Viewpoints – Julie Kim: Time is right for California to tap private infrastructure financing

150 150 Justin Ewers

(Photo Credit: afflictedmonkey)

During a long career in Asia managing large infrastructure projects, Julie Kim got a preview of the pinch California now finds itself in. Throughout the Asian building boom of the 1990s, Kim encountered governments from Korea to the Philippines eager to build the seaports, cargo terminals, and urban rapid transit systems that were critical to their countries’ economic growth. They also shared the same problem: They didn’t have enough money to pay for them.

Time and time again, Kim watched developers and elected leaders adapt–and find new ways to access the private funds they needed to get the job done. In the Philippines, for example, Kim developed a private procurement process that helped lay the groundwork for the construction of the first privatized air cargo terminal in Manila, a project that now serves, literally, as a gateway to the global economy. 

“By tapping private markets, they got the capital they needed and got the facilities built, which would not have been possible otherwise,” says Kim, who co-founded Stanford University’s Global Projects Center in 2004. Among other goals, the center aims to drive a national conversation about how the decaying American infrastructure system could benefit from a similar approach.

“I wanted to do more of these types of public-private partnerships–there has been a pretty significant shift toward this approach throughout the world over the last three decades,” says Kim, now a visiting fellow at Stanford and the founder & CEO of her own consulting firm. “But so far in the U.S., we have been lagging behind.”

This is something Kim is eager to help change, and she hopes to start in California, the state with the nation’s largest infrastructure needs–estimated at $765 billion over the next 10 years–but with the resources available to pay for only about half of it.

Bringing a new approach to California

With Gov. Jerry Brown poised to unveil a new five-year infrastructure plan for the state this year, Kim has joined a growing number of experts who hope to convince the administration the time has come to update the state’s approach to infrastructure financing–and to move away from its current dependency on an ever-dwindling supply of municipal bond sales and state revenues. Among those championing a new approach is California Forward, which has developed a set of principles for a Smart Infrastructure System for California.

In a new paper, Kim outlines her own ideas for what the state can do–right now–to jumpstart investments in public projects, including both public and private financing options.

“We have an infrastructure funding need of $765 billion–and a total shortfall of about $380 billion, but what does that mean?” says Kim. “I like to talk in hard numbers, to peel the onion and make sure we know what we’re talking about.”

While the list of potential projects is long, Kim believes there’s no argument about the California’s most pressing challenge: Transportation. Over the last 10 years, with the state’s fiscal situation uncertain, nearly two-thirds of its infrastructure spending has been focused on education, Kim says–with much of that funding coming from the local level.

The state’s infrastructure needs over the next 10 years, though, will be quite different: Of $765 billion in needed investments, some $575 billion are transportation projects. “About 55 percent of those needs are in maintaining highways and local roads,” says Kim. “Another 33 percent is in public transit. Together, that’s almost 90 percent.”

The vast majority of California’s infrastructure deficit, in other words, is made up of projects that are neither controversial nor complex. There just isn’t enough money to pay for them. Transportation officials estimate the state currently has about $275 billion in existing revenue to pay for transportation costs over the next 10 years–leaving the state’s transportation projects short about $300 billion.

That $300 billion shortfall, says Kim, is the real gap policymakers should focus on. With the state currently spending in the neighborhood of $20-25 billion a year on all infrastructure–and with little appetite for large tax increases to pay for public projects–California faces the same question the Philippines and Korea did 20 years ago: Where to find the money?

The case for both public and private financing

Kim argues that there are several ways to close this gap, many of them involving a combination of public-private partnerships. Judging from experiences from other countries, she believes that if California adopted this approach, the state could fund up to 15-20 percent of its total infrastructure needs–or about $150 billion. “This would eliminate almost 40 percent of California’s existing infrastructure shortfall,” says Kim.

