Tag Archives: climate change

Texas Needs More Than Love To Fix Its Infrastructure

By Henry Teitelbaum, Editor, P3 Planet

That homegrown spirit of caring and support that people across Texas have shown since Hurricane Harvey may be heart-warming, but all the love in the Lone Star state can only go so far towards fixing its battered infrastructure, let alone move it towards better flood planning.

Texas, and particularly its flood defense infrastructure, has been on the American Society of Civil Engineers’ critical list for many years. It last earned a ‘D’ in the the ASCE’s infrastructure report card in 2013. That’s largely because the state spends virtually nothing on flood-control infrastructure, leaving whole counties to fend for themselves. Florida, in case you were wondering, got an overall ‘C’ rating in the latest 2017 report card, but a ’D’ for its critical stormwater drainage systems.

Most will agree that with the benefit of hindsight, the neglect of critical flood infrastructure systems is not good public policy.

Anti-Washington Mindset

Making matters worse for staunchly anti-federal Texans, the state doesn’t participate in the National Flood Insurance Program, even though the state typically leads the nation in terms of dollars paid out for flood claims.

Houston’s liberal zoning laws allow developers to build pretty much anything they want anywhere in the city. This has not only encouraged extensive overbuilding, it has run roughshod over any serious efforts at flood planning. A predictable result of this has been that there is now too little water-absorbing prairie left to soak up flood waters. When Hurricane Harvey hit, some believe the impermeable ground and failure to plan may have prolonged the flooding and the damage that it has brought.

Donald Trump’s climate change-denying regime in Washington has meanwhile been working to make future hurricane-related disasters in the Gulf as costly and destructive as they can be. On Aug. 15, the President used an executive order to overturn a key Obama-administration initiative requiring that infrastructure projects in flood-prone regions, notably roads and bridges, adhere to the Federal Flood Risk Management Standard for “climate resilience.” This sensible rule was designed to protect infrastructure and people from exactly the kind of damage that resulted from over-development in flood-prone areas of Texas.

Trump’s zeal for overturning every infrastructure policy that his predecessor put in place, even as prospects fade for his own promised Infrastructure Plan, appears to have no limits. His transportation secretary, Elaine Chao, is by no means the only crony capitalist in his administration, but she’s one of the most visible. True to form, Chao has been selling off critical infrastructure development decisions to the highest bidders while telling the rest of us that deregulation will slash the amount of time needed to deliver new projects.

Politically Motivated Fix

The importance of being seen to be doing something to aid the victims of Hurricane Irma in Florida, as well as Hurricane Harvey in Texas, has caused Trump to reverse plans to gut the Federal Emergency Management Agency (FEMA)’s Disaster Relief Fund, at least for the time being. Thanks to the President’s agreement with congressional Democrats to raise the debt ceiling earlier this month, some $7.4 billion of federal funding is now being allocated to FEMA’s DRF, with another $7.4 billion going to the Department of Housing and Urban Development’s (HUD) Community Development Block Grand Disaster Recovery (CDBG-DR) funds. These can be used to rebuild housing for both owners and renters.

However, HUD, which runs federally funded Disaster Housing Assistance Programs, currently has no one filling the position responsible for overseeing the Disaster Voucher Program, so it’s anyone’s guess how effectively this will be carried out. Meanwhile, under the Trump Administration’s proposed 2018 budget, both of these programs are still slated for elimination.

Everything Tied To Tax Reform

Beyond short-term fixes, the nation’s long-term investment program for critical infrastructure remains hobbled by Trump’s inability to work with Congress. The latest iteration of Trump’s Infrastructure Plan is entirely dependent on the passage of his corporate tax reform agenda, which can’t even be considered before he passes a budget bill for 2018.

The tax reform plan itself faces opposition from both sides of an increasingly divided Congress because it involves extensive giveaways to multi-nationals to encourage them to repatriate their estimated $2.5 trillion of accumulated overseas profits. Delivery would then depend heavily on these same companies providing equity financing for around $800 billion of the $1 trillion of new infrastructure that the administration would seek to deliver over the next 10 years.

