March 20, 2016

Infrastructure Financing – New Opportunities, New Programs

The United States and most U.S. states and their local governments have an increasingly urgent need for new infrastructure of all types, particularly new clean energy sources and supporting infrastructure. Satisfying these needs will require much capital and increasingly sophisticated levels of managerial and technical expertise. The response to these urgent requirements has in many cases taken the form of public-private partnerships involving support by federal, state and local agencies and governments for private financing and development of infrastructure projects. In many jurisdictions, such support mechanisms are changing and new forms are being created.
 

California – Enhanced Infrastructure Financing Districts 

California cities and counties were authorized, starting January 1, 2015, to establish Enhanced Infrastructure Financing Districts (EIFDs) to provide the support of local governments for private infrastructure investments in or affecting their jurisdictions. An EIFD is “a legally constituted governmental entity separate and distinct from the city or county that established it” pursuant to state law, and is further defined as a “district” for tax purposes and as a “local agency” for purposes of the California Government Code. The EIFD is designed to fill the gap left in the ability of cities, counties and special districts to invest in infrastructure as a result of the termination of redevelopment agencies in 2012. An EIFD can have significantly broader powers than redevelopment agencies had, and can also provide advantages that other alternatives, such as traditional Infrastructure Financing Districts (IFDs) and Community Facility Districts (CFDs), can’t offer. The EIFD is jointly governed by representatives of the taxing entities, including counties, cities and special districts, which have agreed to contribute a tax increment or other revenue stream to the EIFD by consenting to the EIFD’s use for its designated purposes of taxes that such taxing entities are otherwise authorized to collect and use. An EIFD can exist for up to 45 years after it is created. Two of the main concerns are to assure the continued use of much of the property tax revenues to finance schools and community colleges, and to protect and encourage affordable housing. 

An EIFD is empowered to finance public capital facilities or other specified projects of communitywide significance that provide significant benefits to the EIFD or the surrounding community, including:

  1. Highways, interchanges, ramps and bridges, arterial streets, parking facilities, and transit facilities;
  2. Sewage treatment and water reclamation plants;
  3. Facilities for the collection and treatment of water for urban uses;
  4. Flood control levees and dams, retention basins, and drainage channels;
  5. Child care facilities;
  6. Libraries;
  7. Parks, recreational facilities, and open space;
  8. Brownfield restoration and other environmental mitigation;
  9. Acquisition, construction, or rehabilitation of housing for persons of low and moderate income for rent or purchase;
  10. Acquisition, construction, or repair of industrial structures for private use;
  11. Projects that implement a sustainable communities strategy, when the California Air Resources Board has determined that the strategy would, if implemented, achieve certain greenhouse gas emission reduction targets; and
  12. Port or harbor infrastructure, as defined by Section 1698 of the Harbors and Navigation Code. 

The EIFD financing can provide for the purchase, construction, expansion, improvement, or rehabilitation of any real or other tangible property with an estimated useful life of 15 years or longer that falls within any of the foregoing categories, and for planning and design work that is directly related to the purchase, construction, expansion, or rehabilitation of property. In addition, the EIFD may finance affordable housing developments. 

The EIFD relies in large part on tax increment financing as its source of funds, like redevelopment agencies did. Unlike the redevelopment agencies, though, the revenues available to an EIFD cannot include moneys otherwise payable to a school district or a community college district. EIFDs also are limited because a city or county that created a redevelopment agency cannot create an EIFD until certain steps toward terminating the redevelopment agency have been taken. Another limitation is that an EIFD cannot finance routine maintenance, repair work, or the costs of an ongoing operation or of services of any kind. A protection with respect to affordable housing under the EIFD law is that the creation of EIFDs should not ordinarily lead to the removal of existing dwelling units, and if any such units are to be removed or destroyed in the course of public works construction within the area of the EIFD, certain requirements for replacing them must be met. 

The EIFD does have a number of advantages, relative to other entities that played or play similar roles in local development. The EIFD is not restricted to “blighted” or urban areas, like redevelopment agencies used to be. Also, the EIFD may include areas that are not contiguous. The facilities are not required to be physically located within the boundaries of the EIFD. 

An EIFD may utilize any powers under certain provisions of California law that authorize environmental restoration by local government, which includes eminent domain powers and provides the EIFD, owners and operators of the property, and downstream buyers with immunity from further requirements by state or local agencies for additional remedial work on properties after the initial environmental remediation has been completed. 

The EIFD’s ability to tap into tax increment financing from property taxes is limited but, on the other hand, provided that the applicable voter approval has been obtained and the infrastructure financing plan has been approved, the EIFD may utilize revenues from ten other revenue streams of local governments to support its activities.

