Brookings: Topics - Infrastructure Bank

State and Local Leaders Double Down on Infrastructure

Robert Puentes — Tue, 16 Apr 2013 10:35:00 -0400

Cautious optimism followed President Obama's FY2014 budget request to rebuild and reinvest in America's infrastructure.

The proposal highlighted infrastructure as a fundamental driver of the nation's economy and critical asset for its long-term recovery. Specifically, the request reiterates the determined proposals to create a national infrastructure bank, build-out an American high-speed rail system, invest in clean energy, modernize the air traffic control network and the electrical grid, and reinvest in state-of-good repair projects, among other things.

The president's infrastructure package has a lot of good ideas. What it does not have is a lot of money.

Undaunted, state and metropolitan leaders are coming to Washington this week with their own ambitious and creative strategies to make their infrastructure goals a reality and looking to the federal government to engage in new partnerships with government, labor, and institutional investors to accelerate the construction and deployment of new infrastructure.

In many ways, Washington is acknowledging this renaissance and moving to embrace it. Also included in the president's request are plans to cut regulatory red tape in order to prioritize projects and enable better use of public/private partnerships. These are welcome acknowledgments of the principal role state and local leaders play in selecting, financing, and building infrastructure and, given their miniscule price tag, ought to be legislative slam dunks.

Without a doubt, unfunded pension obligations and other debt burdens facing state and municipal governments limit the availability of public funds to pay for necessary infrastructure. And though interest rates remain at historically low levels, the ability of many governments to borrow from the capital markets is limited by debt caps and weak credit ratings.

So states and metros are looking beyond traditional municipal debt markets to find new lower cost, lower risk, and higher impact ways to pay for essential infrastructure projects:

Increasingly, public infrastructure investment occurs through state revolving loan funds and so-called "infrastructure banks." These institutions fund and finance a broad array of projects, ranging from local road maintenance and highway construction (e.g., Florida’s State Infrastructure Bank) to essential water infrastructure (e.g., New York’s state revolving funds) to energy efficiency (e.g., Connecticut's green bank.) While they are not for-profit institutions in the traditional banking context, they rely on principal repayments, bonds, interest and fees to, ideally, re-capitalize and replenish the fund as a perpetual source of debt financing. The model has also gained traction at the sub-state level in Chicago and in the District of Columbia.

At the same time, state officials are also working to design innovative governance and institutional tools capable of overcoming the bureaucratic and technical barriers that can slow or even derail projects. These efforts are clearing the way for new infusions of private capital and streamlined project delivery. States like Virginia, Michigan, Colorado, and Georgia have new offices designed to tackle bottlenecks in public/private partnerships, develop innovative project ideas, and protect the public interest.

To develop consistent and predictable deal flow and ensure private investors’ continued engagement with U.S. infrastructure markets, stakeholders from California, Oregon, Washington State, and British Columbia created the West Coast Infrastructure Exchange (WCX.) The WCX seeks to establish a common market for infrastructure projects on the West Coast by coordinating cross-border infrastructure investments, facilitating procurements, and creating a project clearinghouse for regional infrastructure investments. WCX aims to create a robust market for the nearly $1 trillion in infrastructure projects that the region needs to develop.

Such efforts can be replicated elsewhere around the country. One common thread to the flurry of activity is the idea that stakeholders from all levels of government and the private sector (plus bi-partisan campaigns like Building America's Future and innovative collaboratives like Living Cities) can catalyze a new field of practice, get states ready for new kinds of investment, and explicitly connect long-term economic strategies with infrastructure planning and prioritization.

Our competitors, in mature and emerging economies alike, are in the process of making these kinds of investments and, by so doing, catalyzing productive and sustainable growth. In the United States, it looks like we are finally ready to start moving.

Authors

Robert Puentes

Crumbling Infrastructure Has Real and Enduring Costs

William A. Galston — Wed, 23 Jan 2013 12:00:00 -0500

Anyone who travels abroad can see that the United States no longer has a world-class infrastructure. And there’s hard evidence to back up that impression. The World Economic Forum compiles a massive annual “Global Competitiveness Report.” The 2012-2013 edition finds that the United States has fallen well behind many members of the European Union, Canada, and Asian countries such as Singapore, Japan, and South Korea in the overall quality of its infrastructure. We rank 18th in railroads, 19th in ports, 20th in roads, 30th in airports, and 33rd in the quality of our electrical system.