Even if the administration did manage to push through an infrastructure plan, the role of private sector developers in delivering Trump’s vision is unlikely to produce outcomes that benefit the public interest. This is because private companies, when offered choices for investing in projects intended to provide a public service, tend to pick those that produce the biggest returns for their investors, rather than delivering what’s most needed by the public.

The Trouble With Privatization

Texas has been at the pointy end of this issue for some years. Its inadequate public funding resources, fast-growing population and huge requirements for new infrastructure have led to some disastrous experiences with privately-run transportation infrastructure.

Under former Texas governor (and now Energy Secretary) Rick Perry, Texas expanded the use of Public Private Partnerships (PPP) to deliver new transportation infrastructure during the early 2000s. This was done primarily using a concession-based model that led to an expansion in the use of toll roads. The subsequent public outcry over the cost of using these, along with the high profile bankruptcy of State Highway 130 and other PPP projects, led the Texas legislature to end the state’s use of toll-based PPPs.

So what options do Texas and Florida and any other state hit by powerful natural disasters have to begin fixing, rebuilding and developing new climate resilient infrastructure?

Given the scale of what will be needed, its hard to imagine either Texas or Florda state risking its hard-won Triple-A credit rating by borrowing heavily to make the necessary infrastructure investments. States with lesser credit ratings will be even less inclined to go that route. At the same time, Republican-run state legislatures in both Texas and Florida are going to be wary of raising taxes.

Better Partnerships Can Help 

That leaves no alternative but for public authorities to engage with the private sector for any long-term solution. In this regard, it is fortunate that most states, including Texas and Florida, have PPP-enabling legislation in place. PPP, or P3, is a model for procuring and managing long-term infrastructure that requires private consortia to competitively bid for a contract to design, finance, build, operate and maintain a public asset. It is distinct from privatization because the asset remains in the public domain. There are also ways to structure long-term payments for project delivery, operation and maintenance so that users aren’t stuck with the tolls.

Florida is expanding its existing PPP procurement program beyond transportation infrastructure to include social infrastructure projects in education, water and wastewater facilities, healthcare facilities, sporting and cultural facilities.

Texas, for its part should be exploring alternative PPP procurement models that don’t rely on tolling, but rather on availability payments linked to general tax proceeds. These can be used on their own or structured into a variety of long-term payment arrangements on terms that the state budget can support. Texas also established The Center for Alternative Finance and Procurement in 2015 to help devise better ways for public authorities to engage the private sector in the delivery of future infrastructure programs.

Don’t Call Washington 

The ASCE estimates America’s infrastructure deficit at $1.44 trillion between 2016 and 2025, largely because governments at the state and federal level are only paying half of their bill. The PPP model is currently being used for less than 1% of the projects that are undertaken, so there is plenty of scope for growth as well as for improving outcomes.

In the absence of a workable infrastructure policy, or for that matter any coherent leadership from Washington over the next three years, states will be on their own to develop creative ways to meet their infrastructure procurement needs. P3 offers a way forward that they should all be considering.

This article has previously run in The Market Mogul

How Climate Change Might Hijack Trump’s Infrastructure Vision

By Henry Teitelbaum, Editor, P3-Planet

Any global warming-related catastrophe that hits US coastal areas over the next four years could quickly lead to an unraveling of key features of the Trump administration’s program for rebuilding America’s failing bridges, water systems, and other essential public infrastructure.

If the risks stemming from accelerating climate change do bring disaster to American shores, it will be a hard lesson learned by an administration that shows no signs of accepting the science behind global climate change. Rather than investing in the long-term potential economic benefits of a 21st century infrastructure, the administration could find itself spending all of its available resources fixing broken, inundated or degraded public assets.

