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It is an exciting time for US infrastructure. Alongside the potential passage of President Biden's historic bill, our research indicates that investors, financiers and developers expect to step up their activity over the year to come—and public authorities are ready to return to projects that were delayed during the pandemic.
However, on a range of key issues, this optimism is more nuanced. The US infrastructure sector continues to grapple with a number of challenges as it plots its path toward recovery and renewal.
of respondents believe US suppliers will be key providers of innovation and technology
The search for funding and innovation
As chapter 1 revealed, while US-based respondents are largely prioritizing US infrastructure over the next 12 months, their non-US-based counterparts intend to allocate a more limited proportion of their portfolio to the US marketplace. Public authorities will hope to attract as broad a range of competitors for new projects as possible.
Europe (excluding the UK) is one likely source of that competition, our research shows. Three-quarters of respondents (76 percent) expect market participants from the region to be among the three most significant funders of US infrastructure projects over the next 12 months. Canada (65 percent) and Japan (56 percent) are also seen as important sources of funding for the US infrastructure market.
International partners can also be vital allies, as the imperative to integrate new technologies into infrastructure projects continues to increase. Almost all respondents (98 percent) believe US suppliers will be key providers of innovation and technology, but they also see partners in Germany (85 percent) and Japan (74 percent) as likely sources of the disruptive tools now required. Switzerland, Singapore, Russia and Israel are also regarded highly for their technological prowess.
One aspect that may be hindering more foreign investors is the steep learning curve and the plurality of legal and operational obstacles that they need to overcome to access the US market. One key to overcoming these obstacles is to either partner with a US firm or work closely with local experts and to convince public authorities of their ability to get the job done, regardless of their country of origin.
of public authorities surveyed agreed that P3s were the preferred way to deliver infrastructure projects
The finance factor
While two-thirds of respondents (63 percent) believe funding levels in the infrastructure bill are currently sufficient for the infrastructure sector's needs, that still leaves a great deal of room for partnerships and private financial investment.
Among private finance sources, a broad range of support is available. However, pension funds and development-focused financial institutions are seen as the most likely targets for those seeking capital, with 38 percent of respondents citing each of these.
However, the key for private investment is to play a defining role in the deployment of capital. If capital from public sources is distributed around the country through traditional procurement, it will likely be seen as a wasted opportunity from a private capital perspective. Traditional procurement is usually focused on the design and construction rather than the long term maintenance profile, cost and optimization. If the focus fails to shift to include asset performance, customer service and quality standards, the country will likely find itself generating the same legacy problems of deferred maintenance that it is facing today.
Public authorities are keen on P3s, sending a clear message to investors that these types of partnerships are a solution to the infrastructure gap
Delivering the goods
Public authorities continue to focus on a variety of different delivery mechanisms for infrastructure projects. Encouragingly, more than three-quarters (77 percent) say public-private partnerships (P3) will be among their preferred options for infrastructure projects outside of the energy sector; 68 percent say the same of pre-development agreements (PDAs). Indeed, 71 percent believe that PDAs can increase the likelihood of a successful outcome for a project.
Our survey results show that the public authorities themselves are keen on P3s—of the public authorities we interviewed, 86 percent agreed that P3s were the preferred way to deliver infrastructure projects (no public authorities disagreed), sending a clear message to investors that these types of partnerships are a solution to the infrastructure gap.
And, while the infrastructure bill does not actively promote P3s, there are several sections that could prove beneficial. These include Section 70701, which would require a value for money analysis, which in turn would require public agencies to weigh the cost but also benefits of public versus private finance for projects. Meanwhile, Section 80403 would raise the cap on private activity bonds (PABs) for qualified highway and surface freight transfer facilities from US$15 billion to US$30 billion. PABs are tax-exempt bonds that enable lower interest rates for assets that have been developed and operated by the private sector.
Investors need to approach the different states and municipalities and work closely with them to ensure their goals are aligned.
Focused on the future
The prospects for US infrastructure investment look bright. There is no doubt that COVID-19 has had a significant impact on the development and financing of infrastructure over the past 18 months, but the negative effects of the pandemic are now beginning to ease—and the sector is harnessing some elements of the disruption for positive benefit. Low-carbon projects, digital infrastructure and public health are good examples.
Many of the key themes that respondents highlighted as emerging over the next 12 months will come to reflect this new reality. Respondents point to the continuing rise of smart and digital infrastructure; further prioritization of renewable energy; environmental projects and broader ESG issues, and the importance of social infrastructure. They expect to see upgrades to road, rail and other transport networks, with an emphasis on technology and sustainability here too. And they see scope for increased investment and fundraising, including from the private equity sector.
US federal funding, proposed in the Biden administration's infrastructure plans, would result in an additional boost for the US infrastructure sector. Survey respondents point to seven factors that could make the infrastructure plan successful in delivering the necessary new upgrades and infrastructure to meet the future needs of the US population:
- A greater focus on regional and local growth
- Societal and local government involvement
- Highlighting ESG issues across the board
- Brownfield and greenfield development in tandem
- Greater transparency and more information
- Gaining agreement early in the process to avoid delays and issues
- Spotlighting innovation
US infrastructure market participants are looking at a golden opportunity. Huge federal government spending should unlock the ability to do deals at the state and local level. The key is for both the public and private sectors not to waste that opportunity.
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