An outstanding new report from the Building America’s Future Educational Fund explains why this has happened. Relative to our economic competitors, we have no national infrastructure planning, we systematically underfund infrastructure investments, and we fail to use rigorous measures of evaluation and accountability for the projects we do manage to fund. This makes for a drag on our economy. One example: in 2010, Americans spent a total of 4.8 billion hours stuck in traffic, wasting 1.9 billion gallons of fuel, at a total cost of $101 billion.

And it will only get worse. According to the Building America’s Future report, by 2020, every American port will be struggling to cope with at least twice the tonnage it was designed to handle. While a projected 94 percent of the nation’s economic growth will occur in metropolitan areas, these jurisdictions are already home to “the most congested highways, the oldest roads and bridges, and the most overburdened transit systems,” with no relief in sight. The report warns that “if we don’t create a transportation system that functions reliably and cost-effectively in the 21st century, companies operating in this globalized world can simply choose to do their business elsewhere.”

But before it comes to that, the American economy will pay a steep price. Another report, from the American Society of Civil Engineers, lays out the projected costs, sector by sector. Here’s the bottom line: by 2020, if the mounting investment gap in infrastructure is not addressed, “the economy is expected to lose almost $1 trillion in business sales, resulting in a loss of 3.5 million jobs . . . the cumulative cost to the U.S. economy will be more than $3.1 trillion in GDP and $1.1 trillion in total trade.”

These numbers would appear large enough to arrest the attention of even the most jaded policy makers. This has not happened. Instead, current fiscal trends and policies portend a long-term squeeze on domestic discretionary spending—the pool of funds from which federal infrastructure investment is drawn. Innovative plans for federal government partnerships with the private sector to leverage scarce public resources have not gone forward in some instances and have fallen well short of adequate scope in others. While things have gone better at the state and metropolitan levels, aggregate investment continues to fall far short of needs—by an estimated $1.1 trillion between now and 2020, according to ASCE projections.

As the Building America’s Future report observes, most of our global competitors have access to infrastructure banks that attract private capital to fund major projects. A recent Brookings report has proposed one model for such a bank in the United States. (There are several others.) Sound proposals to break through the current impasse in infrastructure funding are not hard to find. It has proved much more difficult to mobilize elected officials and average citizens around plans that will require higher taxes and fees upfront in return for a stronger economy and better quality of life down the road.

One of the key tests of democratic self-government is each generation’s ability to overcome chronological myopia and provide for the future that its children and grandchildren will enjoy. Throughout history, Americans have found a way to do that—from the canals and roadways of the early 19th century to the Civil War-era Transcontinental Railroad to Theodore Roosevelt’s Inland Waterways Commission to FDR’s bridges, tunnels, and airports that put millions back to work during the Great Depression, to Dwight Eisenhower’s visionary Interstate Highway System, begun in the 1950s and still benefitting the nation two generations later. It remains to be seen whether today’s Americans will muster the will and resources to do as well for their posterity.

Authors

William A. Galston

Image Source: © Eduardo Munoz / Reuters

The Case for a National Infrastructure Bank

William A. Galston and Korin Davis — Thu, 13 Dec 2012 10:05:00 -0500

In its initial fiscal cliff proposal to Republicans, the White House requested additional multi-year stimulus spending, most notably $50 billion in new infrastructure funds for FY 2013 and $25 billion a year for FYs 2014-2018. While rejected out of hand by Congressional Republicans, the potential economic benefits of infrastructure investment are considerable, according to William Galston and Korin Davis.

In this paper, Galston and Davis advocate the creation of a National Infrastructure Bank (NIB) and offer recommendations on its structure, mission and financial powers and responsibilities.

Galston and Davis note how badly American infrastructure has suffered over the past decades: The World Economic Forum’s 2011-2012 Global Competitiveness Report ranks the U.S.’s infrastructure at 16, down from its seventh place ranking just four years ago. And the U.S. has slipped in every category: roads, ports, railroads, and—most precipitously—in air transport and the quality of the electricity supply. Indeed, the reliability of the U.S. electric grid is now ranked 32nd, seven spots behind China.

Galston and Davis argue that government should use scarce public resources strategically to improve American infrastructure, specifically to perform functions for which the private sector lacks adequate incentives, to leverage private sector participation, and to close gaps between the rate of return the private sector requires and the revenues that private users of infrastructure are willing to provide.