Latest Hot Topic

The latest in a string of bad news for the planet’s ecosystem is that 2016 is officially the hottest year on record, marking the third consecutive year of record breaking global temperatures.
Recent evidence also shows that levels of floating sea ice around the world are in a state of collapse, threatening coastal areas with a potentially catastrophic rise in sea water levels. By the middle of this month, total sea ice, as measured by satellite was at its lowest level since records began in 1978, and is likely now at its lowest level in thousands of years.

national Snow and Ice Data Center

 

 

This pattern of melting has been most apparent in the Arctic, where in addition to the general rise in temperatures, “dark snow” or blackish deposits of man-made industrial particles on ice and snow formations are accelerating icemelt across the region by absorbing heat from sun where previously it was reflected by snow and ice. In the Southern hemisphere, a giant crack has appeared in the Larson C ice shelf in Antarctica, threatening to raise sea levels if it breaks off, not just by melting, but by allowing vast amounts of melting glacial water to run directly into the ocean.

Of course, no one can predict if, when or how future catastrophic weather events will bring destruction to US shores. Some scientists using climate change models for predicting weather patterns and changes in sea levels think climate change is already producing more intense cycles of droughts and floods, more powerful storms and more destructive hurricanes.

Rising Cost Of Disasters

Few outside the Trump administration would question that the risks are high, or that they are growing both in cost and in their potential for causing human suffering. Among notable weather related disasters, recovery from Hurricane Katrina in 2007 was the most expensive in US history, costing an estimated $108 billion of damage, while Hurricane Sandy in 2012 was the second most destructive. In both events, urban areas were hard hit by high winds, flooding and storm surges.

It bears noting that 40% of the US population, or 125 million people, now live in counties along the coastal shoreline. The population density in these regions, which include some of the largest metropolitan areas of the country, is six times that of inland counties, and they continue to grow at a much faster pace than inland regions.

This mostly urban population is particularly vulnerable to the kinds of disruptions to infrastructure services that occur as a result of extreme weather events associated with climate change, most notably rising sea levels, storm surges, and heat waves. This is because many urban infrastructure services are interdependent and locally based. So any electrical grid failure due to flooding is also likely to pollute clean water supplies, disrupt emergency services and shut down transportation systems.

Private Sector Infrastructure Push

Mr. Trump has made redeveloping public infrastructure, notably America’s aging roads, bridges, airports and public water systems, a top priority for his administration. Specifically, the “Trump Private Sector Financing Plan” is designed to be a revenue-neutral privately funded option for financing up to $1 trillion of the nation’s infrastructure needs over 10 years.

A key incentive for early stage private sector infrastructure construction would come from federal tax credits. These would be equal to 82% of the amount of the estimated equity required to absorb long-term revenue-related risks on projects. Because the equity component of the required investment is tax credit-supported, it reduces the revenue needed to service the financing, thereby improving the project’s feasibility.

It is entirely possible that the Trump Administration will be forced by a budget-minded Congress to curtail its ambitious infrastructure plans in the first place. But what if funding for the incentives that are needed to make these projects viable for private investors instead goes to covering the cost of restoring essential infrastructure services in cities hit by weather-related disasters? It’s hard to imagine private investors then being willing to take on the risk of long-term infrastructure investments on their own. So the whole program becomes non-viable.

What should worry Americans even more is that Mr. Trump and his choice of like-minded climate change deniers for key cabinet posts pretty much guarantees that the country will be blindsided by any real world climate change scenarios that play out over the next four years.

Featured image  courtesy of Timo Lieber from “Thaw”, an Exhibition of the Melting Polar Ice Cap, depicting photographic evidence of “dark snow” in the Arctic .

This blog post has also appeared in The Market Mogul and Ecosystem Marketplace

Is Trump’s US Infrastructure Vision For Real?

IImage by Henry TeitelbaumBy Henry Teitelbaum, Editor, P3-Planet.com

Right up to election day, President-elect Donald Trump was frustratingly short on the details of his post-election plans. In hindsight, it seems that lack of specificity didn’t hurt his chances, and may have even helped his campaign.

Now that he’s elected, Trump’s public remarks point to the possibility that he really is committed to investing in rebuilding America’s infrastructure. If confirmed, such a program would go a long way towards redeeming an otherwise deeply misguided political agenda.

