State and Local Governments Lead the Way In U.S. Infrastructure Delivery

inf2013

New global report from the Urban Land Institute and Ernst & Young highlights the critical role of local and state governments in meeting US infrastructure requirements

For more information, contact: Trish Riggs (ULI), 202-624-7086; priggs@uli.org

SAN DIEGO (May 16, 2013) State and local governments in the U.S. are leading the way in delivering infrastructure projects against a backdrop of budget constraints and an ongoing lack of consensus about future investments by the federal government, according to Infrastructure 2013: Global Priorities, Global Insights, a joint report from the Urban Land Institute (ULI) and Ernst & Young.

The report points out that state and local governments account for approximately 75 percent of all infrastructure spending, with the remainder supplied by the federal government. However despite this expenditure, infrastructure spending as a percentage of GDP has shrunk to only 2.4 percent from its peak of more than 3 percent during the 1960s.

With uncertain federal support, state and local governments are advocating local tax rises and higher user fees and tolls to pay for key infrastructure investments. Governors and mayors, notes the report, are promoting these initiatives to their constituents by emphasizing the benefits of infrastructure projects as employment opportunities and as an economic stimulus.

“Many local government officials recognize the strategic need to plan for future requirements,” said ULI Chief Executive Officer Patrick L. Phillips. “With the extent of federal support uncertain, many of these officials are taking action for themselves, often pioneering innovative funding models.”

Howard Roth, Ernst & Young’s Global Real Estate Leader, added, “The U.S. has a continuing substantial need to upgrade its infrastructure to keep up with global competitors. There is a clear and powerful linkage between investments in infrastructure and the future growth, real estate development and vibrancy of cities and regions.  Capitalizing on these connections requires public leadership and investment as well as private initiative and capital.”

Mike Parker, Infrastructure Advisory leader for the Americas Area of the Ernst & Young organization, and Senior Managing Director of Ernst & Young Infrastructure Advisors LLC, commented, “Well-conceived infrastructure is a foundation for growth and a higher quality of life in any city or community. We are encouraged by the growing recognition by leaders in both the public and private spheres of the importance of infrastructure investment.  We are seeing renewed efforts to accelerate needed projects, make hard decisions and bring creativity, foresight and sound economic stewardship to critical infrastructure development.”

State and local officials often must overcome skepticism that expenditures on infrastructure will provide appropriate value for tax payers and system users or that the projects can be delivered on-time and on-budget. To that end, some state and local governments are experimenting successfully with design-build construction and public-private partnerships (PPP) which include turnkey delivery, long term performance responsibilities and financing for new infrastructure projects and maintenance.

Interviewees in this year’s report see a large pipeline of potential deals developing but are mindful of the need to demonstrate good value and not unduly impair flexibility to meet changing needs in the future.  In addition, in sectors where there are not targeted federal credit programs, the disparity between private and federally tax-exempt costs of capital requires a more compelling greater justification for undertaking public private partnerships than in other countries which do not have tax-exempt public financing options.  In the U.S., the cost of borrowing for all levels of government remains near record lows.  Access to capital is constrained by future funding projections rather than capital markets.

A significant number of pension funds and global investors have an unmet demand for domestic, taxable infrastructure investment opportunities. However, many institutional investors remain cautious about investing in infrastructure at the development phase, struggling to project investment performance based solely on revenue forecasts or to accept construction risk. There is governmental interest in projects that combine infrastructure and real estate development, but investors generally perceive these as two separate markets.  There is strong institutional investor interest for completed infrastructure projects which are well into construction and pose limited revenue risk. TIAA-CREF and several large public pension plan sponsors such as the California Public Employees Retirement System are leading the way in investing in infrastructure and more are expected to follow as an increasing number of fund managers and certain types of projects demonstrate solid investor returns.

More states and cities, like Chicago, are considering establishing infrastructure banks to enable more creative financing of local projects. However, these business models remain in development as they work to address governance and tax-exempt finance complications.  Ultimately, financing alone will not address structural needs for greater and more predictable long-term funding mechanisms.

