Understanding Infrastructure Financing: How Major Construction Projects Get Funded

Infrastructure is a key component of modern society, and refers to many of the everyday necessities that we need to function in and out of our immediate areas. Infrastructure can include everything from public highways, sewer lines, and hospitals to airports, power plants, and local flood control measures (like levees or sea walls). It also includes private sector projects like

While the depth of infrastructure development may vary depending on where you live, it’s hard to deny its importance in society as a whole, both for everyday function and economic growth. But how do infrastructure projects get proposed, planned, and scaled? And who is on the hook for funding (and later maintaining) these large endeavors?

Here’s a look at the world of infrastructure financing for construction projects, construction financing options available, the capital challenges involved, and how financial institutions fit into the process.

The Fundamentals of Infrastructure Financing

Infrastructure financing refers to the process of planning and securing the capital (funding) to pay for the build, implementation, and even maintenance of large-scale projects. The source of funding for a new infrastructure can depend on whether it’s a public infrastructure (like a highway or public transportation system) or a private-benefit infrastructure (like the utilities or roads necessary for a commercial development project). Some projects teeter on the edge of both — and may even receive funding from multiple sources — like privately-owned and -operated hospitals within communities.

Infrastructure investment can be tricky for a few reasons. First, the scale and scope of these types of projects may be massive. The financing of infrastructures like major highway systems can easily run in the billions of dollars, often running tens of millions per mile.

Sustainability is also a concern as these infrastructure assets need to be maintained over time. This means that infrastructure financing for construction projects needs to account for both upfront allocations as well as ongoing cash flows.

Key Sources of Funding for Infrastructure Projects

There are two primary categories when it comes to construction financing options: public or private. In some cases, projects may use a combination of the two.

Public Funding

Public funds are often used to pay for common infrastructure needs. Depending on the project scope and budget, public construction financing options include funds from

• Local governments, including federal, state, and municipal budgets
• The sale of bonds (municipal bonds, general obligation bonds, revenue bonds)
• Tax revenues (property taxes, gas taxes for roads, tolls, etc.)

For example, a city might issue bonds to fund economic developments like a new bridge or roundabout. And local property taxes could be allocated to pay for enhancements at the local public school campus.

Private Investment

It’s not uncommon for private entities to invest in infrastructure project financing, especially in an emerging market or if the end result is a project that can result in income generation. This private capital can come from sources such as

• Investments from corporations or infrastructure funds
• Institutional investors (pension funds, insurance companies) seeking long-term returns
• Private investors looking to own a portion of the end project (or its profits)

For example, private toll roads are often operated by private firms under a concession agreement, which means that tolls collected are (at least partially) distributed as profit.

Investors are often connected with organizations (including government entities) in need of funding through capital markets.

Public-Private Partnerships (PPPs)

A third option is a combination of public and private funding. These public-private partnerships, also known as PPPs or P3s, provide infrastructure financing for construction projects through both public funding sources as well as private investors.

These joint funding projects require a lot of coordination. Not only is it necessary to define how the risk and responsibility will be shared between the parties, but both sides must work together to create Design-build-finance-operate-maintain (DBFOM) models. This determines how public and private financing funds will be allocated, who approves pricing and chooses contractors, how investment gaps are managed, who is responsible for risk mitigation, and how the project will be both managed and maintained.

Hospitals are often privately-owned by investors and shareholders, though they provide a service to the community and may receive public incentives. Another example is the Purple Line transit project in Maryland. This project couldn’t be completed to the original scope with the initial funding due to supply chain and bid issues, so the state approved a debt financing modification from private sources to finish the line.

Government Grants and Subsidies

Another public source of infrastructure financing for construction projects is through government grants and subsidies. These programs may be project specific, such as through the U.S. Department of Transportation (including USDOT INFRA and RAISE grants) or through special stimulus or legislative packages.

For instance, the Bipartisan Infrastructure Law in 2021 offered $1.2 trillion toward infrastructure improvements across the United States. These funded upgrades targeted things like clean water, aging utilities, wildfire management, and critical road improvements.

