City leaders face a catch-22 when it comes to funding infrastructure projects for climate resilience, energy management and other green initiatives, University of Maryland researcher Anton Steshenko told Smart Cities Dive.

Institutional investors such as pension funds and insurance companies collectively manage trillions of dollars and are searching for long-term investments that provide cash flow, Steshenko said. Infrastructure resilience projects could meet that demand, but most municipal infrastructure projects are too small, fragmented and complex for institutional investors to get involved, he said.  

The institutional investors “don’t want to have to analyze each $5 million project,” he said. “They want to make a contribution to local government but don’t have the tools to do that.” As a result, smaller municipalities struggle to access capital, and instead use their public funds for infrastructure loans or grants rather than leveraging those funds to attract private investment, he said. 

“America’s infrastructure challenge is not primarily a capital problem. It is an institutional design problem,” he said. 

Steshenko’s latest research paper lays out a hybrid institutional capital model, or HICM, that could connect local, statewide or multistate municipalities seeking infrastructure funding, group their infrastructure projects into a financing package and work with institutional investors to fund those projects. 

“It’s a new way to unlock private capital for smaller community projects that are being ignored today,” he said. “Rather than asking how governments can find more money, I asked, how can we organize infrastructure projects so that large investors can participate in those projects?”

Green bank intermediaries

Stehenko said Maryland’s Montgomery County GreenBank is using a version of his HICM for a multi-municipality infrastructure financing project that may be completed by the end of next year. 

Steshenko said green banks — state, local or nonprofit financial institutions that use public or private funds to help facilitate clean energy projects — are the bodies best equipped to serve as an intermediary for his HICM model in the U.S. 

“Green banks understand projects and also investors. They’re comfortable in both roles and can play the role of translator and adviser in setting up public-private partnerships,” he said.

Local governments across multiple communities could either pitch their infrastructure projects to a green bank or the bank could approach them, Steshenko said. The bank gathers these projects into a diverse portfolio — for instance, water infrastructure, energy efficiency and flood protection projects — using the same underwriting and eligibility criteria methodology across the projects to ensure consistency, transparency and structured risk allocation.    

The bank would then package the projects into one of the following financial products, which Steshenko said would allow different sources of capital to participate according to their needs: 

• A fund that owns the underlying projects, into which pension funds could invest directly. 
• Bonds issued by the green bank, backed by cash that the municipalities invest in the projects.
• Loans that the institutional investors provide to the green bank to finance the projects.

“Imagine you’re managing large investments for a large institutional investor. Instead of one infrastructure project, you’re offered a professionally managed, diversified portfolio containing hundreds of projects from several municipalities,” Steshenko said. “It’s another tool in the municipal financing toolbox.”