The U.S. has long relied on the municipal bond market to finance its public infrastructure.
But with massive infrastructure needs, and trillions of dollars of private and pension capital looking for more opportunities, a University of Maryland researcher has proposed a hybrid financing model that attempts to solve a question that has long bedeviled infrastructure investors: how to bring more private money into the space.
"We have an infrastructure gap estimated at almost $3.7 trillion and at the same time we have institutional capital of more than $60 trillion in pension fund assets," said Anton Steshenko, a graduate student at the University of Maryland, Robert H. Smith School of Business, who is pursuing an MBA in finance after a decade in the infrastructure finance space.
"The problem is not the money; the problem is a lack of an institutional platform that can connect and be a reach between local projects and large institutional capital — because for now they operate in completely different worlds," he said.
"The U.S. infrastructure financing gap will not be closed by federal appropriations alone, nor by incremental expansion of traditional municipal bond issuance," the paper said. "Closing the gap requires a structural transformation of the local infrastructure finance ecosystem — new intermediaries, new instruments, and new connections between local project pipelines and the institutional capital markets that hold the capital infrastructure investment needs."
The HICM "combines public credit enhancement in first-loss positions, structured risk allocation across investor tranches, and purpose-built financial intermediaries to mobilize pension fund and insurance capital into local infrastructure," the paper said.
Steshenko looked to the Connecticut Green Bank and the Montgomery County Green Bank as examples that have demonstrated how the model could be feasible in the U.S.
He cited the Greenhouse Gas Reduction Fund, a $27 billion fund created in the 2022 Inflation Reduction Act, as a new capital source, dismissing the Trump administration's efforts to dismantle the fund in favor of the "long view of federal support." He said that federal loan programs like Transportation Infrastructure Finance and Innovation Act are a way to reduce risk for institutional investors.
An example of a HICM structure for a $100 million portfolio would include federal credit enhancement from the GGRF or TIFIA that provides $10 million, or 10%, in first-loss protection; a state green bank contributing $15 million in mezzanine position; impact investors and CDFIs providing $15 million in subordinated debt; and institutional capital contributing $60 million, or 60%, in senior secured and investment-grade debt.
Muni bonds could be part of the equation, likely at the mezzanine level, he said, calling the model a "complement" to the municipal bond market.
"The challenge is not just creating the portfolio but creating consistent underwriting and risk assessment standards across very different types of projects," he said.
Now pursuing his third degree, Steshenko was born and worked in the infrastructure finance sector in Eastern Europe, where governments tackle the problem differently than in the U.S. "That's why I became interested in this area, especially at the municipal level, because the model or approach used in the U.S. and Europe is completely different, so I wanted to make some additional research and propose my ideas," he said.
The $4 trillion tax-exempt municipal bond market, unique to the U.S., has long been the go-to capital market because of its low financing costs. But smaller local governments with infrastructure can face high borrowing costs and limited market access, Steshenko said.
The HICM essentially acts as a "bridge between local projects and institutional investors," he said.
The Montgomery County Green Bank has the kind of legal structure that could work with Steshenko's model and has identified institutional investors eager to invest.
The bank is working to build a pipeline of ready projects that can be bundled into a portfolio for private capital, said Laura Mondragon, the bank's senior director of climate resilience and adaption.
"That's why we're aggregating projects — because institutional investors don't want to have conversations about isolated projects," she said. "The pension funds need us to start doing the investments — they need performance data and they're looking for a standardized project and the portfolios."
The pipeline of projects will grow as more municipalities realize the need to protect their infrastructure against severe weather.
"Climate resilience has always been treated as a market niche rather than as a part of the strategic asset management of a municipality, and that's changing," she said, adding that municipal bonds will be part of the solution. The green bank is considering becoming a bond issuer itself while continuing to work with private capital, she said. "We're working to get the program where it needs to be in order for the investors to step in."
Steshenko, who has submitted his paper to Brookings' Municipal Finance Conference, said his model is meant to be flexible and includes provisions to mitigate political and revenue risk.
"The main idea is that different investors would take different positions depending on their risk appetites," Steshenko said. "The structure is really about making the right type of capital with the right risk."
