Reaching into the Future with Equitable and Resilient Finance Tools
Infrastructure finance is rapidly evolving. This section describes some possible future strategies to bring cost savings and wealth “back from the future.”
Expanded Financing Via Cost Saving (NegaRevenue)
With Energy Savings Agreements (ESAs) agencies are able to fund the capital costs of energy efficiency improvements through cost savings. These approaches directly securitize savings achieved through capital improvements.
While energy efficiency is pretty straightforward to calculate, infrastructure projects generate other cost savings as well that might be monetized in the future. It’s common to consider avoided costs in infrastructure project analysis, but rare to consider it as a form of revenue that could be used to support capital investment. Framing avoided cost as “NegaRevenue,” could encourage both capital markets and cities to expand this approach to more types of projects.
NegaRevenue has great potential to expand beyond the energy space into new areas. For example, could a transit or highway agency use NegaRevenues to invest in new signal infrastructure to reduce operating cost? To make NegaRevenue financing work on those kinds of projects, cities will need to track project benefits and resulting cost savings more closely. It will also help to link the capital and operating budgets, with techniques such as the ones described below.
Cap2Op and Op2Cap Financing: Linking Operational and Capital Budgets in New Ways
Capital investment can be paid off via operational savings. The converse is also true—greater operational investments might create savings from avoiding capital costs. Since operating and capital budgets are usually managed separately, and in different budget cycles, most cities lack a framework allowing city employees to propose either kind of project. Creating a mechanism by which departments could link the dollars in their operational budgets to the dollars in the capital budget—and vice versa—could help foster even more creative thinking about how to optimize life cycle costs.
Op2Cap Projects: Investing Operational Cost Savings in Capital Projects
Suppose a department identified a capital project that would lead to operational cost savings, compared to current expenditures. For example, purchase of hybrid vehicles for a city fleet might result in substantial fuel savings. Many cities have done this, but the savings could be accelerated if there were a direct mechanism for employees to propose a project that would dedicate those savings to financing the fleet upgrade. Where social goals would also be achieved, impact investors may be willing to support the financing. For example, an impact investment fund might be interested in helping a city reduce public health spending due to high rates of type 2 diabetes cases in neighborhoods without bike-able or walkable infrastructure. City staff could identify pedestrian, bicycle, and lighting infrastructure improvements that could facilitate health promotion programs in those neighborhoods.
Cap2Op Projects: Investing Capital Cost Savings in Operational Services
Capital cost savings could also be used to fund alternative cheaper operational improvements that could eliminate (temporarily or permanently) the need for a capital improvement. For example, funds intended to construct new lanes to reduce congestion could be used for active traffic management, ramp metering, or other operational activities that would deliver an equivalent level of congestion reduction. Instead of building a new prison, or expanding an existing one, employees could propose a restorative justice program that would reduce the need for new prison beds. This could provide a direct source of funding for programs backed by outcomes-based financing.
Community Dividends: Sharing the Value of Infrastructure Development
Almost every year, Alaska’s Permanent Fund distributes a dividend to residents that comes from development of publicly owned energy resources like oil and gas. Could the benefits of infrastructure project development be similarly shared? What if governments retained part of the land in infrastructure reuse projects, or adjacent to transit developments, and leased them to the private sector? Part of the returns could be allocated to low-income community members in equity shares. These could be distributed to residents living within the geographic area, below a certain income.
Using Pensions to Fund Placemaking and Placemaking to Fund Pensions
In a sense, urban infrastructure agencies are real estate developers. The three most important things about real estate are, as always, “location, location, location.” Unlike traditional developers, cities have an unprecedented power to reshape location. When people think about where a location is, their mental map locates it by the time it takes to reach other places. By improving transit infrastructure, a city can change where a location is in the public mind– from 45 minutes to downtown by bus, to 20 minutes downtown (by rail). By improving walkability, building parks, and improving aesthetics, these amenities can make a formerly distressed area thrive economically to benefit existing residents.
Cities know that these kinds of improvements will increase property values—eventually. Yet tapping into that long-term value can be difficult, especially when most capital sources want to see returns within a decade, or even shorter-term.
Meanwhile many state and local governments are having trouble meeting their pension obligations. Pensions overseas have provided a lot of the seed capital for infrastructure investment funds. Pensions and infrastructure are a natural fit: pensions have money to invest now, and need a long-term payoff; infrastructure projects need money now, and expect a long-term payoff.
Investing a limited amount of state and local pension funds as subordinated capital for placemaking could help shore up pension financing while providing a truly patient source of capital. Communities could be more receptive to projects making a return if that return were shoring up local pension funds.
Bringing that concept to a national level, the federal government could invest a small share of the Social Security Trust fund in resilience projects to address sea level rise and extreme weather. Right now, Social Security investments are severely limited to safe, but low-paying securities. Shoring up coastlines could bolster the United State’s most important national pension fund at the same time. Of course, as with all of the projects featured in this guide, the challenge will be identifying a revenue source to pay that investment back.
Conclusion: A Time for Bold Ideas and Innovation
Challenges for municipal infrastructure agencies seem to increase daily—from deteriorating infrastructure, budget shortfalls, extreme weather events, polarized politics, and persistent and growing racial and income inequity.
Yet enormous private, philanthropic, and impact investing resources are also growing rapidly. These sources of committed, involved capital can help agencies take on the risk of experimenting with new approaches. The accountability provided by new results- and outcome-driven investment models can help cities collect the data they need to refine those approaches. As a result, infrastructure finance innovations are being diffused and adopted at historic rates.
Indeed, many of the new ideas included in this guide are from the past five years (and some of them from the past few months). We hope that the tools, resources, and approaches in this guide will help other cities to develop their own innovative approaches to solving the long-term challenges of equity and resilience.