A Public-Private Infrastructure Cooperative for California

Abstract

With almost three decades of collective experiences globally, the U.S. is well positioned to lead the future P3 market and to do it better than ever. However, the prevailing capital structures of recent P3 projects exhibit a significant level of subsidy-like contributions from the federal and state governments. This is due in part to the perceived difficulty in securing long-term funding as a result of more stringent post-2007 liquidity and leverage standards for banks and insurance companies. This P3 climate in the U.S., however, has not mirrored the climate in the global investment community. The investor appetite for infrastructure is at an all-time high and infrastructure as an asset class is seen as the next fixed income. Despite the current hype, the inherent challenges to P3 financing and financial viability remain: in particular, the capital-intensive upfront construction-phase funding, the prolonged negative cash flow, and the post-construction restructuring. Due to these early phase risks, many banks charge high risk premiums or are staying away from greenfield projects with large construction commitments altogether. A public-private infrastructure cooperative or “I Co-op” is proposed in this paper to address these critical early phase funding risks for the P3 market in California. I Co-op’s business model helps to eliminate the need for subsidies on P3 projects by converting them into market-driven P3 equity and debt capacity with returns for reinvestment. The model is also explicitly designed to mitigate key political risks underlying P3 projects. I Co-op is an independent infrastructure bank dedicated to financing P3 projects in California. Its ownership is founded on public-private partnership and its initial capitalization draws upon the State’s non-capital contribution in the form of P3 participation guarantees, private capital contributions from local and global investors, and its own bank deposits. Through I Co-op, the State can effectively increase its debt capacity without jeopardizing its current debt limit and with no direct capital contributions. For global investors, I Co-op provides a new vehicle to access a portfolio of infrastructure assets, thereby offering them the opportunity to further diversify their risks. It is recommended that the State consider I Co-op as one of the solutions for actively promoting private sector participation as it strives to bring its infrastructure back up to the world-class level it enjoyed in the past.