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A New Bank to Save Our Infrastructure

Another consequence of having different government programs dedicated to different types of infrastructure—whether highways, water projects, or wastewater treatment—is the creation of bureaucratic fiefdoms that are inevitably held captive to the “iron triangle” of congresspeople, lobbyists, and thebureaucrats themselves, as has happened in the case of the Highway Trust Fund and the Army Corps of Engineers. As a result, these programs never compete with one another. No responsible body has the mission of impartially deciding whether we’d be better off with more mass transit and better train service and fewer major roads, because these are never compared when a specific proposal is under review. Moreover, the different agencies that analyze projects—if they do so—generally use different (and self-interested) criteria for determining such critical variables as the value of time, the value of new jobs created, the discount rate, the cost of capital, and so on.3 As a result, the public is left without the apples-to-apples comparisons that any rational investor would use to allocate a portfolio of billions of dollars of investment.

So the “modal” infrastructure programs, rather than competing efficiently for resources, all lurch forward without coordination or attention to the merits of the specific projects they choose to fund. And that is in cases when the programs are not directly muscled through by politicians. The term “earmark” became popular during the writing of the 2005 transportation bill, which contained over six thousand of them (with a total cost of $24 billion), compared to five hundred of them in 1991 and ten in 1982.

3.

In view of the waste and inadequacies of existing federal and state policies, how can we begin to address the growing infrastructure crisis? In September 2004, former Senator Warren Rudman and one of the authors of this essay, Felix Rohatyn, agreed to chair a Commission on Public Infrastructure at the Center for Strategic and International Studies (CSIS) in Washington, D.C., to outline a new and different approach to selecting, financing, and managing infrastructure. Last year, the commission produced a consensus report; and a bill to enact its approach, the National Infrastructure Bank Act of 2007, has been submitted by Senators Chris Dodd (D., Connecticut) and Chuck Hagel (R., Nebraska), both of whom served as members of the CSIS commission. A companion bill has been offered in the House of Representatives by Banking Committee Chairman Barney Frank (D., Massachusetts) and Representative Keith Ellison (D., Minnesota); while a similar approach has been proposed in a bill introduced by Representative Rosa DeLauro (D., Connecticut). Barack Obama has spoken of the need for “a National Infrastructure Reinvestment Bank that will invest $60 billion over ten years…. The repairs will be determined not by politics, but by what will maximize our safety and homeland security; what will keep our environment clean and economy strong.”

The central idea of the CSIS commission proposal is to establish a National Infrastructure Bank, an institution that would be similar to the World Bank, a private investment bank, or any other entity that evaluates project proposals and assembles a portfolio of investments to pay for them. Traditionally, public financial institutions such as the one we propose are created to correct problems in capital markets, whether they be the failure of markets to fund projects that support development in the world’s poorest nations or their undue pessimism regarding the long-term solvency of a particular city or state government. This is not the case here. State and local governments generally can borrow for infrastructure purposes in line with their ability to service debt and the strength of their credit ratings. The issue here is not the efficiency of capital markets but rather the efficiency with which federal programs work and spend funds. The purpose of the National Infrastructure Bank would be to use federal resources more effectively and to raise additional funding. We propose this bank because we believe that markets for capital do work and can be harnessed to solve the critical shortfall in funding infrastructure.

The bank would replace the various “modal” programs for highways, airports, mass transit, water projects, and other infrastructure, streamlining them and folding them together into a new entity with a new culture and purpose. Any project seeking federal participation over a set dollar threshold would have to be submitted to this bank. (Smaller projects would be left to states, cities, and towns, perhaps with an accompanying federal grant to be used at the discretion of the state or local government.) Rather than receiving grants through pre-set federal formulas or privileged congressional payments, states, cities, or other levels of government would come to the bank with proposals they wished to pursue. These proposals—for, say, a new or improved highway, a subway, expanded airport, or harbor improvements—would outline the investment that state and local governments would be willing to make, what the users of the project would be expected to pay, and what support was wanted from the federal government.

The bank would have no preconceived, overarching plan for the nation’s infrastructure. Proposals for infrastructure investment would still predominantly come from state and local governments. Our plan would preserve almost entirely the existing balance of power between federal, state, and local government, but would change dramatically the way priorities are set and projects funded. That is because it would proceed project-by-project, and dollar-by-dollar, to find the best use of federal resources.

The bank would have a board of directors that included key Cabinet officers and members appointed by both the executive branch and congressional leadership; its chief executive would be appointed by the president and confirmed by the Senate. The Federal Reserve, the Public Company Accounting Oversight Board, and the Pension Benefit Guarantee Corporation are all good examples of comparable agencies with expert and important missions that have consistently functioned well. The bank would require states, cities, or other sponsoring entities to seek federal assistance only after they have thought through alternatives such as tolls and other user charges, such as the adjustment of prices to peak loads on the roads and airports or the availability of other solutions that do not require new, burdensome structures. These would include wetlands for flood control or changing speed limits and the use of “smart” traffic systems that allow more cars to use the same limited road space more efficiently. The bank would be in a good position to ask whether applicants were aware of alternatives and had considered the most efficient technology.

Imagine, for example, that the bank received a proposal from a state for a new highway segment and found, using its consistent analytic approach, that the plan had legitimate national benefits. It could then provide support in several ways. It could simply write a check to the state building the road and provide a direct subsidy for some portion of the total cost. Alternatively, it could purchase credit guarantees for the state bonds that financed the roads; or it could provide interest rate subsidies to reduce the rate paid on those bonds. It could lend the money directly to the state and be repaid from tolls; or it could provide sinking funds (funds sometimes set aside to guarantee the repayment of the bond), or underwrite the state’s bond offering (guaranteeing that all of the bonds will be purchased at a predetermined price), or take other steps. States and municipalities, of course, could continue to borrow from public markets as they do now; what would change is the federal government’s financing role.

