Infrastructure Recapitalization

InRecap was started in 2017 to develop structural refinements for the debt recapitalization of basic public infrastructure. The overall objective is to mitigate specific fiscal constraints that delay investment infrastructure renewal.

John Ryan is InRecap’s principal. LinkedIn profile here

Current Focus: Recapitalization and Federal Infrastructure Loan Programs

State & local fiscal constraints will be dramatically heightened by the Covid-19 crisis. In many ways, the crisis is accelerating trends associated with slower economic growth, demographic change and the 2008 financial crisis that public infrastructure agencies were already facing. Recovery will not be easy, and infrastructure investment will likely be particularly impacted. Cancelling or further delaying basic investment projects will look like a necessary response to short-term budget crises — yet it is exactly those projects that can lay the groundwork for a solid, sustainable recovery in many communities.

While new and innovative sources of private debt capital will potentially be a key factor in America’s infrastructure recapitalization over the longer run, the most immediate needs of state & local public agencies for post-Covid-19 recovery can realistically only be met by expanding and enhancing federal infrastructure loan programs. This is InRecap’s current focus. Two existing programs and a new one (modeled on the others) are the area of current work:

• US EPA’s Water Infrastructure Finance and Innovation Act (WIFIA) Loan Program.

• US DOT’s Transportation Infrastructure Finance and Innovation Act (TIFIA) Loan Program.

• A proposed new program, tentatively titled the ‘Municipal Infrastructure Finance and Innovation Act’ (MIFIA).

Recapitalization: Long-Term Context

Delayed investment in basic essential assets is the real challenge in American infrastructure. Whether caused by deferred maintenance, technical obsolescence or simply reaching the end of an asset’s useful life, the need to restore failing and crumbling public systems is not optional – delayed investment is as much of a public sector liability as bond debt or pension obligations.

Delayed investment is an existing form of off-the-books indebtedness. It’s an expensive and dangerous liability that invisibly accrues at a high rate and often comes due for payment by catastrophic failure. New debt financing to address delayed investment in basic systems therefore does not represent imprudent “additional debt”. Recapitalizing this type of liability with transparent, cost-effective and explicitly approved bonds or other formal indebtedness is always prudent and often compelling in terms of saving taxpayer dollars. Doing nothing is what’s actually imprudent and wasteful.

Recapitalizing American public infrastructure should be straightforward, especially in light of historically low interest rates and the high credit ratings of most state & local public agencies. But it is not. Public agencies face multiple short-term fiscal constraints that are unrelated to the fundamental economics of infrastructure investment: the need to balance budgets annually, arbitrary limits on bond issuance, voter referendum requirements and a range of political considerations. Continuing to ‘kick the can’ and allow the delayed investment liability to accrue for another year frequently appears to be the easiest – and sometimes the only – option.

Fiscal constraints are a fundamental part of US state & local public sector governance. They cannot (and in many cases, should not) be changed quickly, even to respond to an emerging crisis in public infrastructure. But there is another path: Highly rated public infrastructure agencies can seek new and innovative ways to augment the basic debt capitalization of infrastructure projects in order to mitigate the binding forms (though not the spirit) of fiscal constraints. Innovative recapitalization, using the full range of private and public sector capital sources, can be an important — and realistic — part of the solution to the serious challenge of restoring US public infrastructure.