As of this writing, it’s too early to expect a detailed plan from the new administration, particularly one that is led by such an easily distracted personality. However, most political observers seem to agree that this is one domestic program that passes the smell test. It is potentially  a rich harvest of low hanging political fruit because behind all the angry rhetoric of the campaign, both candidates put infrastructure near the top of their domestic agendas.

Serious Commitment

An analysis written in October by Commerce Secretary nominee Wilbur Ross and and business professor Peter Navarro — both senior policy advisers to Trump — points to a serious level of political commitment to infrastructure investment. It also indicates a willingness to consider innovative approaches to private sector financing for infrastructure  alongside public sector and public private partnership investments.

The “Trump Private Sector Financing Plan” described in their analysis is designed to be a revenue-neutral option for financing up to $1 trillion of the nation’s infrastructure needs over 10 years. A key incentive for early stage private sector infrastructure construction would come from federal tax credits. These would be  equal to 82% of the amount of the estimated equity required to absorb long-term revenue-related risks on projects. Because the equity component of the required investment is tax credit-supported, it reduces the revenue needed to service the financing, thereby improving the project’s feasibility.

Tax Neutrality

By their calculation, $167 billion of private sector equity investments in infrastructure could then be sufficient to secure leverage financing of $1 trillion. All of this assumes interest rates of 4.5% and 5%, an assumption that the post-election jump in yields call into question.

To achieve tax neutrality, the plan calls for the repayment of the tax credits from incremental revenue generated from project construction. That would be mainly from taxes on additional wage income and taxes on additional contractor profits.

Trump’s proposed corporate tax reform plan is designed to incentivize private capital flows into redeveloping America’s infrastructure. It achieves this by using the tax credit on infrastructure equity investment to offset corporate tax liabilities on the repatriation of  untaxed profits from foreign operations – effectively turning a tax liability into an equity investment.

Trump has proposed to tax US companies’ accumulated offshore profits at 10%, down from the current top corporate income tax rate of 35% on a one time basis if they repatriate those monies. US companies currently hold an estimated $2.5 trillion in earnings overseas because current federal law allows them to indefinitely defer paying taxes on these profits until they return them to the US.

Trump, who has specified that as a businessman he has “always loved leverage”, has also indicated a desire to take advantage of the current historically low interest rates to borrow long term, likely for a sum exceeding $500 billion.

Clean Sweep of Congress Helps

It’s worth remembering that Trump has been a real estate developer for his entire career. It is where his main business interests lie. But  it also seems that creating impressive, modern, even garish physical structures really excites him on a personal level. During the campaign, Trump emotionally recounted his experiences visiting modern airports in China and Dubai and wondered why the US has allowed its own public infrastructure to fall into its current state of disrepair.

Another factor that supports a potential increase in borrowing for infrastructure investment is the Republican sweep of both houses of Congress. Historically, most of the increase in federal spending in the US in recent decades has occurred under Republican administrations, most notably under George W. Bush when both Houses were under Republican control.

There is also considerable bi-partisan support for large scale infrastructure investment. President Barack Obama’s first term featured the American Recovery and Reinvestment Act, which was passed in 2009. It has been widely criticized for being too small in scope, and too focused on shovel-ready projects and other short-term fixes to address the enormous backlog of under-investment in infrastructure. But many still consider it an important Keynesian boost to the economy that contributed to the US outperforming other developed countries over the past eight years. A significant part of Hillary Clinton’s plan would have involved extending this investment program by creating a federally funded infrastructure bank that Obama was blocked from creating in the early part of his term by congressional Republicans.

Sorry State of US Infrastructure

There’s no question that the US would benefit enormously from new investment in these essential assets of future prosperity. The nation has been under-investing in its economic and social infrastructure for many years under both political parties, with overall spending dropping by half over the past three decades.

