Traditionally, infrastructure projects — road and bridge repair, public-transit expansion and port development — are funded by federal, state and local grants or loans, the municipal bond market and, in some cases, the Highway Trust Fund or international banks. But the federal government, suffering from political fracturing and financial austerity, won’t pony up as much as before. The Highway Trust Fund could soon face bankruptcy, and many banks have backed away from long-maturity project finance.

On a brighter note, money has recently flowed into municipal bond market funds, and bond issuers have increased offerings, with the Securities Industry and Financial Markets Association predicting $347 billion in issuance, while others forecast $360 billion.

Ground zero construction Sept. 9, 2011, in New York; Creative Commons photo courtesy of Flickr.com/zokugapredicting

This should be good news for infrastructure projects. Unfortunately, much of the issuance is for refinancing debt. Many states and municipalities are loath to take on additional debt because they’re unclear on revenue. Some investors hesitate to put in money because municipal bonds’ tax-free status could be jeopardized, because some see it as a “subsidy for the rich,” said George Friedlander, senior municipal strategist at Citigroup.

At the same time, the country faces a $2 trillion funding gap for backlogged infrastructure projects, and our deteriorating infrastructure “reduces the productivity and competitiveness of American firms and their goods” and costs families thousands of dollars each year, according to the American Society of Civil Engineers.

So, from where will the money come?

From cooperation, creativity and leadership, according to a report by Ernst & Young and the Urban Land Institute.

“The absence of a national policy on transportation and freight infrastructure continues to hamper U.S. ability to compete globally,” according to the report. In that absence, it’s vital that local and regional leaders step up and look at infrastructure projects in new ways. Think regionally, rather than disjointedly, and pool resources for long-term water, sewer and public-transit projects, the report suggests. Make the benefits of infrastructure clear, and demonstrate how it is an “important differentiator in a globally competitive marketplace.” Look at projects that add value in the long term, and invest in those that maximize each dollar and “attain multiple benefits from every dollar spent.”

Possible sources

Look to pension funds to sponsor projects. “[M]odest but steady investment yields can appeal to pension funds interested in reliable income returns to match with their long-term liabilities,” the report states. Look to cash-flush sovereign funds to be capital partners with engineering-concession companies, which are often willing to reduce their equity contribution.

Consider ballot measures, which “often pass when framed as beneficial for future economic growth and property.” The report identifies best practices that help ballot measures pass.

Lobby politicians, and encourage them to stick their necks out and advocate for increased user fees or raise water rates and train-ticket prices to maintain service. Call for a higher gas tax.

And, perhaps most importantly, understand public-private partnerships, in which a private firm or joint venture builds and manages a road, a port or other infrastructure. This doesn’t privatize the project; rather, it lets governments leverage local sources. Oregon is considering this, even for smaller infrastructure projects that were bundled together to make the value more appealing to private firms. The Port Authority of New York and New Jersey is looking for a private partner to help replace the Goethals Bridge, which links New Jersey to Staten Island — a project worth about $1 billion.

The Urban Land Institute and Ernst & Young report suggests:

• Using infrastructure to its maximum potential.
• Tapping whatever federal funds are available to maximize investment opportunities.
• Explicitly linking development and infrastructure.
• Exploiting the possibilities of collaboration and partnership.

“[N]ow more than ever, new approaches and new kinds of leadership are needed to connect infrastructure to values and to make clear its benefits,” wrote Patrick Phillips, CEO of the Urban Land Institute, and Howard Roth, global real estate leader at Ernst & Young.