Sustainable Infrastructure Finance: Enhancing Transportation Construction Expenditure Management and Exploring Innovative Financing Mechanisms

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Liang, Yunping
Ashuri, Baabak
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Infrastructure is vital to the daily life of every single person – from the road that people travel to work, to the pipes that deliver clean drinking water, to the electrical grids that deliver electricity to light rooms, no matter in the deep valley or in the New York City. Persistent failure to invest in the aging infrastructure of the United States severely jeopardizes this country: the cumulative documented investment gap in the U.S. infrastructure system is more than $2.6 trillion by 2029, leading to more than $10.3 trillion loss in GDP by 2039. Every household in the U.S. will be expected to suffer an average loss of more than $3,300 per year in disposable income through 2039. Above statistics by American Society of Civil Engineers (ASCE 2021) are tabulated before the outbreak of Coronavirus Disease 2019 (COVID-19), which worsens the situations by shrinking the limited revenue sources. In addition to the rehabilitation of decaying facilities, intensive investment needs in the wake of emerging consensus on constructing sustainable infrastructures due to the challenges such as climate change, urbanization, and the rapid pace of technological advancement, bring additional pressure to infrastructure finance. The nexus of infrastructure finance and sustainable infrastructure system is more than the financial burden imposed by infrastructure system on finance. Moreover, as the definition of sustainability by ASCE (n.d.) indicates, the financial activities of sustainable infrastructure system should have the capability to maintain and improve quality of life without degrading the quantity, quality, and availability of economic and social resources. People need to finance sustainable infrastructure. Meanwhile, people need to finance infrastructure sustainably. This thesis describes three studies. Centering around cash flow shortage and default risk of transportation projects, the first two studies use advanced analytics methods to better protect investment by enhancing the risk assessment of P3 projects, and to enable effective use of limited public funding by generating realistic estimate on expenditure cash flow at early phase of project development. The last study aims at helping people apply the innovative financing mechanism originally designed for traditional, large-scale infrastructure projects to sustainable infrastructure projects. Compared to traditional infrastructure projects such as interstate highway, sustainable infrastructure projects are frequently smaller in size. The third study identifies and analyzes the unique challenges of using P3 on smaller infrastructure projects and provides enablers with potentials to overcome the identified challenges. In the first study, a novel real options model is developed to quantify the risk of cash flow shortage caused by technical uncertainties and market uncertainties in transportation public-private partnerships (P3). As the state-of-art financial engineering instrument which provides evaluation on investment opportunities under uncertain market conditions, real options analysis has been used by many prior researchers to explore various kinds of options in transportation infrastructure investment. Nevertheless, no approach is developed in prior of this study for pricing technical risks, which do not have hands-on market risk premium. Involvement of technical risks enables better approximability of model and higher accuracy in project volatility calculation. The developed model is used to quantify potential refinancing costs due to cash flow shortage, which is a risk receiving litter attention in the literature. In the second study, a new forecasting model which enables reasonably accurate prediction of expenditure cash flow of transportation design-build projects is developed, based on case-based reasoning and genetic algorithm. Lack of complete design and exact quantities for cost estimation make estimating the project payout in pre-award phase difficult. Accurate forecast on construction expenditure cash flow is crucial for state transportation agencies to secure sufficient funding to cover their annual fiscal obligations. However, there is no quantitative model to assist state DOTs in accurately forecasting expenditure cash flows for design-build projects in prior of this study. The third is a conceptual study which identifies the challenges and enabling features of small and medium infrastructure P3. In classic perspective, P3 is exclusively designed for megaprojects. However, drawn upon the transaction cost, a theoretical framework is proposed to explain the features of successful small and medium P3s. The proposed framework is validated by case studies on identified small- to medium- sized P3s in the U.S. The study also reveals the potential of the model as a supplement of existing financing methods in terms of meet ever increasingly complex social needs. The thesis is ultimately driven by the aspiration of addressing the funding gap of building an economically, environmentally, and socially sustainable infrastructure system. In the age of analytics, infrastructure finance is becoming a multidisciplinary field requiring creative and rigorous combination of advanced analytics, project management and policy analysis. It is hoped that the work presented in this thesis can contribute to the body of knowledge by improving the use efficiency of limited infrastructure funding, by enhancing the risk assessment of infrastructure investment, and finally, by expanding available funding sources of infrastructure development.
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