The EIFD’s infrastructure financing plan sets forth the provision that specified taxes levied upon taxable property in the area included within the EIFD each year may be allocated to the EIFD as set forth in the law. The public financing authority may, by majority vote, initiate proceedings to issue bonds to be paid from such allocation over the following 45 years by adopting a resolution stating its intent to issue the bonds. (These bonds may or may not qualify as tax-exempt municipal bonds.) The bonds may be issued if 55 percent of the voters who vote on the proposition favor of issuing the bonds. 

In addition, a city, county, or special district that contains territory within the boundaries of the EIFD may agree to loan money to the EIFD to fund the activities described in the infrastructure financing plan. 

California – Affordable Housing and Sustainable Communities Program 

California’s Sustainable Communities and Climate Protection Act of 2008 supports the state’s climate action goals to reduce greenhouse gas (GHG) emissions through coordinated transportation and land use planning. Pursuant to the act, the California Air Resources Board sets regional targets for reductions of GHG emissions for passenger vehicles, and reviews and updates the targets periodically. Also under the act, California’s Affordable Housing and Sustainable Communities program (AHSC) funds land-use, housing, transportation and land preservation projects to support infill and compact development that reduces GHG emissions. AHSC is administered by the California Strategic Growth Council and it awarded its first year of grants in 2014–2015. In the 2015–2016 year, an eligible project will be able to seek up to $20 million in funding from the state under the AHSC. The funding is available on an annual basis from the state’s cap-and-trade auction proceeds. Applicants may be eligible for funding if (a) the project area has a residential development or residential portion of a mixed-use development in the project area in which at least 20 percent of the total units are affordable housing, or (b) over half of the project area is located in a “Disadvantaged Community,” as identified by the California Environmental Protection Agency’s CalEnviroScreen tool, which evaluates an array of socioeconomic factors. Many of the projects that received grants in the first year of the AHSC were eligible under both sets of criteria. AHSC primarily funds housing and transportation-related projects to support compact development that reduces greenhouse gas emissions by improving mobility options and increasing infill development. To be selected, applicants should support related objectives, including reducing air pollution, improving connectivity and accessibility to jobs and services, increasing options for bicycling and walking, transit projects and programs, and implementing the local Sustainable Community Strategy for meeting the regional target for GHG emissions set by the Air Resources Board. 

The California Strategic Growth Council finalized updates for the 2015–2016 AHSC Program Guidelines on December 17, 2015, with minimum and maximum award amounts per project at $1 million and $20 million respectively. The new guidelines set forth three types of projects, each of which must demonstrate the reduction of GHG emissions through a reduction of personal vehicle miles traveled due to the creation of transit infrastructure and/or active transportation and transit projects and programs. The first type of project is the Transit-Oriented Development (TOD) type, which requires the integration of “high quality transit” (e.g., trains and other forms of dedicated right-of-way or high-occupancy transit) into the project area; the second type is the Integrated Connectivity Project (ICP), which requires the establishment of transit and transportation infrastructure, projects and programs in an area that does not have high quality transit; and the third type is the Rural Innovation Project Area (RIPA), which is essentially an ICP in a rural area. 

New York – New Clean Energy Fund and Private Capital 

On January 21, 2016, The New York Public Service Commission approved, and Governor Cuomo announced, a new Clean Energy Fund (CEF) authorized to spend $5 billion over the next 10 years on clean energy infrastructure and related projects, to pick up where the state’s previous clean energy and energy efficiency mandates left off when they expired in 2015. The fund, along with private investment, will help to finance Governor Cuomo’s new Clean Energy Standard to meet 50 percent of the state’s electricity needs with renewable energy by 2030. That standard includes plans to phase out the state’s three active coal-burning plants within four years, and to close one of the state’s three nuclear power plants. The governor also directed the Public Service Commission to set mandates by June, 2016, for future use of renewable power. 

The CEF will have four major components. (1) The New York State Energy Research and Development Authority will use approximately $2.7 billion to stimulate consumer demand for clean energy and energy efficiency and to build the clean energy supply chains to serve that enhanced demand. (2) The CEF will commit almost $1 billion to support the growth of the solar electric market and industry in New York. (3) The CEF will contribute almost $800 million to the capitalization of the NY Green Bank, which is expected to leverage an estimated $8 billion of private investment. (4) The CEF will provide over $700 million to fund research and development in the clean tech industry in New York. The Public Service Commission also allocated $150 million of the CEF to the development of new large-scale renewable power projects in 2016. 