The extent of the neglect is evident across the board, with the American Society of Civil Engineers giving the country’s infrastructure a ‘D+’ GPA score on its 2013 report card. This includes a ‘D’ (poor) for drinking water and wastewater and a near failing grade of ‘D-‘ for levees and inland waterways. Aviation, roads and schools infrastructure are also rated ‘poor’ in terms of their fitness as measured by their capacity, condition, funding, future need operation, maintenance and public safety.

According to the ASCE, the US has infrastructure needs of about $3.6 trillion through 2020, including $1.7 trillion for roads, bridges and transit alone.

The Trump analysis points out that the future attractiveness of the US as an investment destination, its competitiveness, and its productivity are all at risk from the poor condition of the country’s infrastructure. It noted that the US now ranks 12th on the Global Competitiveness Index in infrastructure, with traffic delays due to inadequate transportation infrastructure costing the economy more than $50 billion annually.

Public Safety Issues Emerging

Beyond this, America’s quality of life and increasingly public safety are compromised, as recent episodes of lead poisoning and bridge collapses have demonstrated. The Trump campaign’s analysis cited an investigation by USA Today identifying nearly 2,000 additional water systems spanning all 50 states where testing has shown excessive levels of lead contamination of the past four years, including 350 systems supplying drinking water to schools or daycare facilities.

Since the Great Depression in the early part of the 20th century, infrastructure investment has been used as a fiscal tool for generating economic growth.

Citing the Federal Reserve, The Trump campaign paper says that in the US every $200 billion in additional infrastructure spending creates $88 billion in wages and increases real GDP growth by more than a percentage point, with each GDP point creating 1.2 million additional jobs. Other estimates, suggest that this multiplier effect could be even higher. According to the Federal Reserve of San Francisco, over a 10-year horizon, the average multiplier effect of government spending on highways is about two, which means that for every dollar spent, two dollars of GDP activity is generated.

There is also a potentially huge pool of domestic investment demand for infrastructure projects from pension funds, insurers and other institutions with long-term liabilities. The long-term nature of infrastructure programs means these investments are structurally well matched to the revenue flows from the debt that finances their construction, operation and maintenance.

Inflation Protection, Diversification Benefits

This revenue is highly reliable due to its link to dedicated tax revenue streams (availability payments) or revenue collected from tolls (concessions), it can provide inflation protection to the investor. Investors also look to infrastructure for its portfolio diversification benefits.

There are several challenges that could derail, or at least limit the success of Trump’s infrastructure plans. Among these is that the US unemployment rate has now fallen below 5% and continues to decline. That leaves very little slack in the labor market to prevent cost-push inflation from being generated. Regardless of the fundamental economic case for investing in infrastructure, shortages of labor are bound to appear, driving up the cost for delivery of these assets and making his goal less attainable.

It seems, in fact, that Trump’s plans for rebuilding America’s infrastructure will almost certainly be at cross-purposes with other key elements in his domestic agenda. Most notably, this includes his outspoken pledge to deport some 11 million illegal aliens.

Debt Spiral Risks

Another consideration is that the scale of Trump’s other policy initiatives, including higher defense spending and a range of tax cuts, could create a debt spiral that is potentially unsustainable. Already, the bond curve has steepened significantly amid concern that interest rates could start to rise quickly to prevent inflation from running out of control. If this happens, it could quickly and dramatically raise the cost of any large infrastructure investment program.

My own view is that Trump, or his Congressional allies will sooner rather than later have to decide which of his campaign promises needs to be curtailed so he can pursue the priorities that he believes will restore America to some semblance of his definition of its historic ‘greatness’.

Nearing A Watershed for Water Infrastructure?

By Henry Teitelbaum, Editor, P3 Planet

When public water infrastructure makes it into the presidential campaign debate, is it a sign that public discourse is at a tipping point?

Considering the scale of the looming national  water crisis, let’s hope it is. Public debate has been long overdue over how best to cover the giant backlog of under-investment in safeguarding sustainable drinking water supplies. We’re now at a point where doing something about it is as important as finding new sources of fresh water to supply the parched Southwest corner of the US.

