Rural Infrastructure: A Creaky Skeleton (U.S. Version)

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Unless you went looking, you might never notice the oblong lagoons outside of Farmersville, California. Set back from the county highway, trimmed in dirt roads, these wide, blue pools are swallowed by farmland. But they are an essential part of the town’s daily life. Here, wastewater is treated and cleaned.

An aging bridge over a rural river.

The infrastructure skeleton that undergirds our lives and businesses can fade into the landscape—which means that when budgets pinch, their maintenance is easier to ignore. Across the country, in many farming communities with limited tax bases, infrastructure is falling into disrepair.

That makes the wastewater system in Farmersville, a town of around 10,000, an exception. The system, first built in the 1960s, is targeted for an $18 million upgrade. And the money stems in part from an unusual source: private financiers.

Such private funding remains a popular way to pay for infrastructure without hitting up taxpayers—and is expected to increase under President Trump. Is this the answer to farm-country infrastructure woes?

It’s not just rural America that is crumbling. In its latest report, released in March 2017, the American Society of Civil Engineers gave the nation’s infrastructure a D+. According to the report, much of that which is most essential to farm communities—levees, inland waterways, roads and wastewater treatment—are among the worst off. The state of the nation’s roads adds $523 in repairs and operating costs to each driver’s annual budget, for a total of $121 billion a year. And local problems have ripple effects. While farmers may be among those most directly impacted by, say, detours around unsafe bridges, the high cost of getting crops to market raises the cost for everyone’s food.

“Everyone is a part of a national economy,” says Christopher McLean, the acting administrator of the USDA’s Rural Utilities Service. “It’s just as important to people living in New York City that they’re able to reach and communicate with people living in rural Kansas or rural Nebraska.”

Who pays for infrastructure? Click to enlarge the infographic.

As of 2016, the government, across all levels, had committed only 57% of the $3.3 trillion needed to bring the system up to standard by 2025. Closing that gap often depends on local funding, as the federal government pays on average a quarter of the cost of infrastructure maintenance.

That leaves rural communities in a catch-22. They lack the tax base to pay for projects; but, given their small size, they sometimes do not meet the required standards to receive federal grants.

Three years ago, the Obama White House Rural Council launched the U.S. Rural Infrastructure Opportunity Fund (RIOF). The fund is managed by a private firm, Capitol Peak Asset Management, which also recruits investors, while CoBank, a national cooperative bank that serves rural communities, pledged up to $10 billion in future loans. The USDA acts as a “connector,” helping identify and prioritize rural infrastructure projects that might yield a profit for investors.

Those investors will appear only if there is the hope for returns—and there are skeptics. William Fitzgerald, an asset manager and financial analyst who has invested in sustainable infrastructure, thinks the number of users for most rural projects is too low to yield real profits. Nevertheless, Fitzgerald looked into the RIOF—and never heard back. “I tried every way possible to get in touch,” he says. He was left skeptical as to whether the program truly existed.

It does, though details have been scarce. In July 2015, a year after the RIOF’s launch, the first round of investments was announced: 22 projects across 14 states, including the wastewater system upgrade in Farmersville, which, according to a city council memo, received a $5 million loan.

As of October last year, a White House press release indicated over $3 billion in funding for more than 400 projects, including power, water, communications and community infrastructure.

Capitol Peak canceled a planned interview for this story, citing compliance rules governing ongoing transactions. CoBank directed FarmLife to the USDA for comment on the fund, and the USDA declined to comment, per guidelines that restrict comment on initiatives of past administrations.

Bob Madsen, vice president at AgStar Rural Capital, another firm that has invested in the fund, did comment, and indicated that his firm’s investment reflects a commitment to farms. AgStar is not only a Farm Credit entity like CoBank, but is cooperatively owned by its borrowers.

To those AgStar owners, who include many farmers and ranchers, rural infrastructure is not just a potential source of returns, but also a lifeline. That’s a typically rural outlook: Take care of yourself when no one else will.

Still, private capital alone, even through a cooperative model, “is only a piece of the puzzle,” Madsen notes. To build a comprehensive system of strong infrastructure—including roads and bridges and broadband—requires public dollars, too.

That makes the national discussion of infrastructure—typically, a hot topic at the beginning of a new White House administration—of real relevance to farming communities. Though President Trump has promised $1 trillion in infrastructure spending, little is likely to come from public coffers. Instead, the White House is reportedly hoping to use tax credits to attract private-public partnerships.

Such partnerships—often labeled as PPPs—can take various forms. In Farmersville, for example, the wastewater system will be owned and managed by the city, and is simply financed through a private loan. In other cases, private firms not only finance but own and operate the infrastructure.

Canada has been a leader in the use of PPPs and, in 2014, Canadian financial experts testified before a U.S. Congressional committee on infrastructure, offering best practices on funding projects with private money.

One clear priority for the new administration is rural broadband. Ajit Pai, the new chairman of the Federal Communications Commission, has proposed a multi-pronged approach for expanding access—particularly by using public funds to support competitive “reverse auctions,” in which private providers offer decreasing bids for the chance to wire underserved areas.

But what of less flashy yet just-as-essential tools like bridges, roads, even power providers? Many analysts remain skeptical that private funding will deliver the needed boost.

“The mathematics of rural service is inescapable,” says Rural Utilities Service’s McLean. “It is almost always more expensive and more difficult to provide quality utility service [in rural areas].” The USDA’s Rural Utilities Service aims to bring down the cost of capital at the outset of infrastructure projects. McLean notes that the recipients of USDA loans are largely nonprofit cooperatives and municipalities, but private co-lenders are an important program component.

In 2015, in discussing the RIOF, the Obama White House noted that its emphasis on private financing was a stopgap. Because Congress refused to increase the infrastructure budget, President Obama turned to whatever tools he had. “Private capital is not a substitute for public investment,” the White House noted.

At the launch of the Trump presidency, that idea remains a rare point of bipartisan agreement. In February, at a Congressional hearing, Senator John Barrasso (R-Wyo.), chair of the Senate Environment and Public Works Committee, was skeptical that PPPs would fund rural roads. Still, supporters point out that PPPs aren’t always dependent on user fees—and instead could be paid back by a government that still benefits by transferring risk and setting more certainty in their budgets.

The USDA seems to have no druthers whether infrastructure is public or private, so long as it is built. “We execute the laws that Congress enacts,” McLean says. What matters is that the work continues.

“You can’t just throw up the infrastructure and say, ‘Mission accomplished,’” he continues. “You have to continually upgrade, modernize, maintain.”

See the Canadian version of this story here. >>