The Infrastructure Gap:
Financing and Funding the Future

The future of infrastructure

2 minute read
Michael S. Burke Clive Lipshitz

With increasing urgency to resolve the financing and funding of future infrastructure, Michael S. Burke, Chairman and Chief Executive Officer at AECOM, and co-author and Specialist Consultant, Clive Lipshitz, outline several approaches that, taken together, can help reduce the infrastructure gap.

In the following piece, we discuss ways to address the global infrastructure gap. The jumping-off point for our analysis is the observation from 39 percent of our Future of Infrastructure survey respondents that a lack of public funding is the key reason that civil infrastructure is failing to keep pace with society’s demands. With massive infrastructure needs around the world, and against a reality of constrained public-sector budgets, bold leadership is needed to prioritize assertive public policy, harness private capital, and bring innovation to infrastructure funding and project delivery. While many of our observations and recommendations apply globally, much of the focus in this article pertains to the United States.

The infrastructure gap

The need for substantial investment in infrastructure has been well documented, with the McKinsey Global Institute estimating that US$3.3 trillion must be spent annually through 20301 just to support expected global rates of growth. Most countries are not investing nearly enough, with an annual global shortfall of US$350 billion2. The American Society of Civil Engineers (ASCE) estimates that if the 10-year U.S. infrastructure gap of US$2 trillion is not addressed, it will cost US$3.9 trillion in GDP by 2025.3 This shortfall affects everyday life – each year, two trillion gallons of drinking water are lost to water-main leaks4 while 5.5 billion hours are lost to traffic congestion.5 Americans could soon experience “Thanksgiving-peak” transit volumes at 24 of the 30 largest airports at least once a week.6 Failure to invest in infrastructure is not just costly; it also impacts personal safety. Almost 10 percent of the bridges over which Americans drive – about 56,000 in total – are structurally deficient, as are 15,500 dams (17% of the total).7 The infrastructure gap is exacerbated by factors such as climate and technological change.

How climate and technological change impact infrastructure

At the time of writing, Cape Town, South Africa, was just a few months from “day zero” when faucets will run dry and the city will have to adopt a network of water distribution points.8 It will take significant – and rapid – investment in desalination infrastructure to provide drinking water to the city’s four million residents. Meanwhile, new technologies such as shared autonomous vehicles could wreak havoc on traffic assumptions that inform investment decisions.9 Anticipating such concerns, Los Angeles World Airports is reportedly incorporating within the design of what will become the world’s largest consolidated rental car facility at LAX, the ability to support alternative uses if future rental car needs fall below current expectations.

Constraints on public-sector budgets

Public-sector budgets across the developed world are strained. U.S. state and municipal governments face unfunded pension liabilities of more than US$1.6 trillion,10 diverting tax revenues away from infrastructure development and maintenance. Moreover, the U.S. municipal bond market, which has funded much public-sector infrastructure, is facing headwinds as lower tax rates and persistently low interest rates make these bonds much less attractive to investors.11 It is noteworthy that municipal bonds are inefficient for tax-exempt investors, the largest pools of long-term capital, and they cannot be used to fund infrastructure developed by private-sector interests.12

Private capital is drawn to infrastructure, but with caveats

A relatively recent development in the financing of infrastructure is the significant and growing private-sector capital that has been drawn to these assets. Infrastructure investments are well suited to the portfolios of the world’s largest and most patient pools of investment capital – the balance sheets of pension plans, life insurance companies, and sovereign wealth funds. Cash flows from infrastructure assets are reasonably predictable, of long duration, somewhat indexed to inflation, and relatively uncorrelated with public equity markets, all of which makes them a good match for the liabilities of life insurers and pension plans, and for the permanent capital of sovereign funds. For an indication of the possible magnitude of capital that could be directed to infrastructure investing, it is worth noting that U.S. public pension plans, corporate pension plans and life insurers hold assets of US$4.2 trillion,13 US$1.5 trillion,14 and US$6.8 trillion,15 respectively, while sovereign funds globally hold assets of US$7.4 trillion.16 Allocations of five percent of the portfolios of these asset pools to infrastructure would equate to close to US$1 trillion, with upside from non-U.S. pension plans and insurers, and from higher allocations.