Governor Cuomo stated that the CEF will leverage more than $29 billion in funding from the private sector. While private financing for large-scale energy projects is not usually easy to find, New York has an advantage, being the headquarters location for a number of private equity funds combined with the fact that private equity funds are showing an increasing interest in energy projects. For example, Blackstone is continuing to pursue the construction of the Champlain Hudson Power Express to transmit clean electricity from Quebec to New York City by 2017, and the Federal Energy Regulatory Commission approved on January 13, 2016, the sale of the two remaining nuclear power plants in upstate New York to a subsidiary of Blackstone. 

State and Federal Innovations in Public-Private Partnerships for Transportation 

In response to the increasing requirements that state governments encounter in developing and financing transportation improvements and the repair and renovation of their existing transportation infrastructure, many states have focused on expanding the role of public-private partnerships in order to leverage their limited resources. In such arrangements, private companies may assume roles in the development, construction, management and financing of transportation projects that were traditionally undertaken by the public sector, although the public sector remains accountable for the project. 

The National Conference of State Legislatures (NCSL) has played a significant role in recent years in expanding the scope of public-private partnerships for transportation, both geographically and functionally. In 2010, it developed a toolkit to aid state legislatures in considering and evaluating such partnerships. By the time the NCSL published a set of updates and corrections to the toolkit in 2015, the number of states that had adopted such legislation had increased by four, to a total of 33 states, plus the District of Columbia and Puerto Rico, and the number of projects being financed and developed through public-private partnerships had increased substantially. 

The Federal Highway Administration (FHWA) of the U.S. Department of Transportation also supports the increasing use of public-private partnerships in transportation projects. It has established the Office of Innovative Program Delivery (IPD) to help states consider systematically their programs in terms of project delivery strategies, including the use of public-private partnerships, encouraging partnerships in the development of transportation improvements and to utilize private sector creativity, efficiency and capital to address the complex problems that often arise in transportation projects. The IPD’s role is to provide information and expertise in using different approaches to public-private partnerships. 

U.S. Department of Energy – Mission Innovation and the Loan Programs Office 

At the time of the United Nations Climate Change Conference 2015 (COP21) in Paris, it was acknowledged that, although important progress had been made in cost reductions and deployments of clean energy technologies, the pace of innovation and the scale of development remained significantly short of what is needed. Through the “Mission Innovation” initiative announced at COP21, 20 of the largest countries in the world have committed to double their clean energy research and development investment over the next five years. Moreover, Mission Innovation is complemented by a separate private sector-led effort that pledged to invest private capital in clean energy, focusing on early-stage innovations. This parallel initiative, led by Bill Gates, includes more than 28 private capital investors called the Breakthrough Energy Coalition. 

This combination of governmental and private support for research and development activities for early-stage innovation is impressive, but such innovation often stalls if it lacks the kind of financial support necessary to get innovations deployed on a commercial scale. Last December, the Executive Director of the Loan Programs Office (LPO) of the U.S. Department of Energy responded to this potential obstacle by announcing that the LPO could play a major role because it still has more than $40 billion in loan and loan guarantee authority remaining to help finance research and development that bring to commercial scale innovative technologies that reduce carbon emissions. Projects financed by the LPO are already helping deploy some of the world’s largest and most innovative clean energy projects, helping the U.S. to commercialize a clean energy economy, and providing technologies that are being adopted globally. 

Foreign Projects and Opportunities 

Infrastructure projects and the related financing and legal work are increasingly international in nature. Lawyers in the United States and elsewhere can look beyond their borders for opportunities to be involved and apply their project interests and skills. Canada is an excellent market for consideration, with recent changes at the federal government level and in several provinces that should bring opportunities. A theme of the election promises made by the Liberal Party of Canada, now the Government of Canada, with a controlling majority, was a stimulus program for the Canadian economy using significant infrastructure investment. This promise continues to be repeated and appears to be developing as a federal initiative. Investments will include infrastructure projects of specific public interest, mainly to be identified by the individual provinces and municipalities. Significant infrastructure investment is anticipated to be in public transit, green projects (particularly renewable energy) and social infrastructure, including affordable housing. 

The infrastructure spending program will be for refurbishment and expansion of existing projects and construction of new and expanded infrastructure projects, particularly in public transit. Grants, loans, and similar support, together with simplified approval processes, will make practice in infrastructure project development and related finance a key area of interest for several years. Canadian financing sources, including particularly the term-lending sectors of insurance and pension, have a strong interest in infrastructure with stable revenue. That said, the stated intention is to find ways to expand the market appetite for infrastructure projects, in both the private debt and equity markets and in the public markets. 

India has not produced the levels of GHGs that the United States has produced historically, but the government of India is determined to grow the economy of India and promote the well-being of the people of India. The Indian government is aiming to increase renewable energy capacity to 175GW by 2022 while bringing electricity to an additional 300 million people. These steps, coupled with access to finance, quality project development, and government regulatory systems, lend themselves to the new opportunities and new financing structures needed to accommodate them. 

