It is no secret that the roads, bridges, water and sewage systems that have shaped the way our communities have developed over the past century operate, in too many cases, over time. borrowed time. Infrastructure is – after all – the collective of services that enables a society to function.
In its recently released infrastructure report, the American Society for Civil Engineers (ASCE) listed more than 45,000 bridges nationwide as structurally deficient. Despite the poor condition of these viaducts, they make 178 million journeys every day. Although our drinking water system has improved over the past few years, there is still a water line break every two minutes somewhere along its 2.2 million kilometers of pipes. These are just two examples of the many US infrastructure services that need to be fixed and stood the test of time – and urgently.
It is promising to hear that President Joe Biden is prioritizing infrastructure with a multi-trillion dollar plan. To meet the country’s infrastructure needs by 2029, ASCE estimates the infrastructure funding gap between needs and available funding at $ 2.68 trillion across multiple categories defined in the report. These include surface transportation, water and stormwater, energy, schools, inland waterways and ports, airports, solid waste management, dykes and dams. and broadband, to name a few. If we are serious about tackling the scale and scale of these challenges, we must look to new funding and funding models.
Typically, governments use a mix of public and private financing instruments to finance large infrastructure projects. The main public funding comes from municipal bonds financed by taxpayers or from project-specific income streams, revolving loans and grants. The remainder comes from private funding through public-private partnerships such as toll roads and other user-fee-based arrangements. But neither approach will raise enough funds to remove potholes from our roads, make all of our bridges safe, and provide clean drinking water that every member of the public can trust. The sufficient cost of borrowing is simply too high, or politically unsustainable, for cities and towns to collect taxes. And the options on the current public-private partnership menu will not cover it in costs.
There is a better way. Based on my work with financing mechanisms that incorporate measures of performance or structural health, there are ways to unlock new sources of income for projects, to link the cost of borrowing to measures (which reduces risk) and reduce the cost of infrastructure operations using smart contracts. . These new funding opportunities do not require raising taxes, making it easier for them to gain bipartisan support. We can do it with smart city infrastructure, but replacing existing systems will not be instantaneous. The race is on to define transformative practical applications in road design, solar power, water systems, solid waste and port management.
Funding with data
Increasingly, our roads and bridges, drinking water and sewer lines, buildings, ports and hospitals are equipped with sensors and other data collection systems. An urban Internet of Things is emerging and its data has the potential to generate incredible added value. We can harness this technology to provide information that will make financing more efficient and to develop the next generation of public-private partnerships.
Sensors can extract data on water flow, traffic congestion, air pollution and more, all of which can be processed to inform how to deliver services more efficiently and at lower cost. Data is attractive to insurance companies because it helps cover risk, and to investors because information can lead to new sources of revenue or create value far beyond the infrastructure itself. .
For example, sensors on roads and bridges can monitor deterioration as well as the impacts of trucking. This information could be used to price a pricing structure for logistics companies based on how they reduce lifetime usage or maintenance requirements. Models like this are being explored in the Netherlands and Germany. Rather than charging tolls, public agencies in these countries are considering outsourcing bridging portfolios to asset management companies that collect anonymized data on traffic volume, truck weights, and structural health. In turn, these companies can sell this data in derivatives markets to materials suppliers, insurance companies, marketing companies and hedge fund investors.
As part of pilot projects that combine a new financing instrument with sustainability goals, utilities in Washington, DC and Atlanta, and Buffalo, New York, have issued “environmental impact bonds” for the green stormwater infrastructure. Rather than finance the construction of more “gray” pipes at a fixed interest rate, they tied the cost of those bonds to the results. The sensors measure stormwater runoff and the performance of the infrastructure can be quantified and translated into operational savings for the utility. In turn, the utility pays part of the savings to investors. Since financial returns are not correlated to the overall market, investor interest in this type of performance bond is booming.
The “ stock ” of infrastructure
Indeed, just as data from smartphone apps creates value, data from physical infrastructure will lead to a new market in which public infrastructure is much more attractive to private capital than it currently is. . Data contracts can be securitized like mortgages, repackaged, and resold in various business-to-business data marketplaces.
Not only does data have the potential to add new sources of income, it also improves the liquidity of investments. Most infrastructure investments take the form of debt or equity and cannot easily be converted to cash, which limits the type of money that goes into it. The data provides near real-time information on performance, structural health, and usage, as does updating stock prices as new information becomes available to inform buyers and sellers. Data represents the infrastructure ‘stock’ of information, which allows for better pricing of its value and can improve the liquidity of investments.
This is good news for cities, counties and states – the owners of public property – and at a difficult time. At the onset of the pandemic, some city and state budgets faced financial challenges that threatened to further defer funding for infrastructure and exacerbate existing social gaps and inequalities. Federal stimulus has helped ease those tensions, but many of the regions that have been hit hardest by the pandemic have the greatest need for infrastructure upgrades. Smart finance can serve as an equalizer for high and low income communities.
So instead of just issuing new debt and raising taxes, let’s start looking beyond the cement, steel, or fiber-optic cables that make up our physical infrastructure to the data it can generate. Consider data as a new legacy or windfall that can move the nation’s core systems towards a more resilient future.
Top photo: Construction on the northern part of US 181 leading to the Corpus Christi Harbor Bridge in Corpus Christi, Texas, USA on Thursday, April 1, 2021.
Copyright 2021 Bloomberg.