In creating an efficient, effective NIB, Galston and Davis offer the following policy recommendations:

Establish the bank as an independent government-owned corporation (GOC) outside of any governmental agency. This would endow the NIB with greater budgetary flexibility and not unnecessarily narrow the scope of infrastructure projects it could support.
The bank’s leadership structure should feature a CEO and board of directors, some nominated by the president, others by the leaders of the two parties, confirmed by the Senate, serving staggered terms of about six years. Such a leadership model would give Congress some oversight authority but would sufficiently insulate its operations from political whims and create enough of a buffer so that elected officials would neither determine strategic chioces or project selection nor be called on the carpet for unpopular or controversial decisions.
Create a division of the bank responsible both for analyzing the viability of proposed projects and for advising those seeking support. A strong and permanent professional staff would provide financial and technical advice to further improve resource allocation.
The NIB should initially be financed with appropriations totaling $5 billion for each of the first five years. The goal would be that after the initial funding period the bank would be financially independent. Administrative costs could be covered by application and transaction fees.
To achieve leverage, the new entity would have to attract private investor-depositors as well. Its authorizing legislation should be drafted to permit such offerings, subject to the bank’s meeting specific quantitative tests.
Legislation setting up the NIB should establish some quantitative parameters for its lending activities. At the same time, the bank’s portfolio should be adequately diversified. No individual project should put at risk more than 10 percent of the bank’s lendable funds or encumber more than 5 percent of its capital.
Do not limit the bank’s lending to specific categories of infrastructure, such as transportation. Instead, the bank should be free to invest in a wide array of infrastructure projects, including technology, environmental and energy projects, public utilities, or the renovation of schools and hospitals.
Fundable projects must generate a stream of revenues through user fees. Each project’s private goods component (fundable through user fees) would have to be substantial relative to its subsidized public goods component.
The NIB should not be empowered to offer loan guarantees, at least not at the outset.

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Setting Priorities, Meeting Needs: The Case for a National Infrastructure Bank

Authors

William A. Galston
Korin Davis

Image Source: © Anthony Bolante / Reuters

Cut to Invest: Exempt Private Activity Bonds from the Alternative Minimum Tax

Robert Puentes and Joseph Kane — Tue, 13 Nov 2012 00:00:00 -0500

To attract additional private-sector investment in infrastructure and heighten the ability of municipalities to carry out future projects, the Metropolitan Policy Program at Brookings recommends the exemption of Private Activity Bonds from the Alternative Minimum Tax. Tax exemptions on PABs will reduce the cost of borrowing for issuers and give them added flexibility to make targeted investments in those projects that promise the greatest impact on the area economy.

Exempting PABs from the AMT would:

Help boost private-sector investment in infrastructure, spurring the development of projects throughout the nation

Lower existing costs of PABs for state and local governments faced with declining revenues and restricted by tight budgets

Facilitate investment in infrastructure projects with a clear public benefit, including capital improvement projects at airports that connect metropolitan areas and foster trade

Build on the success of the previous exemption under ARRA, providing greater financial clarity and regulatory certainty for investors in the long term

In this way, by promoting favorable regulation on bonds, the federal government can encourage private- and public-sector infrastructure investment and streamline the delivery of necessary infrastructure projects.

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Authors

Robert Puentes
Joseph Kane

Image Source: © Jeff Haynes / Reuters

Strengthen Federalism: Establish a National PPP Unit to Support Bottom-Up Infrastructure Investment

Robert Puentes — Tue, 13 Nov 2012 00:00:00 -0500

In a time of constrained public budgets, leveraging private-sector financial resources and expertise to deliver a range of infrastructure projects has growing appeal. However, these public/private partnerships (PPPs) often entail complicated contracts that differ significantly from project to project and from place to place.

To address this problem, countries, states, and provinces around the world have created specialized institutional entities—called PPP units—to fulfill different functions such as quality control, policy formulation, and technical advice. The federal government should establish a dedicated PPP unit to tackle bottlenecks in the PPP process, protect the public interest, and provide technical assistance to states and other public entities that cannot develop the internal capacity necessary to deal with the projects themselves.

Creating a federal PPP unit would:

Provide states, cities, and metropolitan actors with the support and technical assistance needed from the procurement stage through long-term management of the projects by helping public actors determine the best Value for Money investment, assess long-term economic benefits of projects, and increase capacity to deal with contract changes over the life of the PPP

Create a more attractive, open, and robust environment that encourages private investment by creating predictability in the procurement process and demonstrating that the government actors involved want to “do business”

Serve as the first step in creating an integrated national infrastructure agenda, given that PPPs are integral to the overall capital investment and infrastructure strategy of the nation. Establishing a more uniform PPP process across all 50 U.S. states necessitates creating a broad strategy for national infrastructure development in the future

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Authors

Robert Puentes

Banking on Infrastructure: Enhancing State Revolving Funds for Transportation

Robert Puentes and Jennifer Thompson — Wed, 12 Sep 2012 00:00:00 -0400

In recent years, states and the federal government experimented with a set of innovative finance mechanisms, credit programs, and revolving loan funds to stretch public and private dollars and support the kind of infrastructure investments necessary to build the next economy.