How institutional investors approach infrastructure investing

Most U.S. public pension plans invest in infrastructure through commingled funds managed by investment management firms. Many Canadian pension plans have adopted a more sophisticated approach of direct investments in infrastructure.17 CDPQ, manager of the Quebec Pension Plan, has even taken on development and operation of the Montreal light rail system.18 The largest sovereign wealth funds – which each hold assets of hundreds of billions of dollars – are attracted to infrastructure because of the scale it permits, since individual transactions can draw hundreds of millions in equity capital. Life insurers typically obtain exposure to infrastructure as lenders.19

Investment management firms helped catalyze the infrastructure allocations of institutional investors and have responded to the growth in such allocations with more and ever-larger funds. At the end of the first quarter of 2017, total assets under management by private infrastructure funds were US$426 billion.20 This will likely increase substantially, driven by both supply and demand factors. On the supply side, several US$10 billion-plus funds have been raised or are presently being marketed, while on the demand side, 53 percent of institutional investors surveyed plan to increase their allocations to the asset class.21

Infrastructure investing strategies

Infrastructure investing strategies defy easy categorization. Many of the largest funds are finite-life vehicles that utilize private equity strategies and target high investment multiples rather than investment income as a source of returns, an approach known as value-add investing. At the other end of the spectrum, core funds hold assets for long periods and generate returns primarily from current income.22 Investment managers generally focus on brownfield operating assets, relatively few take on greenfield development risk, unless the development cycle is short and revenues are pre-contracted. Only eight percent of infrastructure funds take on opportunistic risk.23 Funds may specialize by geography and/or asset type – for example, transportation, water, or energy assets. Distinct from funds that invest in the equity of infrastructure assets is a burgeoning category of funds that invest in infrastructure debt (10% of capital raised since 2008), although the vast majority of debt financing for infrastructure investments is provided directly from the balance sheets of banks and insurance companies.

Is this growing pool of private capital effectively addressing the financing needs for global infrastructure? We believe that the answer to this question is, at best, equivocal. In an industry-wide survey, investment managers’ primary concerns were found to be transaction valuations (expressed by 53% of those surveyed) and deal flow (32%).24 Exacerbating these concerns is the growing accumulation of capital committed to funds but not yet invested (dry powder), which has grown to US$151 billion25 and can be expected to increase as the trend of mega funds continues.26

Why this disconnect between capital and investment opportunities? While there is strong interest among investors in cash-flow-generating operating assets, private capital is very cautious about investing in assets without in-place revenues and in greenfield assets.27

There are no silver bullet solutions. And, given the stakes, inaction is not an option in addressing global need. What is required is a combination of approaches aligned behind a strong vision, transparency, innovation, a conducive regulatory and permitting environment, and willing partners – across borders, governments and industries – that can rise above complicating factors and build trust that leads to confidence in proceeding.

In this spirit, we now turn to four approaches that taken together can be helpful in reducing the infrastructure gap.


Public-private partnerships (P3s) are an effective way of transferring life-cycle costs of infrastructure off public-sector budgets and simultaneously create investable assets for the private sector. We expect that the P3 market – which is quite evolved in countries such as the U.K., Australia, and Canada – will deepen in the U.S. as concession terms become standardized and as valuation transparency is enhanced from higher transaction volumes.28

P3s have demonstrated their value in projects around the world. Private investment in infrastructure, in partnership with the public sector, can motivate accountability in the delivery of critical assets, stretch public dollars and help local, state and national governments deliver highways, bridges, ports, airports and other infrastructure faster and cheaper, and ensure that they are properly maintained.29

Delivering economies of scale through project bundling

Many infrastructure assets are too small on an individual basis to attract the attention of investors. A solution to this problem is asset bundling. For example, the Pennsylvania Rapid Bridge Replacement Project is a P3 that bundles 558 aging bridges.30