Kim divides her proposals into two categories:

1) Kim argues that about a half of the $150 billion (or $74 billion) can readily be sourced through existing federal incentives and private sector “at-risk” equity contributions. Specifically, this includes:

  •  Private activity bonds – $37 billion: These tax-exempt bonds offer the same advantages as municipal bonds, but the repayment responsibilities are in private hands. Current regulations specify private activity bonds can be issued by each state at a rate of $95 per-capita, per year (their spending can be delayed up to 3 years). For California, with its 37 million people, this adds up to a $3.7b annual tax-exempt bonding capacity every year with no recourse to the state–which works out to $37 billion over ten years. “This is easily accessible, additional capacity the private sector is responsible for,” says Kim. “California has just not capitalized on the level of these bonds we can actually issue.”
  •  TIFIA loans – $7 billion: Kim believes California could also take better advantage of the federal Transportation Infrastructure Finance and Innovation Act (TIFIA) program, which provides credit assistance to “significant” regional projects in the form of direct loan and loan guarantees. The program currently has a $1.75 billion lending authority–which, according to TIFIA, can effectively be leveraged at 30 times that amount. Divvying up this pot of money based on state GDP, California (responsible for 13 percent of the nation’s economic activity) could potentially collect about $7 billion. “This amount could be even larger if there are additional TIFIA authorizations in the future,” says Kim.
  • Private equity contributions – $30 billion: The largest and most complex public projects–heavily-used roads like the Presidio Parkway in San Francisco, for example–best lend themselves to public-private partnerships. The Presidio’s $1 billion project attracted nearly $400 million in private capital. All told, since 2005, private investors have contributed about 20 percent of their own equity in American public-private projects in roads and public transit systems. Assuming that same ratio holds for the $150 billion worth of projects Kim believes could lend themselves to public-private funding, the state could tap into roughly $30 billion in private equity.

“I understand there’s a tremendous resistance to public-private partnerships in the U.S.,” says Kim. “But many people don’t have a good understanding of it, and a lot of the really important issues aren’t being discussed fully. There’s a way to do this without selling off all of our assets to the private sector.”

2) Kim says the other half of the $150 billion (or $76 billion) would be sourced through private sector debt-financing, typically in the form of long-term bank loans or “fixed-income” taxable bonds. This would involve at least one major change:

  • A stronger infrastructure bank – The state’s existing “I-Bank,” Kim argues, could play an important role in arranging a large portion of this debt-financing. Kim believes the state should revamp its I-Bank, an already-established financial tool for funding infrastructure projects. The I-Bank has broad statutory powers to issue revenue bonds, make loans, and provide credit to a wide variety of projects. It has thus far financed some $32 billion worth of projects over its 13-year history, but Kim would like to see that number expanded–and the bank’s business model revised.

“Right now, the bank’s typical lending is no more than $10 million per project,” says Kim. Instead of offering projects only small-scale loans, she thinks the bank should act more like a credit union based on a business model she calls an “infrastructure cooperative” or “I-Coop.” If, for example, the I-Bank could raise $4 billion from private sources–perhaps including some of the largest state pension funds, which might blunt political opposition to the idea–it could then lend out as much as $40 billion (of the $76 billion) to worthy projects across the state. The private sector can then handle the remaining debt-financing needs on its own.

There are obvious hurdles involved, including existing laws that limit the I-Bank from engaging in certain banking activities that attract private capital. But Kim believes the time is right: “There’s a tremendous appetite for infrastructure investment globally, and state infrastructure banks could play a much more significant role in accessing these resources.”

While Kim’s proposals could help the state close almost 40 percent of infrastructure existing shortfall, much of the rest, she believes, could be dealt with by carefully prioritizing and phasing the state’s infrastructure spending.

“If you look at transportation again [with its $300 billion shortfall], their estimate of what’s needed for roads, for example, is based on those that are “at-risk” conditions that can vary widely,” says Kim. “Knowing that we cannot fix them all, the key is to peel another layer–prioritize and fix those that are most pressing first in terms of their long-term risk impacts and phase the spending accordingly.” 

Eventually, Kim believes, these “small changes” can make a difference–and give the state a much bigger capacity for tackling its daunting infrastructure challenge. 


Justin Ewers

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