The bank’s ability to sell securities based on its infrastructure projects such as roads and bridges would also resolve a major quandary of infrastructure policy—how to manage the influx of private money into particular projects. State and local governments too often sell highways and other transportation networks to private investors because they have been unable to raise tolls to sufficient levels, and as a result they risk selling these on the cheap or other bad terms. San Diego has approved a plan to let a private company build a private toll road with the promise that no other road would compete with it for the indefinite future. Chicago’s lease of its Skyway road system to a partnership of the Spanish firm Cintra and Macquarie will last for ninety-nine years, far longer than the road itself will! And if local governments use the receipts of such one-off sales for “rainy day” funds or other operating expenditures, they are making their long-term fiscal situations worse, not better.

Although private investors have successfully built new roads in places such as Poland and Spain, they have not done so extensively in the US. But a National Infrastructure Bank could redirect private efforts away from refinancing old facilities—as in the case of Chicago’s Skyway—to building new ones. According to our plan, most of the funds the federal government now spends on existing programs (along with many of those program’s experts and facilities) would be transferred to the bank, which could not only finance the projects but also resell the loans it makes to investors in capital markets, much as other assets are rebundled for investors. The receipts from these sales would allow a new round of lending, giving the bank an impact far in excess of its initial capitalization. Moreover, selling the loans it makes to private investors would require the bank to convince those investors that its projects are tenable and capable of producing tangible benefits—in short, the bank’s project selections would face a market test every day, as a deep and liquid market for its securities was formed. Or, alternatively, the bank could issue its own fifty-year bonds, backed by its loan portfolio, to obtain its own capital.

Even with a conservative ratio of borrowed funds to capital of three to one (meaning each dollar of federal activity attracts three added dollars of private borrowing), this could produce almost a quarter-trillion of investment on a $60 billion annual bond issue. But regardless of the particular financial mechanisms chosen, a freestanding bank would permit raising additional money by borrowing on the basis of the bank’s balance sheet and financial capacity. As a result, the bank could produce substantially more investment and hundreds of thousands of new jobs in the first several years of its operation.

The bank’s securities, whatever they may be, should not benefit from a promise of the government’s full faith and credit (as has been enjoyed and abused by Fannie Mae and Freddie Mac). Only close scrutiny by investors can provide the kinds of discipline needed to ensure the bank’s long-term success. If the bank wishes to support a proposed project—whether by writing a check, insuring a local bond, providing other credit guarantees, or lending its own money—its securities should each be carefully exposed and specifically targeted, allowing participating investors to evaluate the assets they buy. But in our view the dramatic need for additional infrastructure investment clearly justifies tax-free returns for those securities.

4.

A final question concerns paying for this new infrastructure policy. As we noted above, the first source of financing should come from the funds now dedicated to existing infrastructure programs—about $60 billion annually could be taken from these programs with a balance left over. And there is nothing wrong with continuing to charge users a motor fuels tax, an air ticket surcharge, port fees, and other fees that now are imposed for using infrastructure. But two further points should be made.

First, we can increase our investments in infrastructure and still have fiscal discipline. There is no shortage of options for raising revenue for investment purposes while still making the tax system more efficient and fair—two examples are a consumption or value-added-tax (perhaps partially offset by lower income taxes to maintain progressivity) or a carbon tax or energy tax. And since it would target its subsidies more effectively, the bank would get more investment out of existing budgetary resources while adhering to the “pay as you go” (PAYGO) budget rules used by Congress, which call for each new dollar of spending to be offset by a dollar of reduced spending or increased revenue elsewhere. At the same time, the bank’s financial statements would take us one step closer to having the information that a capital budget would provide—most critically, whether we are investing in infrastructure faster than it is depreciating or becoming obsolescent.

The second point is the matter of fiscal stimulus. Bloomberg, Rendell, and Schwarzenegger have recently urged that increased spending on infrastructure be the center of a new stimulus package, as have House Speaker Nancy Pelosi and former Treasury Secretary Lawrence Summers.4 This is an attractive prospect—an additional $40 billion in infrastructure investment could create as many as a million new jobs. We share this objective,5 but believe the best way to accomplish it is through an immediate revenue-sharing grant to states and cities for these purposes. In the interim, a bank along the lines described here and in the Dodd-Hagel bill could be set up and put into operation within a year.

Ultimately, we face a future of mass transit strained beyond capacity, planes sitting on tarmacs, slow traffic and wasteful sprawl, ports that lack the capacity to operate efficiently, and increasing numbers of bridges and dams that are obsolescent and dangerous to the public’s health and safety—in short, the dire prognosis of the American Society of Civil Engineers is coming true. Regardless of the government’s fiscal position, vital investments in transportation, water supply, education, and clean energy are necessary to maintain our future standard of living. Our political system pours money into war and tax breaks while relying on deficit finance. Those in charge then announce that there are no resources left to secure our economic future. The new bank we propose offers one alternative to such a dangerous set of policies.

—September 10, 2008

  1. 3

    The Office of Management and Budget does send notifications to all federal agencies urging the use of a 7 percent real discount rate for allcapital projects, but it allows that other rates are appropriate under different circumstances.

  2. 4

    See Lawrence Summers, “What We Can Do in This Dangerous Moment,” Financial Times, June 29, 2008.

  3. 5

    See the authors’ “Measures to Avoid the Worst Recession in 30 Years,” Financial Times, July 21, 2008.

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