Many cities and regions find they can achieve more by pooling resources. In a promising initiative for regional cooperation along the Pacific Coast, California, Oregon, and Washington have joined forces with British Columbia in Canada to explore funding strategies for upwards of $1 trillion in shared infrastructure projects to promote growth over the next three decades.

Some progress has been made on federal support for key infrastructure sectors, most notably the Moving Ahead for Progress in the 21st Century (MAP-21) bill which was enacted by Congress in 2012.  The bill consolidates numerous highway and mass transit programs, allocates $1 billion for projects of national and regional significance, and expands the popular Transportation Infrastructure Finance and Innovation Act (TIFIA) credit-support program. The TIFIA program has a lending capacity of $750 million in 2013 and $1 billion in 2014, representing about $17 billion in lending capacity, however, the deployment of loan funds has been slowed by administrative procedures.

Of critical concern to future road investment in the US is the pending insolvency of the Highway Trust Funds within the next few years at current rates of expenditure.. Reliance on a federal motor fuels tax that does not escalate with CPI or other factors is undermining longer-term planning for critical highway and mass transit investments nationally.
The report cautions that there is an urgent need is to determine the future of the Highway Trust Fund amid spending reductions, erosion of projected revenues on a real dollar basis and a lack of political appetite for new taxes.

Infrastructure 2013: Global Priorities, Global Insights highlights a number of key US projects to watch this year:

  • Atlanta Multi-Modal Passenger Terminal – Georgia’s state capital is advancing the planning for a $1.2 billion downtown multimodal (subway-bus-streetcar-passenger rail) terminal through a master developer agreement procured under the state’s PPP framework. This project will help expand the city’s mass transit network and anchor private redevelopment of the surrounding 120 acre study area  into a remodeled commercial center.
  • Chicago Union Station – Chicago is considering a makeover of its Union Station as a catalyst for new commercial projects and increased property values that would help finance the renovation.
  • Seattle Alaskan Way Viaduct – Seattle is moving forward on replacement of a decrepit downtown viaduct with a $3 billion, 1.8-mile toll tunnel, which will dramatically revamp the city’s waterfront, reduce center-city congestion, and pave the way for new commercial projects.
  • New York State has executed a firm-fixed price design-build contract for the building of a new $4 billion Tappan Zee Bridge next to the nearly 60-year-old existing span. The state is making an allowance in the design for the addition of a future mass transit crossing.
  • California High-Speed Rail – California is progressing with the development of a San Francisco–to–Los Angeles high-speed rail line. However, the completion of the multibillion-dollar project remains dependent on private financing and additional federal funding, which has not yet been secured.
  • Streetcar systems across the country – Encouraged by transit-oriented development successes in Portland, Oregon, cities across the United States are building small-scale, street-running rail systems to link neighborhoods and provide transit connectivity. Dallas, Fort Lauderdale, Atlanta, Charlotte, Arlington (Virginia), and other municipalities are advancing systems, while the District of Columbia is launching a procurement process for a 22-mile system (eventually growing to 37 miles) that would be the most comprehensive in the country.

Scanning the globe, Infrastructure 2013: Global Priorities, Global Insights concludes that emerging markets spenders such as China, Brazil, and the Middle East Gulf states, and mature economies such as the United Kingdom, France, and the United States—now constrained by austerity—can still find a competitive edge. Those who pay attention to urban mobility, setting priorities, wisely incorporating public/private partnerships, and addressing climate change will come out ahead. The report features quotes and insights from infrastructure leaders from around the globe.

Infrastructure 2013: Global Priorities, Global Insights is the seventh of annual infrastructure reports published by the Urban Land Institute and Ernst & Young. The report reviews key global infrastructure trends, policies and issues based on in-depth research and interviews with leading experts from around the world.

A copy of the report can be downloaded at uli.org/infrastructurereport.

About the Urban Land Institute
The Urban Land Institute (uli.org) is a global nonprofit education and research institute supported by its members. Its mission is to provide leadership in the responsible use of land and in creating and sustaining thriving communities worldwide.  Established in 1936, the Institute has nearly 30,000 members representing all aspects of land use and development disciplines.