Traditional Delivery

In most countries, the US included, the idea used to be that water is too precious a public resource to allow the private sector to have any control over managing its delivery, or even the operation and maintenance of its physical infrastructure.

But the  Flint, Michigan lead poisoning scandal changed all of that. For one thing,  the myth that dedicated public sector servants somehow can ensure better safety standards than if water supplies were privately run has been exposed. Not only did the government fail in its mission to protect and serve the people, it has claimed the right to hide from its responsibilities. 

Michigan’s Get-Out-Of-Jail-Free Card

Michigan’s ‘sovereign immunity’ doctrine is a piece of self-serving state legislation that now presents a significant legal obstacle to anyone seeking compensation, or even medical treatment for the long-term health damage caused by lead in the water supply. Under the law, Michigan and other states must grant permission to anyone making a legal claim against it.

In other words, officials elected by many of the same people who have been poisoned by their subsequent  negligence are in a position to deny legal responsibility for actions they take in an official capacity. So victims can give up on the idea that the government is better motivated than the private sector to pay for heath care,  worker’s compensation or damages, when things go badly wrong.

Blame it on the Budget

The lack of adequate public financial resources to pay for water infrastructure maintenance cuts to the heart of the issue, not just in bankrupt states like Michigan, but  across the country and, indeed, around the world.

It goes a long way towards explaining why water regularly ranks at the bottom of the American Society of Civil Engineers’ Report Card on the nation’s infrastructure. It’s current grade is a D-minus, placing it one notch above failing.

Private Money to the Rescue?

The free market approach, as often advocated by business-minded politicians, is that privatizing these assets will bring better cost control and more efficient service. This is predicated on the shaky assumption that any company that gets the contract will treat public health as a solemn trust, even as it strives to provide fat returns to its shareholders.

If you think calling in the private sector is always the best alternative model for managing water and other essential public resources, consider the largely preventable water crisis that recently brought the western hemisphere’s largest mega-city Sao Paulo, Brazil to the brink of disaster.

Sao Paulo’s Near Miss

SABESP is a mixed capital company that is both stock-exchange listed and publicly owned.  It has a 30-year concession for water and waste management in Sao Paulo, but has utterly failed to  manage the city’s available water supply in a country often referred to as the Saudi Arabia of fresh water. By neglecting to make critical investments in water infrastructure that might have prevented a severe water shortage in 2014,  it bears direct responsibility for bringing the city to the verge of catastrophe.

An equally damning  criticism  is that the profit-oriented structure of the company is fundamentally at odds with its ethical and public health duty to deliver an essential public service. The company’s long history of stock splits and  increasing dividends to stockholders does little to discourage this view.

Short-changing  Public Health

While the water crisis there has receded for the moment,  critics say SABESP’s failure to invest in critical water infrastructure gave short-shrift to the health of 30 million citizens of Sao Paulo.

Beyond the near criminal neglect of infrastructure are systemic legal issues, such as Brazil’s constitutional requirement for shared management of water resources by Federal, state and municipal authorities. A lack of communication or coordination among these levels of government resulted in watersheds being managed based on political rather than more logical geographical criteria.

Water Delivery in The Age of Shortages

So what is the right structure for water infrastructure delivery?

There is of course no single blueprint that applies to all situations. But considering how climate change is likely to bring a lot more spot shortages of water going forward, it’s fair to expect that water  infrastructure issues are going to come up again and again.

Given the gravity of water issues around the world a look at how Israel has overcome chronic water shortages by adopting holistic delivery and  management practices coupled with advanced desalination technology provides some scope for optimism.

Israel, like many countries, faces challenges related  to  a growing population, a thirsty agricultural sector and over-exploitation of natural water resources. It also exists  in a particularly hostile, crowded and arid region of the world.

As water shortages became critical earlier this century,  the Israeli government established an inter-ministerial agency in 2007 with the goal of coordinating policy at all levels and implementing the most comprehensive water management program ever undertaken.

Holistic Approach Needed

The program included a big push on water conservation, but also an ambitious wastewater recycling plan to ensure adequate water was available for agriculture use. For human consumption, the country planned. and has now mostly completed building five giant desalination plants using the latest reverse osmosis technology.