The Role of Financial Institutions in Infrastructure Financing

When it comes to project financing in the infrastructure sector, borrowers have a few different options from which to choose.

Investment firms may structure financing by buying an ownership stake in the project, for instance, providing a direct equity investment. This provides infrastructure funding for the construction project in exchange for a share of the future profits. They may also offer debt financing through private loans or project bonds, which are repaid over time with interest just like standard bank loans.

Many banks and multilateral lenders — such as the World Bank — underwrite and syndicate global infrastructure finance solutions, sometimes specifically providing funding to governments for the purpose of funding projects. This provides a financing solution for everything from the procurement of materials to required surveys and case studies, project management, construction, and even long-term management and upkeep.

In many cases, large infrastructure projects will require blending multiple financing solutions.

Long-Term Capital Challenges in Infrastructure Projects

Pouring millions or even billions of dollars into an infrastructure project may be necessary and important, but that doesn’t mean it doesn’t come with many hurdles, hardships, and ongoing challenges.

Project Risk and Uncertainty

Any big construction project is susceptible to risks, often proportionate to the size of the project. When embarking on an infrastructure project that might cost tens or hundreds of millions of dollars, it’s expected that a certain level of risk and uncertainty will crop up. This could include:

• Unexpected regulatory changes (climate change laws, emissions regulations, etc.)
• Political risks
• Going over budget
• Timeline misalignment between infrastructure loan funding and construction schedules
• Supply chain gaps

All of these can create a disconnect between the project’s financing sources and funding needs, and even upend the project entirely.

Maintenance and Lifecycle Funding

Upfront capital isn't enough when it comes to planning for infrastructure financing for construction projects. Project leaders must also take future operations and maintenance funding into critical consideration.

Ongoing costs should be overplanned for, including lifecycle cost modeling and budgeting. Failing to plan for the post-construction phase can easily lead to an overall project failure.

Inflation, Interest Rates, and Market Conditions

The budget created today for an infrastructure project isn’t necessarily going to be correct when it comes time to break ground. Rising interest rates and inflation can affect financing viability and completely wreck a prospective project. These are often factored into long-term P3 agreements, but without a crystal ball, it’s hard for anyone to perfectly predict what will happen years into the future.

Unexpected supply chain and labor force disruptions can also derail infrastructure projects. This is what happened to many projects during and after the COVID pandemic, such as the Purple Line in Maryland. To get funding back on track with that project, organizers had to unexpectedly turn to private financing sources after the fact.

Final Thoughts

Large construction projects require big decisions and even bigger financing strategies to take them from concept to implementation and even beyond. Infrastructure financing for construction projects may even require collaboration between public funding sources — like local and state governments — and private stakeholders — such as private equity investors. Staying up-to-date with funding opportunities is integral to the success of any big infrastructure project.

FAQs on Infrastructure Financing for Construction Projects

Who finances infrastructure projects?

Infrastructure projects can be financed or funded through a combination of government allocations, construction loans, direct equity investments, grants, and partnerships, to name a few. In many cases, infrastructure financing for construction projects is accomplished through a combination of both public and private funding sources.

Which type of loan is often used for financing an infrastructure project?

Infrastructure projects may utilize construction loans, debt financing, municipal or project bonds, or equity capital for financing. Some are repaid like a standard loan with interest and other fees, while other financing options may be used to purchase a stake in the project and share in future profits and earnings.

Who finances infrastructure?

Infrastructure is mostly funded using public resources, such as state, local, or federal allocations. Since infrastructure projects — like highways, waste water facilities, utilities, natural disaster prevention, hospitals, and such — benefit society as a whole, public funds are generally expected to support their efforts. However, some projects may also enter into partnerships with private financing sources to share in the investment and future earnings, depending on the project.

What is the difference between financing and funding?

Funding means that money is provided for a project, usually from a government source such as a bond, grant, or public budget allocation. Financing means that money is lent to a project with the expectation of being repaid (in some form or fashion) down the line. Financing is often provided through loans, capital investments, partnerships, and equity shares.

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