Long-term and local currency financing for India’s renewable energy sector is an increasing constraint to sustainable growth, both for the mid/large-scale projects (50-200 MW) and the smaller-scale renewable-energy value chain (including household and off-grid solar). Simultaneously, as the central bank and financial regulator, the Reserve Bank of India (RBI) is limiting the inflow of foreign capital for such purposes. 

The RBI’s priority sector lending targets for domestic and foreign commercial banks mandate that within the next three years, 40 percent of bank loan portfolios will have to be in certain sectors, including agriculture, micro and small enterprises, education, affordable housing and renewable energy. 

Macroeconomic stabilization, after a period of high inflation and interest rates, provides new financing opportunities through the domestic capital markets where institutional investors can provide large-scale financing. The bond market for project finance transactions is opening up, presenting opportunity for the renewable energy sector. 

With both the renewable energy and priority sector lending targets key to India’s development goals, many banks are keen to increase their work in these sectors. Prime Minister Modi has implemented a number of pro-sector reforms since taking office, including setting targets for renewable energy generation and consumption and proposing tax-friendly reforms. 

Owing to the nature of project financing, it can be challenging for greenfield renewable energy projects to access the capital markets, which provide long-term and relatively cheap funds. Instead, projects in India have historically accessed shorter-term loans from specialty banks that understand the technology and construction process. These banks are better able to deliver a loan product with more flexibility than capital markets (e.g., phased disbursements). As project become bigger, however, banks may not have enough funding or experience to meet the market needs. 

Fundamental challenges facing the banking sector in lending to infrastructure include regulatory and self-imposed caps on exposure to the energy sector and single borrowers in addition to asset-liability mismatches on banks’ balance sheets (79 percent of bank deposits have a tenor of less than three years, while most renewable energy projects have a tenor well in excess of ten years). Capital market access could aid in closing this gap by increasing the amount of capital available through pension funds and life insurance in particular and to enhance the borrowing terms. The move towards capital market financing for such projects has gained some momentum in the past year, presenting new opportunities for financing, including the use of enhancements from development institutions, which can be instrumental to capital market development by improving a project bond’s rating and thus, opening up the market. 

Development agencies, such as USAID, seek to create partnerships that combine the assets, technologies and resources of public, private and nonprofit organizations. The varieties of partners can include large multinational corporations, local businesses, universities, foundations, nongovernmental organizations, and government agencies. USAID’s preferred model for partnering with private entities and other nontraditional partners are Global Development Alliances, which enable USAID to access private sector markets, skills, technologies and assets to promote market-led development while providing it with USAID’s expertise, relationships and financial support. One of USAID’s most widely used forms of such support is the Development Credit Authority guarantee, through which USAID has made $3.7 billion in credit available in 74 countries during the period from 1999 to 2014. 

Conclusions 

The need for replacement of aging infrastructure across the developed world provides investment opportunities in a number of sectors. Renewable energy provides opportunities throughout developed nations, with a focus on hydroelectric in Canada, geothermal in the United States, and nuclear in the United Kingdom and Europe. Social projects, including affordable housing in many parts of North America, represent opportunities for commercially based returns with public revenue support. Public transit provides a utility-like return on investment and transit expansion is required in many of the developed countries and their major municipal centers. The coincident development of infrastructure gaps in many of the developed nations should allow the exportation of legal skills and techniques by North American lawyers as they follow their clients into support of the international growth in infrastructure development and refurbishment. 

Just as the need for countries around the world to fill the requirements for construction and renovation of infrastructure relating to energy, transportation and other critical needs has resulted in the development of innovations in the technologies and expertise involved, it has also caused the development of advancements and refinements in the financing structures and tools needed to support such innovative projects up through the commercialization stage. For the lawyer who is helping clients to develop and commercialize such new innovations, it is important to be aware of, and to be able to counsel the clients on, the financing structures and tools that are necessary, and are constantly changing.

Additional Resources

For other materials on this topic, please refer to the following. 

Business Law Section Program Library

Best/Worst Practices – Drafting in the Forefront (Project Finance) (PDF) (Audio)
Presented by: Project Finance and Development, Commercial Finance, Energy Business, Young Lawyer
Location: 2015 Annual Meeting

Show Me the Money: Financing and/or Acquiring Renewable Energy Projects (PDF) (Audio)
Presented by: Energy Business, Business Financing, Project Finance and Development, Securitization and Structured Finance
Location: 2015 Annual Meeting

Planes, Trains and Automobiles: Current Issues in Transportation Projects (PDF) (Audio)
Presented by: Project Finance and Development, Business Financing, Commercial Finance, Community Economic Development; Environmental; International Business Law
Location: 2014 Spring Meeting