Navigating Infrastructure Delivery Through Financing Headwinds

As the federal debt grows and bond yields rise, public owners may need to reevaluate their approach to financing and delivering essential infrastructure projects. Over the past few weeks, the national debt surpassed $40 trillion and the yield on 30-year U.S. Treasury bonds reached a 19-year high. Growing federal debt may constrain future federal contributions to state and local projects, while rising bond yields may increase borrowing costs for those projects. To overcome these challenges, state and local governments may need to consider alternative strategies to address their critical infrastructure needs.

When applied strategically to appropriate projects, project delivery methods such as design-build and construction manager-at-risk may create efficiencies with respect to project cost and schedule. An environment with constrained government financing options may also lead more public owners to consider public-private partnerships (P3s) for project delivery. While private developers are facing similar challenges with respect to increased borrowing costs and inflation, P3 structures could open avenues for combining public and private financing sources to raise the capital necessary for major projects. Further, the greater flexibility in risk allocation offered by delivery models such as design-build and P3s may provide greater cost certainty for public owners, provided such risk allocations are made appropriately.

Although public owners may look to alternative delivery and financing strategies to address their infrastructure needs, federal support of state and local infrastructure financing will also be necessary to deliver projects. The need for Congress to pass a surface transportation reauthorization bill to provide surface transportation funding after the current authorization under the Infrastructure Investment and Jobs Act expires this year presents an opportunity to increase the funding sources available to public owners. Federal grants to state and local governments and other direct expenditures for projects will always be an important component of infrastructure financing, but the rising federal debt and increasing borrowing costs could constrain Congress’s appetite to deliver the level of direct expenditures for infrastructure projects that state and local governments desire. However, Congress can also expand the financing tools available to state and local governments by supporting programs such as private activity bonds and TIFIA loans, which can leverage federal resources to reduce public infrastructure borrowing costs, but generally do not have as great an impact on the federal debt as direct expenditures.

While reduced federal funding and rising borrowing costs may create a challenging environment for public owners seeking to address their critical infrastructure needs, public owners can still deliver important projects through careful, proactive planning and the effective application of alternative delivery and financing strategies.