by Malek Moubasher

It will only take you few minutes after you search about "gap in infrastructure finance in the US" to figure out how scary is the problem and how large in scale it is. You will find, for instance, that the American Society of Civil Engineers (ASCE) classified U.S. infrastructure with a D+ “poor” rating and estimated a cost of $4.6 trillion to improve its quality to a B rating by 2025. The bulk of its burden lies on the shoulders of local government in the the US to deal with and find sources of funding for.

Municipal bodies and governments have several options when it comes to investments in infrastructure projects. Public-private partnerships between public and private sectors, infrastructure banks offering loans used for infrastructure projects, taxes to raise funds, cash savings, and bond issuance with which investors which provide capital are paid back later with interest. Unfortunately, with the nature of certain investment options, specifically bond issuance, several factors make investment in public infrastructure projects much more challenging than it should be.

Challenges with the Current Funding Mechanisms

Among other challenges that are keeping us behind upgrading our existing infrastructure and building newer ones is the challenge related to the way we fund our local projects. The ways that local infrastructure projects have been historically funded are with:

• Public private partnerships
• Cash reserves
• Infrastructure banks
• Micro-bond issuance (to a lesser extent)

These funding methods each have their own disadvantages which put them farther towards the ‘hard’ scale of the ‘Ease of Project Implementation and Access to Capital’ axis.

• Public private partnerships can be somewhat difficult to implement as the contracts associated with them require careful planning but the main problem with these projects is that many private companies hired to implement these projects do not take most of the financial responsibility for them. This requires a government to issue a bond or use cash reserves or a tax increase to cover the costs if it wouldn’t make financial sense for a private company to do so.
• Many governments also use cash reserves or funds to finance small projects. The issue with this option is that many cities like to have a large amount of cash reserves for emergency situations and the amount of money that is available for use on community projects is limited and thus is in high demand, making it hard to complete many projects at once.
• Infrastructure banks are a growing form of funding for community projects but many of them only issue loans for certain categories of projects and have a limited amount of capital that can be dispersed thus leading to capital shortages and risks of projects funding being denied by the bank.

A bigger problem with these forms of funding for infrastructure projects is that most of the capital comes from institutions outside of the community. This leads to the problems associated with decreased civic engagement and a disconnect between the citizens of a community and the government on what projects should be implemented to best achieve the social and economic goals of the community.

The only funding option that has attempted to address this issue are mini-bond and micro-bond issuance offered to the local population in the community. This type of funding has had its own slew of problems and has historically been one of the most expensive and difficult ways to access capital. As opposed to traditional bond issuance, micro-bonds tend to have higher costs and more administrative burdens attached to them which has made them unfeasible for many governments.

Leveraging Technology to Engage Communities to Finance their Local Projects

In order to overcome the issues that local governments and municipalities face in terms of civic engagement and funding of local projects our ideal solution aims to develop an easy-to-use, plug-and-play technology bond issuance platform that enables cities, local districts, and counties to engage their community using the least possible effort to finance their projects. It would open a new pool of capital for a community to use, lower the costs of obtaining the capital, create a secondary market for participants to buy and sell their bonds, close the gap in providing easy access to funding for small projects and act as another useful ‘tool’ in the ‘toolbox’ that is available to governments to fund infrastructure projects.

Recent advancements in securing financial transactions on the internet such as introducing Blockchain and similar distributed ledger technologies has made our ability much better for issuing micro bonds with very low denomination to a large number of individual participants and manage these bonds throughout their life cycle.

Innovative local governments and progressive financial institutions are now experimenting on the use of this technology to issue micro bonds and explore how introducing them into the project funding arena will change the rules of the game around municipal bonds and how the technology involved will introduce new dynamics around it.