The prior post outlined the concept of a ‘ramp’ to achieve full cost recovery for infrastructure that relies on regulated rates. At the core of the ‘slow and certain’ approach is very long-term debt that can accrue in the early years (strictly in accordance with a plan) but is cost-effective overall.

In effect, that means a private placement with a pension fund or insurance company — or, sometimes even better, a loan from a federal infrastructure loan program that offers concessionary rates. Not quite available as yet though — what would the extent of required legislative changes? Perhaps small and technical enough to happen?

Maybe. The following is a short thought-experiment about what changes would be required for Cost Recovery Ramp financing to be sourced from a water loan program.

When you’ve kicked the can on asset maintenance and replacement for many years in order to keep rates low, how do you dig your way out of the hole before the system really starts to implode? (yes, I know — mixed metaphor — but the images just go together so well…)

What you can’t do (as matter of political feasibility, economic efficiency and basic fairness) is just spring higher rates on everybody. But if you do it slowly, won’t that lead into can-kicking temptation all over again — while things get increasingly worse?

I think the answer has to be in a combination of (1) getting the real-world work done as quickly and efficiently as possible, (2) telling people they’ll be eventually paying for it, so get ready, and (3) and enforcing the commitment with the necessity to repay very-slowly (but relentlessly) amortizing debt.

Here’s a short summary of an analysis I did recently on the potential impact of a federal infrastructure loan program on federal revenues due to the displacement of other forms of financing. Very preliminary — more like a “thought experiment with some numbers” at this point — but the results show that the impact might be worth further research if loan programs become (as I think they will) a larger part of the infrastructure solution.

Here’s a ‘cut to the chase’ version of the evolving functional approach to P3s discussed in the previous post.

One of the most important things that the New Alternative Framework clarifies is highlighted in Concept 4: Ownership and equity Alternatives are not really necessary for most basic infrastructure deferred maintenance and delayed investment projects. The focus should be on construction, O&M and debt financing Alternatives.