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Infrastructure Investing: Investments (P3-SPE/SPV) vs. Loans
When Should GRIP Be Used as an Investment Instrument vs.Traditional Financing?
There are three (3) primary methods of financing infrastructure grants/revenue-sharing, loans/bonds, and investments.
The ideal investment vehicle to finance infrastructure is one where the taxpayers receive tax deductions for infrastructure investing and tax-exempt interest earnings on their infrastructure investments, in addition to be the benefits of benefit and usage of the infrastructure item.
Whether a GRIP is determined to be an investment or a loan, is a matter that is determined at the planning/feasibility phase of the project.
Whatever method/instrument is used for infrastructure investing depends upon the project and also whether or not a Public-Private Partnership (P3) with a Special Purpose Entity (SPE/SPV) is used to construct and manage the infrastructure project, or if the GRIP is to be managed by a political subdivision (municipal, school district, county, state, federal) and or by an authority or board elected or appointed by the elected officials of the political subdivision.
Regarding the type of project, an infrastructure project that manages natural resources would generally issue some kind of loan or investment issue, distributed by the bank or broker, given these are more likely to yield returns ROI for the investor more immediately.
Under these conditions, the taxpayer-owned SPE or political subdivision would eventually take over the management and maintenance of the project and the SPE/SPV would be sold or dissolved by the repurchasing of all outstanding shares of GRIP. Something similar to a 26 U.S.C. § 103 Lease-Purchase type of program is an example.
Lease-Purchases and investments have several advantages over bonds. Lease-Purchases don't require ballot referendums, extensive public hearings, and are far less costs to market and administrate.
Lease-Purchase and GRIP type of financing has several advantages over municipal bonds.
Bond issues are expensive and difficult to enact, because they require ballot referendum, along with public hearings and marketing to the taxpayers/citizens. Even here, communities have additional marketing expenses, to persuade taxpayers to agree to debt, who may not be as eager to do so as is done on the federal level.
Likewise in compliance to the Securities Act of 1934, et. seq, bonds must be sold by licensed bond brokers, who require commissions, which immediately diminish the face value of the bond.
This is also where, in the spirit of a lease-purchase type of financing, a stock selling SPE/SPV that is community owned has advantages, because they can be processed through local banks and these accounts can be separated in a bank within a bank...a true infrastructure bank. Also this approach does not effect a community's bond rating.
Projects that are best suited for these arrangements are renewable energy migration, formation of neighborhood or community renewable energy co-ops, broadband, schools, water systems, storm water flooding abatement, sewage and recycling centers.
A project such as a road, bridge, school, would yield more of an economic development benefit and the return on investment (ROI) may be slower realized.
These would probably be best financed by a loan situation, with repayment through property taxes or in tandem with energy, water and economic development projects, given they are more long term and are not directly revenue generating.
Roads and bridges would be a prime example of this situation given that toll roads are the generally not very palatable with the public. The best option for these, to limit or avoid raising property taxes, is to do them in tandem to more easily revenue generating infrastructures, such as energy and water. The only remaining option for more immediate revenue generation to reimburse investors would be imposing a local fuel tax, or fuel tax increase
Either way this is a decision needed to be made by the political subdivision, the public (through public hearings and discussions) the bank and investors, at the preliminary planning stages of the project. These are all important considerations when determining the need and feasibility of the infrastructure project. It also effects the rating on the GRIP instrument equally as it does the rating of the project which collateralize it.
For more information on investing or loaning for infrastructure projects and determining their feasibility and viability; see your CPA, tax-lawyer, and/or financial adviser.
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Consultation limited to general advice for establishing P3-SPE/SPV alternate sources of project financing.