The Biden Administration’s push for a large-scale infrastructure package has been met with unsurprising opposition, hampered by the two perennial concerns of infrastructure reform: Who will benefit, and how do we pay for it? And this time around, the need to encourage more sustainable infrastructure and green energy investment is a critical concern as well. With special interests battle lines drawn and negotiations underway, it benefits all parties to consider more exclusive and expanded ways of financing infrastructure, addressing each of these concerns from a new angle.
Antonio Vitti and Bob Dewing are co-founders of Pontoro, a financial technology company focused on transforming infrastructure financing. Here they share their thoughts on innovative financing solutions for infrastructure reform.
Innovations in financial technology can create opportunities for public officials to embrace new, flexible capital access platforms. Emerging institutional-grade digital asset platforms can synchronise key stakeholder objectives with enhanced regulation, oversight, and participation abilities. While this solution is already under development to improve private infrastructure financing, there is clear potential for crossover into the public and public-private initiatives central to overall reform.
Traditional infrastructure financing options provided a seemingly zero-sum choice: use public resources or use closed private financing silos. But what if current infrastructure debt originators (e.g., banks) and prospective long-term investor bases (e.g., public pensions, charitable foundations, and even retail mutual funds) stand to mutually benefit? Fintech innovations can provide, as an effective conduit, a transparent platform that allows new capital sources to participate in infrastructure investments in a scalable way through a pooled approach.
The platform our firm, Pontoro is building, facilitates connectivity between originators and institutional investors of all sizes using blockchain to enable high-velocity distribution of infrastructure debt, as well as investor-led customisation of debt portfolios around asset duration, segment, geography, and returns, all of which can create new options for financing infrastructure in a collaborative manner with current debt originators. In turn, it makes liquidity possible for a commercial asset class that traditionally required an onerous private placement process to change hands.
Congress and Wall Street may have historically had differing approaches to infrastructure financing; however, there is now an opportunity to align interests. Digitisation of financing channels creates a closer orientation of all constituents, which will be a critical factor for the success or failure of our needed infrastructure projects. These are no longer private versus public choices. Instead, the connectivity of many investors creates an opportunity for all sides – even those away from Capitol Hill and Wall Street – to have a stake in infrastructure reform.
By its nature, a digital market invites broader participation by private capital through a greater array of capital sources, which provides support to public and private-federal initiatives at improved velocity. In practice, our platform can provide greater and more flexible capacity to the debt financing needed for new government infrastructure initiatives, which, in turn, is dependent on the private sector being partially or wholly responsible for the construction and provision of the endeavour.
Increased liquidity, greater transparency and an expanded capital base constituting a greater array of investors have become common outcomes for sectors successfully engaged by Fintech – many of which attract ‘new’ money by accommodating a wider spectrum of financing sizes and tenors to suit investor preferences. What is more recent, and highly compelling for infrastructure, are developments showing technology can flexibly embed regulatory, reporting, and oversight features. If employed, this final piece will make liquidity possible for the infrastructure asset class which, historically, requires an onerous private placement process to change hands. The outcome: for the first time, new sources of capital will be able to participate flexibly, away from Wall Street.
We recognise that for all large-scale initiatives, the buy-in of state and local leaders is critical. A more inclusive financing platform invites communities throughout the U.S. to participate in infrastructure reform.
In this case, banks may wish to underwrite new infrastructure projects but do not always desire to hold the related loans long-term on their balance sheets. Conversely, many institutional investors seek long-term debt assets with attractive risk-adjusted returns, low default rates, and stable yields with built-in inflation protection. However, many of these investors lack direct access to infrastructure assets or lack the expertise to select and manage investments at the individual transaction level.
Fintech solves this issue for both parties and opens possibilities for investors across our country. Wouldn’t our public pensions, such as CalPERS or the New York State and Local Retirement System, want more scalable and cost-effective ways to own a slice of their own backyard? Wouldn’t the pensioners themselves, the teachers, police officers, firefighters, and other local residents want to have an ownership stake in these local projects through mutual funds that are currently restricted in their holdings of infrastructure loans?
Through a digital asset platform, these market participants could generate financial returns with greater transparency and with shared benefits in the same infrastructure projects in their local communities. Further, local projects that were initially funded by public capital can be refinanced in a scalable way through a private market, allowing for the recycling of public money to new infrastructure initiatives.
The earlier concerns of who will pay for it and who benefits can now be answered through a different lens: We will all benefit from it, and each of us has an opportunity to invest in it. Public, private, hybrid, concessions, and many other structures can be more flexibly developed and distributed via fintech innovation.
This new approach may also help green technology initiatives, as the additional refinancing risk currently limits the availability of long-term capital due to rapid technological obsolescence. By improving institutional investors’ access to more desirable longer-dated loan assets, we can encourage bank underwriters to make correspondingly longer-dated loans, enabling the growth of sustainable green energy projects.
Regardless of its final form, the Biden Administration’s infrastructure program will require a huge debt component to allow society to repay the initial construction or reconstruction costs over the useful life of the projects. We now have the ability to enable a much larger number of potential long-term investors with access and participation in the financing of these assets.
If our public officials want to move infrastructure from a punchline to a policy win, and more importantly, propel our country forward, they should look towards the innovation provided by financial technology. It’s time to break old impasses and finance our future.