Helping Our Cities and Towns Grow Sustainably
Against the backdrop of a sluggish economic recovery and budget constraints at all levels of government, American cities continue to grow. The country’s ten largest metropolitan areas, which include New York, Los Angeles, Baltimore-Washington, Chicago, the Bay Area, Houston, Dallas-Fort Worth, Philadelphia, Boston and Atlanta, have seen steady growth between 2009 and 2012. Urban centers in general, and major cities in particular, press above their weight economically. Growth, and even moderate growth, places high demand on governments, local authorities, and planners.
To grow sustainably, these urban centers must continue to make major investments in their infrastructure – across healthcare, transportation, utilities and public services such as government and education. Tax receipts alone are not enough to generate the capital needed to fund such investment. Access to private finance is needed, using financing techniques that offer efficient and competitive solutions for both cities and their taxpayers alike.
As outlined in the 2011 Siemens Financial Services’ white paper The Affordable Metropolis, current estimates peg U.S. urban infrastructure investment to reach 3.6 trillion dollars by the year 2020. In the short term, however, the municipal sector faces an estimated shortfall ranging between $50 billion and $80 billion between 2010 and 2012 alone.
In a survey of city finance offices conducted by the National League of Cities in 2011, 69% expected to delay or cancel capital infrastructure projects.
Public Private Partnerships (PPPs) are one important solution to the infrastructure improvement challenge. These can range from traditional government procurement to totally private ownership, and from involvement in existing facilities to new ones.
The great attraction of the PPPs for city infrastructure investment is that financiers not only provide the required capital at a transparent rate of return over a long period, but financiers also share the project risk by providing a portion of their investment as equity at a risk premium included in the return rate.
Risk transfers to the private sector include cost overruns, construction delays, and, in certain cases, usage risk and need to be constantly monitored – another valued core competence of the financier.
Depending on the type of PPP, other risks may transfer to the financier as well. This type of investment is likely to encourage careful scrutiny from investors, who leverage their technical expertise to help ensure that projects are completed on time and on budget, and produce the public-service outcomes that were originally envisioned.
Siemens Financial Services (SFS), for example, fully participates in the project-finance market and actively lends into PPP projects in North America. As a financier who can provide both debt and equity, SFS is a good example of a private participant whose range of expertise helps to ensure funds are available to complete essential infrastructure projects for urban centers.
To date, SFS has participated in several PPPs in the U.S., including, for example, a project to upgrade service plazas along major highways in a heavily commuted state.
Large cities are not alone in their need to access new infrastructure financing. Townships and municipalities across the U.S. must also find ways to invest in essential infrastructure projects, which span the gamut from transportation and construction improvements to utilities and public services, such as government and education.
Energy-saving initiatives in particular offer cities a strong return on investment and have a positive impact on the community. Despite this, many municipalities find it challenging to meet the capital requirements necessary to implement such projects and need to access private-sector finance.
Financing solar power
In 2011, Siemens introduced a Solar Power Purchase Agreement (PPA) program in the U.S., which allows public sector entities to bring solar energy projects on their properties without making any capital investment in solar equipment.
The program, carried out by Siemens Building Technologies in collaboration with Siemens Financial Services, deals with both the financial (Siemens takes on the risk) and technical barriers associated with implementing solar energy. SFS has now expanded this PPA model to include CoGeneration facilities for municipalities and higher education institutions that wish to outsource power generation to this facility.
In 2012, Siemens entered into its first Solar PPA with the Township of Hillsborough in Somerset County, New Jersey (right). The PPA included installation of solar panels on the roofs of a municipal complex and the Department of Public Works building.
The solar panels will provide 25% of the power at the municipal complex and 90% of the energy at the Department of Public Works, resulting in significant savings for Hillsborough.
The benefits of passing on certain project risks to the private sector and the need for private capital to fill funding gaps should continue to drive the interest in PPPs and other private-sector financing techniques and solutions.
That is good news for our towns and cities and their growing infrastructure needs.
Andrew Carman is Head of the Americas for the Project & Structured Finance - Infrastructure, Cities and Industry business unit at Siemens Financial Services (SFS). In this role, he has regional responsibility for the team’s four core areas of infrastructure, transportation, municipal and equipment finance and oversees a comprehensive debt and equity product suite that includes structured ...
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