These convert sea water into potable water by forcing it through a membrane that filters out the salt and other impurities. The plants were delivered using the public private partnership (PPP) model, which enabled the government to tap the private sector know-how and financing to bring innovative approaches to reducing energy consumption and boosting efficiency.

In return, the company, IDE Technologies, got a concession to operate the plants for 25 years, after which time the assets will be transferred to state ownership. The state, for its part, retains final ownership of the assets, but buys the desalinated water from the company for 58 cents a cubic meter. That’s actually cheap by Middle Eastern standards. It then reinvests the money it collects from taxes into new water infrastructure, which is being developed by the national water company, Merokot.

Making Friends In the Middle East

The country now has a water surplus, which in a hostile neighborhood such as the Middle East, could go a long way towards building lasting friendships.

The risks are weighted toward further severe water crises, whether due to over-exploitation of existing natural supplies, or the effects of climate change. So at the very least, Israel’s successful use of PPP to manage its vital water requirements represents one highly effective model for water delivery in an increasingly thirsty world.

This article has also appeared on Medium and Business Daily

 

Climate Change Reshapes Infrastructure Investing Frontier

By Henry Teitelbaum
Editor, P3 Planet

Unless you’ve been living under a rock, you may have noticed that  climate change investing is finally starting to get the widespread attention it deserves.

In this regard, December’s COP 21 Paris Climate Change Conference was the watershed moment we’d been waiting for. The signed document that came out of that particular event legally binds all countries to work towards limiting the rise in average global temperature to less than 2% from pre-industrial levels. In terms of adaptation effort, it also brings clarity to how the government and business need to proceed with their investments in the physical infrastructure.

“COP 21 was a clear signal to business that any investment in infrastructure has to be low carbon,” Laetitia De Marez, senior climate policy analyst at Climate Analytics Inc. in New York tells P3 Planet. She says the international agreement to limit CO2 in the atmosphere means that governments can no longer commit public funds or, for that matter facilitate private sector funding for carbon-intensive projects. Beyond funding issues, she believes there is a growing risk that these investments will create “stranded assets” as economies shift towards renewables.

Stranded assets are investments, such as those in fossil fuels, technologies or related businesses, that suffer premature write-downs or conversion to liabilities. This reduction in their value becomes more likely as regulatory, tax and other indirect costs penalize the burning of carbon.

Climate Change Tops Risk Survey

The speed with which climate change has moved to the top of the global agenda is evident in January’s World Economic Forum 2016 Global Risks Report http://www3.weforum.org/docs/Media/GRR16_ExecutiveSummary_ENG.pdf. The 11th edition of the report found that the possible failure of climate change mitigation efforts is for the first time the top concern among survey respondents. What’s more, concerns about cascading risks related to climate change, including water crises and large scale involuntary migration are now in the top five concerns in terms of potential impact.

There is also a growing recognition of the investment opportunities in delivering the physical infrastructure that addresses climate change risks. Business leaders understand that green infrastructure, whether for public transportation, renewable energy or climate adaptation projects such as flood barriers, sea-walls and coastline conservation, is a good investment in and of itself. Not only do these  investments help to safeguard human and natural habitat, they are capable of generating  stable  long-term returns.

Mobilizing the private sector is important for two reasons. One is that we live in an age of fiscal austerity and constrained public budgets. This means that achieving any of the targets set by the United Nations Framework Convention on Climate Change (UNFCCC) will require private sector funding, particularly in underdeveloped countries. The other is that many investments in public infrastructure generate economic growth in both the short and long-term that more than justifies the initial expense.(http://www.frbsf.org/economic-research/publications/economic-letter/2012/november/highway-grants/)

PPP Model Draws New Interest

One UNFCCC-supported approach to tapping into the financial resources, efficiencies and technologies that the private sector brings to efforts to tame global warming is through the Public Private Partnership model.