The realities of a federal system, the inefficiencies of completely devolving decision making and financing to the state and local level, and the reality that infrastructure is not artificially bounded by state lines (think port and airport systems, roads, rails and waterways), all suggest that infrastructure could be tackled on a regional basis. This is especially true as urbanization transforms many of our global cities into mega-regions, requiring broad and interconnected infrastructure systems. Today, 55 percent31 of the world’s population lives in cities; that is projected to increase to 66 percent by 2050.32

Regional infrastructure authorities

The U.S. has numerous authorities that operate – and have been responsible for developing – significant portions of the nation’s infrastructure. Among the advantages of these bodies is that they take a long-term and expansive view of infrastructure needs. For example, the Port Authority of New York and New Jersey used revenues from bridge and tunnel tolls to help fund development of nascent airports in the New York area.33 Its scale allowed it to negotiate equitable terms with airlines. Similarly, the Tennessee Valley Authority – whose service area covers portions of seven states – has invested significantly in infrastructure (power generation and environmental systems), while also spurring regional economic development. We believe that these and similar bodies should remain a core component of national infrastructure policies.

Regional P3 centers

Governments seeking to advance P3s in a programmatic manner might adopt the successful model of infrastructure offices, such as the U.K.’s Infrastructure and Projects Authority and Canada’s Infrastructure Ontario and Partnerships BC. The role of these centers is, among other things, to spur P3 activity through encouraging enabling legislation, prioritizing projects, and interfacing between procurement agencies and private capital sources.

We recommend a regional approach to P3 centers for several reasons. A highly centralized model is not realistic in light of the federalized system of decision making in the U.S. At the same time, it is not realistic or efficient to replicate P3 centers in 50 states. Regional centers would standardize legislation and concession terms (in the absence of standardization, private capital would be disincentivized, from having to “reinvent the wheel" on each new transaction). Additionally, regional centers could act as advocates with all stakeholders – procurement agencies, legislatures, the public, and private capital. There is an important role for the federal government to support these centers. It could partially fund their budgets, deploy specialists (perhaps rotating out of private sector), and help with standardization of enabling legislation and concession agreements.34


Whether financed by public or private capital, there is much that can be done to enhance funding models for infrastructure assets.

Generate sustainable revenues through fair-usage charges

Many infrastructure assets, particularly in the transportation and water/waste sectors, are subsidized or free to users. This is not uniformly sustainable and so we recommend a reality where, in the words of the ASCE, users “pay … rates and fees that reflect the true cost of using, maintaining, and improving … infrastructure.35 There are numerous examples where this reality has been recognized. New Jersey is considering a US$0.90 surcharge on New York-bound trips to fund its portion of the Gateway rail tunnel expanding links between the two states.36 Israel – much of which is desert – has sustainable water resources, in part because water is priced at market rates to all users.37 Airports – particularly in the U.S. – have argued for removal of caps on passenger facility charges, as these are a necessary source of funding for infrastructure improvements.38 Of course, usage charges are not realistic for all assets, most notably in the case of rural transportation systems. In these cases, tax revenue will generally need to cover capital expenditures as well as operation and maintenance. That said, in the absence of market controls, these assets would need to be prioritized very carefully to avoid white elephant projects, such as the US$400 million Ketchikan, Alaska “bridge to nowhere.”39

Dynamic pricing and efficient use of infrastructure

Dynamic pricing is a usage charge policy that can both increase revenues and ensure efficient use of infrastructure assets. It could be applied to many infrastructure types – think highway tolls (reducing peak-hour congestion), passenger facility fees (charging more during peak travel times), and end-user water and electricity rates (reducing usage during periods of peak demand).

