Photo Credit: Mark Anderson via Flickr Creative Commons
If you live in urban areas – which, according to the U.S. Census Bureau, over 80% of Americans do – you know the feelings associated with traffic. Busy roadways and overcrowded public transit lines are just some of the many consequences of the increased need for infrastructure investment in the U.S. To grow sustainably, cities must continue to make major investments in infrastructure – across healthcare, transportation, utilities, buildings, energy and even within our industrial base.
In 2013, the American Society of Civil Engineers estimated that U.S. infrastructure needs will total $3.6 trillion in investment by 2020. Traditional financing structures – such as public funding – alone are not enough to generate the capital needed to fund such investments. Access to private capital investment and financing techniques has become a critical component for governments and municipalities. As Siemens Financial Services’ Chief Risk Officer for Industry and Healthcare Finance, I am tasked with helping cities achieve their infrastructure improvement goals. Leveraging public-private partnerships (PPPs) is an increasingly important way investors are offering this support to their clients.
Recently, Urban Land Institute and Ernst & Young surveyed 440 top public officials and real estate leaders from around the world for their latest annual report, Infrastructure 2014: Shaping the Competitive City. In the survey, 75% of respondents said that PPPs will play a significant role in funding new infrastructure investments over the next 10 years. In fact, PPPs were considered the most important funding source for new infrastructure, and Moody’s recently predicted that the U.S. has the potential of becoming the largest market for PPPs in the world.
Financiers are able to provide the required capital at a transparent rate of return over a long period of time, but share the project risk with the government by offering a portion of their investment as equity. The private sector can help take on risks such as cost overruns, construction delays, and, in certain cases, usage. Infrastructure projects are highly complex and require an expert with financial and technical expertise who can help manage risk as a trusted partner. The technical proficiency of the investor helps ensure that projects are completed on time and on budget, and produce the public service outcomes that were envisioned.
At Siemens Financial Services, I have invested in infrastructure projects through PPPs and see exciting potential for their usage in the U.S. I mitigate risk by supporting projects when I am confident in the technology solutions being offered to public sector clients and project developers. A combination of industrial expertise and financial know-how is integral to a successful PPP, helping cities meet their goals of obtaining intelligent infrastructure solutions and enabling a smarter, more sustainable transportation network.
One example of a successful PPP project, which can be replicated using a similar model in the U.S., is the Thameslink rail line in the United Kingdom. By carrying 50 million passengers into London every year, the Thameslink project will demonstrate how large-scale infrastructure partnerships can be completed in volatile market environments by combining leading technology with innovative financial solutions. While Siemens Financial Services structured the £1.6bn Thameslink rolling stock PPP, it required a 19-strong bank syndicate, including the European Investment Bank, to close the deal – representing the importance of developing creative, integrated financial solutions to address a vast array of complex project challenges.
However, the benefits of sharing project risks and the need for private capital to fill funding gaps should continue to drive public interest in PPPs in the U.S. – and help fuel the future of American infrastructure.