PPPs are partnerships between public institutions or non-governmental organizations (NGOs) and private sector developers, who in addition to providing expertise bring their own financing to the table. In the context of climate change mitigation efforts, they have been already been successfully used to support forest and coastal wetlands conservation efforts, among others. Looking ahead to the growing challenge that global warming poses to existing economic and social infrastructure, their use is becoming even more important as the rising cost of adaptation places a greater burden on public finances in both developed and developing economies.

The growing interest in attracting private sector investment to climate change mitigation also comes at a time when there is strong structural investment demand for the assets that are created.

Rising Demand, Constrained Supply

Institutional investors in the developed world, particularly those with very long investment horizons such as public pension funds, are finding it challenging to meet their liabilities as more and more baby boomers reach retirement age. More than a decade of low interest rates has meant that many of these funds can no longer expect government bonds to provide the yield they are committed to paying out to pension recipients. As a result, trillions of long-term investment dollars are searching far and wide for high-quality cash-generating investments backed by physical assets with sufficient yield to cover their liabilities. And this increasingly points them towards investments in green infrastructure projects.

There is much work to do. Years of under-investment and neglect of physical infrastructure in developed and developing economies alike have left many countries with huge infrastructure deficits. McKinsey & Co. has estimated the global infrastructure deficit for the period from 2013 to 2030 at around $57 trillion. http://www.mckinsey.com/insights/financial_services/money_isnt_everything_but_we_need_$57_trillion_for_infrastructure

Governments, typically burdened with shorter-term political priorities, have consistently failed to make the necessary long-term investments that would put a dent on this deficit. Many have also been unwilling or unable to incentivize private sector investment by extending credit guarantees, and some do not even have the legal and regulatory structures in place. A further complication is that some of the private sector banks that used to play leading roles in arranging project financing have withdrawn from the sector since the financial crisis.

Institutions Becoming Early Stage Investors

One important development has been for pension funds, private equity firms and other long-term investors to take on leading roles in the financing of PPP projects themselves. In more and more cases, this means leaving their comfort zone and find new ways to manage the risks involved in early stage investment.

Public sector authorities around the world can do much to encourage this trend at minimal cost. Among the several ways they can help to incentivize private sector investment in climate resilient infrastructure would be to adopt PPP enabling legislation. Beyond this, governments should  provide credit guarantees to enhance the credit quality of debt funding for specific projects, remove structural impediments to infrastructure development, and promote best practice by establishing local centers of excellence.

A multilateral facility whose advancement would also support these efforts is the UNFCCC’s Green Climate Fund. This fund is designed to encourage programs and policies to support thematic investments in climate change mitigation, such as in climate resilient infrastructure for developing countries. It currently has more than $10 billion of funding in place and a goal of raising $100 billion by 2020. But the fund, which was established more than five years ago, is beset by disagreement over board transparency, country ownership and the role private enterprise should play in financing solutions. Developing countries want fund resources to focus on financing locally sourced solutions that support small- and medium-sized businesses. But developed countries are pushing for a Private Sector Facility that focuses on tapping into the huge capital resources available from institutional investors.

Explosive Growth Of Green Bonds

Other facilities for attracting private investment to climate change mitigation projects are faring better. Early progress from multilateral and national development banks in developing a global market for Green Bonds has led to explosive growth in the past three years. New issuance topped $41.8 billion in 2015, and is expected to rise to $100 billion in 2016, according to the Climate Bonds Initiative. https://www.climatebonds.net/

Governments and public sector authorities at every level can help to deepen the liquidity of this market further by issuing their own green bonds. But they should also consider offering credit enhancements such as guarantees to improve the risk profiles of important projects. Tax incentives are another tool that could be used to attract long-term investors. http://www.climatebonds.net/files/files/10%20point%20policy%20guide.pdf

What the world’s climate cannot afford is a drawn out debate over modalities. Global warming is a reality that cannot wait for consensus. We need to act now.

If you’d like to support P3 Planet’s mission to promote sustainable public infrastructure, please contact Henry at hthq@hotmail.com.