Creatively utilize value-capture techniques

Land and property values increase – sometimes dramatically – when they benefit from adjacent infrastructure. Value capture leverages the increase in real estate valuation to fund infrastructure development. One approach to value capture, used extensively to finance expansion of Hong Kong’s mass transit system, is called “Rail plus Property.”40 Hong Kong grants MTR, the private-sector transit operator, development rights above new stations. MTR uses its profits from newly developed real estate to fund expansion and maintenance of rail lines, allowing the city government to avoid taking on infrastructure development costs. The approach works because of Hong Kong’s extremely high density and land values and can be adopted by other densifying cities. More generally, transit systems can generate revenues from development of mixed-use real estate at transit nodes. Another approach to value capture is tax increment financing which finances new infrastructure from tax revenues that it generates. The extension of New York’s subway system to the Hudson Yards district was financed using debt that will be repaid with property tax revenues from to-be-developed real estate in the district.41

Ensure dedicated and robust state and local sources of funding

A peculiarity of the U.S. federal system as it pertains to publicly owned infrastructure42 is that it is not uncommon for the federal government to fund upfront capital expenditures and for state and local governments to fund operation and maintenance.43 Stressed state and local budgets inevitably lead to maintenance backlogs, which is why it is of prime importance that local sources of maintenance funding be developed from tax revenues and ring fenced, protecting them from being diverted to other budgetary needs.

Modernize the gas tax

The U.S. Highway Trust Fund, which finances most federal government spending for highways and mass transit, is funded primarily from gasoline taxes. The fund has effectively operated in deficit since 2008 because the tax per gallon of gasoline has not changed since 1993 and because it did not anticipate the significantly higher fuel efficiency of modern motor vehicles – not to mention the absence of revenues from electric vehicles.44 Because wear and tear on roads is correlated much more closely to mileage driven than to gasoline usage, the fund could be stabilized using a mileage-based revenue source that accounts for both gasoline-powered and electric vehicles.


Development of new infrastructure requires substantial capital and entails significant risks. We propose several approaches to address these challenges.

Government-subsidized construction financing

As in many other countries, the U.S. has governmental programs that subsidize financing for infrastructure development. We believe that budgets for these programs should be expanded, as they are an effective way of providing leverage to federal funds, from private capital and state or local public capital, in the development and maintenance of infrastructure.


The Transportation Infrastructure Finance and Innovation Act (TIFIA), the Water Infrastructure Finance and Innovation Act (WIFIA) and the Railroad Rehabilitation and Improvement Financing program (RRIF) provide loans and loan guarantees to finance development of new road, water, and rail infrastructure.

Asset recycling

An effective way to leverage public capital in a resource-constrained environment is to fund new infrastructure via “asset recycling,” whereby proceeds from the lease of existing assets are redeployed in the development of new infrastructure.45

Mitigate risks for private investors

Private capital is generally unwilling to invest in greenfield development because of the difficulties in accurately budgeting development costs and timelines, and forecasting future revenues in the absence of operating history. These concerns are heightened by well-publicized examples of projects going awry, such as Berlin Brandenburg Airport, which is expected to open almost a decade late and €4.5 billion over budget.46 These risks can be mitigated by inclusion of the right partner in the development and operating consortium. Private-sector investors will typically not take volume risk, which is why greenfield P3 concessions usually incorporate availability payment structures, whereby the private-sector partner receives a flat fee and the public sector absorbs volume risk. Another consideration in new developments is political uncertainty – this is generally remediated by active stakeholder engagement47 and by utilization of political risk insurance.

How AECOM reduces risks as a partner in greenfield development

The experience that comes from having managed Gantt charts on thousands of large-scale projects provides a firm like AECOM with deep institutional knowledge of how to create realistic budgets and project timelines. Moreover, from its experience migrating infrastructure assets to their ultimate owners, AECOM has garnered significant experience in the fine tuning of volume forecasts and operating expenses.

Reforming regulatory and permitting practices

Predictable regulatory guidelines and efficient permitting processes can be helpful in driving private investment into infrastructure. In countries around the world, there are many cases of multi-year delays in project approvals because of inter-jurisdictional conflicts and changing environmental approval standards. Policies set by one administration or legislature can fall away with the next, creating uncertainty.


As we have argued, there are practical steps that can be taken right now by participants in the infrastructure market, as well as public policy initiatives that we actively support. In future articles we expect to expand our scope beyond the U.S.


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