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Infrastructure: Commingling, Financing and Funding Through Technology Incentives?

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization. 

By Daniel Bauer
November 19, 2018

Oftentimes the best intentions lead various actors to pursue enriching communities by declaring infrastructure as the pathway to prosperity. Conversely, impetus for pursuit of such infrastructure policy is oftentimes a knee-jerk result emanating from a natural disaster or accident of some kind. In such circumstances, considerations regarding funding, financing, commingling funds; essentially, accounting for the ability to pay, are relegated to second hand considerations. However, conventional wisdom (backed by scholarly research) asserts that infrastructure possesses a positive impact on productivity by increasing gross domestic product (GDP). If infrastructure is universally recognized as a “pathway to prosperity” and, additionally, increases productivity, then shouldn’t there be factors serving as incentives to jump-start financing? Can technologies serve as incentive mechanisms for infrastructure financing and funding? If the answers to both questions are yes, than is it possible that scholarly research may discover that technology incentives may serve as the underpinning for new infrastructure asset classes born out of environmental, social and governance initiatives?

In order to assess technologies serving as incentive mechanisms delivering a financial benefit (underwriting the cost of infrastructure) an overview of the meaning of terms is warranted. In general, there are four types of infrastructure, two of which have been defined in previous articles in this series. These two consist of the primary type known as Physical Infrastructure (also known as Gray) and the second type known as Information Communications Technologies Infrastructure.

More recently, two additional types of infrastructure have emerged under the guise of environmental, social and governance themes. Formally known as Green Infrastructure and Sustainable Infrastructure, these two relatively nascent classifications often are erroneously substituted one for the other. According to the U.S. Environmental Protection Agency (EPA) Green Infrastructure consists of “natural, undeveloped areas, where rainwater is absorbed and filtered by soil and plants. Storm water runoff is cleaner and less of a problem. Green infrastructure uses vegetation, soils, and other elements.” Moreover, the EPA further defines green infrastructure at various geographic sizes including, “at the city or county scale, green infrastructure is a patchwork of natural areas that provides habitat, flood protection, cleaner air and cleaner water. At the neighborhood or site scale, storm water management systems that mimic nature soak up and store water.” Finally, green infrastructure reduces and treats storm water at its source all the while delivering environmental, social and economic benefits.

Sustainable infrastructure on the other hand is more akin to ICT networks and whole processes such as Smart Cities. According to the International Institute for Sustainable Development when funding infrastructure (roads, power plants, water/sewer systems, ports and other), consideration must be given in the form of assessments for carbon and environmental footprints, social cohesion, stewardship of ecosystems and the financial viability of projects, all the while delivering, once again, environmental, social, economic and financial benefits.

Now that we have defined various types of infrastructure, each requiring technology networks and applications, a definition of incentives is warranted.

Incentive theory of motivation posits that people are motivated to engage in behaviors which gain rewards. Rewards can be synonymous with incentives. People are bounded by rationality. Therefore, rational behavior dictates that incentives, when used correctly may lead to positive outcomes. Some positive outcomes relevant to infrastructure would be reduced overall costs and lower costs of capital (debt for public; potential equity component for private and commingled financing), driven by technology-induced incentives.

The economist Paul Samuelson concluded that public goods (such as infrastructure), cannot be sold in private markets because individuals have no incentive to pay for them voluntarily. Instead such individuals hope to get a “free ride” from the decisions of others to make the public goods available. People do respond to incentives. Within this context, the meaning of incentives has changed over time. This past June, 2018, Robert McDonald writing in the journal, Advances in the History of Rhetoric, in an article titled From “Incentive Furie” to “Incentives to Efficiency”, or the Movement of Incentive in Neoclassical Thought reminds us that when incentives, in and of themselves, become an economic objective, incentives can therefore become foundational. So, attaching financial incentive mechanisms and/or finance programs to technologies which, ultimately, enable improvements to existing infrastructure or serve as an integral part of new build infrastructure are fast becoming part of the normal course for infrastructure development funding and financing.

Several technology-induced financing programs abound but one program is worth mentioning at this time and highlights the growing trend towards this emerging asset class: the PACE program.

The U.S. Department of Energy (“DOE”) makes available the Property Assessed Clean Energy model serving as an incentive mechanism for financing energy efficiency, renewable energy improvements, and water conservation on private residential housing. According to the DOE as of 2017, “over 150,000 homeowners have made $4 billion in energy efficiency and other improvements to their homes through PACE financing.” PACE financing for clean energy projects is based on a special district organizational structure known as land-secured district or local improvement district. Additionally, the municipality may issue debt in the form of bonds to fund projects such as PACE which serve a public purpose.

A commercial version exists known as C-PACE and the Department of Energy launched an aggressive drive for C-PACE just this past February 2018. Presently, more than 30 states including the District of Columbia have C-PACE enabling legislation. Projects totaling $500 million plus have been financed through different special districts and state and local organizations, financing structures, and performance metrics. PACE financing for clean energy projects is based on a special district organizational structure known as land-secured district or local improvement district. Additionally, the municipality may issue debt in the form of bonds to fund projects such as PACE which serve a public purpose.

Public procurement enacted policy in the form of incorporating incentives into procurement contracts for infrastructure projects may reduce transaction costs. Efficiency can thereby be not only pursued but obtained for public goods. Eventually, applying Harry Markowitz’ Efficient Frontier for achieving optimal infrastructure projects combined with optimal technologies may even be a possibility. Ultimately, the entire infrastructure market has expanded in both depth of perspective and breadth of vision. Newly created incentive programs are arising, technology adoption and application is increasing across the spectrum of infrastructure, and innovative financing techniques are creating new debt issuances such as social impact bonds, green bonds, clean energy bonds, environmental financing, private activity bonds, public-private partnership issued debt, century debt (100-year maturities) with either no call provisions or 30-year provisions. An opportunity to exponentially increase public value in the form of newly defined 21st Century public goods presents itself.

Author: Daniel G. Bauer is finishing his Doctorate at the School of Public Administration at Florida Atlantic University. Mr. Bauer has an Executive MBA from the College of Business at Florida Atlantic University and a BBA in Finance from University of Toledo College of Business. Daniel has 20+ years of professional experience both domestically and abroad. His research areas focus on finding solutions at the confluence of financing, procurement/supply chain, organizational behavior, sustainability, and social responsibility. Please reach out to him at [email protected]

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