Having spent the week moving around New York, the evidence of America’s infrastructure deficit is clear to see. Catching a train from Marcy Avenue Subway Station in Brooklyn you can literally feel the station moving as trains approach. I am no engineer but I don’t think that is a sign of infrastructure in its best condition. And although the New York City of Design and Construction Department has new projects to replace water mains and sewers across the city, the sickly sweet smell of sewerage coming up through vents tells me that they have a big job ahead of them.
In a week of news two relatively small articles caught my attention. The first was a story on how Hurricane Irma had resulted in floods in Brunswick, Georgia which have overwhelmed the city’s water infrastructure. The second was an analysis about Amazon’s RFP for cities to support its new headquarters. Amazon’s RFP lists that it is looking for low taxes, incentives and the support of a diverse population in return for potentially $5 billion of investment. An arms race has started with cities competing to attract Amazon.
The articles raise the question is there are connection between infrastructure and large corporations? And should there be?
One of America’s most famous brands, Coca Cola in fact owes must of its success to infrastructure. As Bartow J Elmore discusses in his book Citizen Coke (bought incidentally on Amazon’s Kindle), Coke was able to benefit from two infrastructure investments in the 1880’s – tap water and railroads.
Coke’s syrup was shipped around the US via the new network of railways with bottlers taking advantage of new municipal water supplies to create the final product. The excitement of water infrastructure at the time is hard for us to comprehend today, but a daily reminder for New Yorkers is the Bethesda Fountain in Central Park, topped by a winged Angel of the Waters, which was built to celebrate the first supply of clean water via the opening of the Croton Aqueduct in 1842.
Amazon is clearly indicating in its RFP that good infrastructure is a requisite for new investment. But what role does Amazon have to help cities to procure that infrastructure?
The challenge that US municipal authorities have is that whilst the US has the largest municipal bond market in the world – which some experts are arguing is close to being “tapped out”, the market itself is based on the same credit principles that apply when consumers seek loans from banks. For municipal authorities with good credit ratings there is no problem accessing new debt. But for those whose economies that are struggling debt is more expensive, and in some cases almost impossible to secure. The municipal bond market creates a cycle where growing and prosperous cities are able to afford new infrastructure, and struggling cities cannot.
The question is whether Amazon can help break this cycle?
Amazon is one of the most successful companies in the modern era. Together with Google, Facebook and Apple, Amazon has added $2 trillion of market capitalisation since the global financial crisis.
Amazon has two things that cities could use. The first is an excellent credit rating. The second is cashflow.
Using traditional financial services techniques such as credit enhancement and securitisation, it is possible to bring these two elements together to support new investment in community infrastructure.
For Amazon the question becomes “not what the city can do for Amazon, but can Amazon do the city.” [apologies to JFK for this mangling]
Here is how it could work.
As part of a deal with the city that Amazon selects, it can provide credit enhancement for “community bonds” that would be issued to support the new community infrastructure that would be needed as a result of attracting new employees to the city.
For Amazon the cost of the credit enhancement is literally zero. The credit enhancement guarantees would only ever be called upon in the event of default, which is unlikely given the injection of economic development opportunities. But for the city it reduces the cost of credit and enables the city to finance the community infrastructure it needs.
The community bond would itself be used for soft community infrastructure assets such as sports fields and community facilities. The heavy lifting of roads and bridges would still belong to the municipal authority and Federal Government.
Through a process of activation, community facilities can deliver a range of service including child care and learning and support programs for aging population in the community. A Community Partnership Agreement is the mechanism by which the community would work with Amazon and the city to determine what it is that is needed, and how it would operate.
Finally Amazon would support interest payments on the community bond by for instance committing to paying 50% of interest payments over a ten year period. The remaining 50% would come from the activation of services with the municipal authority only requiring a small contribution on its own part.
The Community Partnership Agreement model is an acknowledgement that we need to move away from the days when we worked in silos. By working collaboratively there is the potential to unlock new investment and deliver economic, social and environmental outcomes.
Amazon’s need for new headquarters is a great opportunity but by developing a collaborative model Amazon can leverage its impact, supporting the development of facilities that its employees and the rest of the community will use, building a deep and lasting connection with the city it selects.
Gordon Noble is the President of the Network for Sustainable Financial Markets which has been working on the concept of community bonds through its Real Assets Working Group.
Originally published LinkedIn September 24, 2017