CHICAGO — Revenue may be down but capital needs remain, prompting more governments to partner with each other to finance infrastructure projects, according to panelists Tuesday at the Bond Buyer’s Midwest Public Finance Conference.
Current infrastructure needs total $2.2 trillion nationally, according to Victor Chang, director at Wells Fargo Securities.
Public-private partnerships remain an option, but amid a tightened P3 market governments are considering setting up regional authorities that cross political and legal boundaries to get broader economic development power and fresh revenue sources.
In Ohio, a $45 million highway interchange project involved eight separate government entities, several financings, and a willingness to form new authorities that overcame legal obstacles, said Barbara Hawley, a partner at Squire, Sanders & Dempsey.
“The complexity was astounding,” Hawley said.
“It highlights how incredibly difficult it can be when you collaborate across jurisdictional boundaries,” she said. “But government needs are not confined to boundaries.”
It can be a thorny problem to iron out political, legal, and taxation issues when partnering for projects, panelists said.
“There’s a tension in our system between the need for larger amounts of money to pay for expensive projects and the concept of local self-government on the other hand,” Hawley said.
The aerotropolis, a kind of city built around an airport, is an example of a multi-jurisdictional entity that is increasingly popular with airports across the country, from Memphis to Detroit, said Jeremiah Wise, treasurer of the Indianapolis Airport Authority.
An aerotropolis requires governments to partner across boundaries in an often-complex transaction, but can lead to a new revenue base that is independent of passenger levels — a plus for airports struggling with declining enplanements, Wise said.
“How do you diversity your [revenue] base?” Wise asked. “That’s why you see a lot of airports looking at aerotropolises and focusing a lot more on non-aeronautical revenue streams.”
“There are lots of legal hurdles to create a true multijurisdictional funding authority,” Wise said. “But going forward, complexity is going to be the norm.”
The Illinois Tollway is increasingly focused on partnering with government entities in northwest Illinois to share financing of projects, said Michael Colsch, the tollway’s chief of finance.
Less revenue also means that all capital projects receive more scrutiny, issuers said.
The tollway wants to achieve two times maximum debt service coverage to cover its financing costs for new projects, Colsch said.
At the Indianapolis airport, which issued more than $1 billion of bonds to finance a new airport, all future projects are subject to a number of criteria. That includes a requirement that any new project achieve a 12.5% annual return on investment, Wise said.
“That [$1 billion in debt] makes us a leader in debt per passenger, and that constrains how we finance programs going forward,” Wise said. He added that requiring a 12.5% annual return takes a lot of projects off the table. “To me that’s a good thing,” he said.
Many governments continue to consider public-private partnerships as another financing tool, panelists said.
“The role of the private sector is driving these kinds of projects for local governments that are less willing or less able to put their credit on the line,” said Greg Stype, partner at Squire, Sanders & Dempsey.
“In central Ohio we have enjoyed a very robust economy before the recession; what’s missing now is the public capital to move these projects and we’re starting to see the private sector step up and fill the void.”
