Infrastructure 2014: shaping the competitive city

Top infrastructure funding source: cooperation between developers and government

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In many places—and notably the United States—traditional revenue strategies, such as the gas tax for transportation, have been stagnant or in decline. What alternative approaches are seen as promising by survey respondents?

  • Three-quarters of both public sector and private sector leaders identified cooperation between developers and local government, or joint development, as the most significant funding approach for new infrastructure over the next decade.
  • Strategies that require collaboration between real estate and civic leaders top the list of likely infrastructure funding sources.
  • Six in ten respondents expected value-capture strategies to play a significant role.
  • Over half thought that negotiated exactions—in which development rights are tied to the delivery of infrastructure projects—will also be an important funding source.
  • More traditional options—such as income and property taxes, and contributions from federal and state governments—were rated as less significant.

Every option presented got relatively strong responses, indicating that when it comes to funding, many options will need to be on the table.

Public and private responses to this question tended to align, despite the limited ability of development-driven strategies to pay for infrastructure at a systematic level and the challenges of applying them in weak-market contexts.

These answers demonstrate that private sector investors and developers recognize that they will need to do their part to catalyze new infrastructure investment. Revenues from real estate—though a small part of the overall infrastructure funding picture—can be essential components of the funding package for specific projects, like transit lines or stations.

If the trend is toward expecting developers to provide more infrastructure, not all interviewees were in support. Some developers complained that local governments are now asking them to pay an unreasonable share of infrastructure costs.

Other interviewees noted the limits of expecting strategies like value capture, including tax increment financing and special assessments, to pay for infrastructure at a systematic level. These strategies are typically focused on particular projects or in particular areas, and generate traction because “people are prepared to pay if they can see what they are paying for.” Mastering the cooperation frameworks needed to make joint development and other coordinated approaches work will be essential.

In general, interviewees also voiced a preference for adopting more of a “user-pay” approach, possibly via public/private partnerships. However, local governments, facing pressure from constituents to keep infrastructure fees low, may be more inclined to migrate toward use of more conventional means of raising revenue, such as municipal bonds backed by general revenues.

EY – funding sources for new infrastructure