Financing Infrastructure
Phil Kenkel
Bill Fitzwater Cooperative Chair
Updating our aging infrastructure would be easy if someone else were paying for it. Unfortunately
infrastructure must be financed with some combination of debt and equity. Because cooperatives
create equity and pay interest payments out of the profit stream, both debt and equity have
implications on the required level of earnings. Financing infrastructure also competes for funds
with cash patronage and equity retirement. Given these inter-related complexities it is sometimes
hard to know where to start the planning process.
The guiding principle is to manage the balance sheet first and not let either infrastructure projects or
equity retirement programs drive the cooperative away from its desired capital structure. I think of
this as protecting the goose that lays the golden eggs. First consider what you feel is an appropriate
mix of debt and equity for your cooperative. Next, look to your long range plan for infrastructure
investment and forecast the needed investment. That will determine how much additional equity
you will need to create through retained patronage. If that projection is not consistent with your
current profitability and retention percentages, the cooperative should either reconsider the schedule
of infrastructure investment or their margin and cash patronage structure.
In most cases the specifics of the infrastructure project do not impact the availability of debt
financing. Your lender probably is not concerned whether you select steel or concrete grain storage.
Possible exceptions would be constructing temporary storage or infrastructure assets involved in a
multi-cooperative alliance. In these cases you would want to work closely with your lender to
consider any issues with the debt side of the financing.
The last step in financing infrastructure is to communicate the rationale for the investment to the
members. Infrastructure investment competes directly or indirectly with the funds returned to
members through favorable margins, patronage refunds and equity retirement. Members are
generally in favor of investments that they can see and touch. They may be less excited about
investment at another location. Communicating the long-range plan for infrastructure
improvements and recognizing the members’ role in providing the funding helps to ensure member
support.
7-14-2011