The Biden Administration’s push for a large-scale infrastructure package has been met with unsurprising opposition, hampered by the two perennial concerns of infrastructure reform: Who will benefit, and how do we pay for it? Moreover, the need to encourage more sustainable infrastructure and green energy investment has become increasingly in focus. With institutional-grade fintech continuing to advance across asset spaces, the question has to be asked: is there not a tech-enabled horizon in view, that stands to benefit all parties, which can solve these questions in a new way?
Antonio Vitti and Bob Dewing are co-founders of Pontoro, a financial technology company focused on transforming infrastructure financing. Here they share their thoughts on innovative financing solutions for infrastructure reform.
Traditional infrastructure financing options provide seemingly limited choices: use public resources or use closed private financing silos. But what if current infrastructure debt originators (e.g., banks) and prospective long-term investor bases (e.g., public pensions, charitable foundations, and retail mutual funds) could adopt a means through which they all mutually benefit?
Fintech platforms have now reached a point where they enable tokenization and securitization of real-world assets. This allows diverse pools of assets to be curated and accessed securely by a far greater spectrum of accredited investors, and at a much greater velocity.
The platform our firm, Pontoro, is building is just one example as it brings connectivity between originators and institutional investors, using blockchain, to facilitate high-velocity distribution of infrastructure debt; as well as investor-led customization of debt portfolios around asset duration, segment, geography, and returns. This creates new options for financing infrastructure in a collaborative manner with current debt originators.
The sanguine aspect that digital platforms offer is a level of visibility, not possible with today’s paper-only processes, that allows synchronicity between parties of varying objectives. Namely, where Wall Street, Capitol Hill, and buy-in from local leaders may historically have been at odds over infrastructure, the digitization of financing channels creates new optionality and flexibility that benefits all sides.
Increased liquidity, pricing transparency, and access to a broader base of investors have become common outcomes for sectors successfully engaged by fintech. What is more recent, and highly compelling for infrastructure, are developments showing technology can embed regulatory, reporting, and oversight features. If employed, this final piece will make liquidity and scalability possible for the infrastructure asset class which, traditionally, requires an onerous private placement process to change hands. The outcome: for the first time, new sources of capital will be able to participate flexibly with Congress and Wall Street on infrastructure, and in an aligned way.
How so? Digitization of financing channels enables streamlined decision-making and customizable execution over real asset financing for multiple stakeholders simultaneously. Additionally, if leveraging distributed ledger technology, expensive ‘red tape’ can be automated through smart contracts. This previously unavailable optionality allows closer orientation between all involved, which will be a key factor in the success, or failure, of getting (or keeping) critically needed infrastructure projects off the ground.
More importantly, it means there will no longer be private-versus-public choices. Tokenization allows more private investors to profitably support government-led infrastructure initiatives, to a level where even those not on Capitol Hill or Wall Street can have a stake in infrastructure reform. And ‘multistory’ connectivity between parties leveraging smart contracts enables flexible synchronization of their objectives.
For example, banks may wish to underwrite new infrastructure projects but cannot feasibly hold these large loans long-term on their balance sheets as it hinders them supporting more projects in the future. Conversely, many institutional investors seek long-term debt assets with attractive risk-adjusted returns, low default rates, and stable yields with built-in inflation protection. Many of these investors lack direct access to infrastructure assets or the expertise to select and manage investments at the individual transaction level.
By leveraging fintech, individual infrastructure loans can be quickly pooled and distributed, much like taking a share in a mutual fund, to a wide range of investors. This offers banks the security they need to make longer tenure loans as they can quickly access off-takers who desire the non-correlated, long-term returns infrastructure projects deliver. On the other side, projects initially funded by public capital can be refinanced through the private market, allowing for the recycling of public money to new infrastructure initiatives.
Wouldn’t our public pensions, such as CalPERS or Local Government Pension Schemes, want scalable and cost-effective ways to own a slice of their own backyard? Shouldn’t pensioners, teachers, firefighters, and other local residents be given the opportunity to have an ownership stake and gain returns from local infrastructure projects, which underpin daily life, through mutual funds?
The creation of neutral, institutional-grade, digital financing channels reduces reliance on traditional concentrated pools of capital; whilst carrying implicit characteristics that enable local and global investors the opportunity to directly engage projects of varying sizes that meet federal demands. The critical conundrum of “How do we pay for it?” is suitably answered as public, private, and hybrid concessions, and many other structures, can be flexibly developed and distributed through these channels. The concern over “Who will benefit?” can be answered through a different lens: we can all benefit from it, and each of us has an opportunity to invest.
This new approach could also help green technology initiatives. The additional refinancing risk ESG carries, due to rapid technological obsolescence, currently limits availability of long-term capital. By improving institutional investors’ access to more desirable longer tenure loan assets, we can encourage bank underwriters to make correspondingly longer-dated loans, enabling the growth of the green energy space.
Lastly, the question of asset quality is implicitly answered. Any fintech team that desires professional investors, but then offers up long-term loans on sub-standard projects is, well… not going to last very long. Thus, the bar of new infrastructure builds for communities would likely also be raised; as democratized, or non-siloed access to infrastructure project financing will create a more competitive market, generating higher-and-higher demand for increasingly robust, 20-year-plus assets.
Regardless of its final form, the Biden Administration’s infrastructure program will require a huge debt component in order to allow society to repay the initial construction or reconstruction costs over the useful life of the projects. If our public officials want to move infrastructure from a punchline to a policy win and propel our country forward, they should look towards the innovation provided by fintech.