For transportation projects, much of this support comes in the form of below market revolving loans and loan guarantees from state infrastructure banks (SIBs.) Since established in the 1990s they have provided billions in financing for more than 1,000 projects mostly focused on the 100 largest metropolitan areas. However, this activity is highly concentrated in just a few states as many SIBs are underutilized or inactive. This research shows that SIBs can be valuable tools for delivering infrastructure projects and can generate more investment per dollar than traditional federal and state grant programs.

This report recommends that U.S. states should:

Align federal and state roles and responsibilities to streamline project delivery and ensure loan capacity is fully utilized
Ensure the long-term sustainability of revolving infrastructure funds by leveraging capitalization and reach a broader range of sponsors and projects
Develop partnerships with local public and private actors so projects have high economic, environmental, or social effects

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Authors

Robert Puentes
Jennifer Thompson

Image Source: © ERIC THAYER / Reuters

Banking on the States for Clean Energy Innovation

Mark Muro and Ken Berlin — Wed, 12 Sep 2012 11:00:00 -0400

With Washington mired in unproductive argument this fall, it’s a great time to look elsewhere in America for smart, constructive problem-solving.

Specifically, it’s a great time--in the realm of energy policy--to look at what’s going on in U.S. states, many of which have been at the forefront of implementing innovative clean energy solutions.

Which is why my group at the Metropolitan Policy Program at Brookings (working with the team at Ken’s Coalition for Green Capital) just posted a new brief this morning on the growing interest among multiple states in state-level clean energy finance banking—a new innovation in U.S. energy finance and sub-national pragmatism.

Written by Reed Hundt of the coalition, Devashree Saha, and ourselves, the new brief (part of our Brookings-Rockefeller Project on State and Metropolitan Innovation) describes Connecticut’s path-breaking design of the nation’s first “green” bank and proposes ways other states might get into the act.

They probably need to. Financing the broad deployment of clean new energy and energy efficiency solutions remains one today’s most challenging energy policy problems.

Energy efficiency projects remain complicated to finance given their large up-front costs and the limited capital resources available to consumers while the delivered cost of energy from renewable energy projects--even though its has been dropping rapidly--is still generally more expensive than the delivered cost of energy from conventional sources, making the widespread deployment of these projects problematic. Most notably, clean solutions tend to falter in the marketplace because neither their full social benefits not their dirtier competitors’ full social costs are priced in, leaving those dirtier solutions cheaper.

Yet, here is where Connecticut innovated. By consolidating several existing programs into a new quasi-public corporation and then securing for the new entity the ability to raise and leverage funds from private sources, the state set up the nation’s first clean energy finance bank to leverage scarce public dollars with private capital so as to provide a combination of low-interest rate funding for clean energy projects and low-cost up-front loans for energy efficiency projects.

The result was the Connecticut Clean Energy Finance and Investment Authority, and over the last year the new entity has been making progress at transitioning Connecticut’s clean energy programs away from relatively expensive grants, rebates, and other subsidies toward the attraction and deployment of private capital to finance commercially available clean energy technologies. Though the start-up has been slower than hoped for the concept remains promising. And so in this way, Gov. Dannel Malloy, Energy and Environment Commissioner Dan Esty, and the state’s legislature have scored what appears to be a significant institutional and finance breakthrough on one of the truly hard problems.

Drawing on such models as the Overseas Private Investment Corporation, the Export-Import Bank, and several foreign examples, such as U.K.’s Green Investment Bank and Australia’s proposed Clean Energy Finance Corporation, a determined U.S. state has pushed ahead, and now other states are interested.

Work is getting done and our paper seeks to suggest a variety of ways interested other states can design their own clean energy finance authorities beginning from their own starting points. In the vein, while some states may need—like Connecticut—to establish a new quasi-public corporation into which to gather existing funds and then leverage them, other states may prefer to repurpose an existing finance authority or adjust an existing state-level infrastructure bank so as to attach a clean energy finance bank. Others, moreover, may want to attach to their finance entity a special “innovation window” to provide financing solutions for scaling up riskier emerging technologies.

There are many ways to proceed and states are looking at all of them, just as they have embraced the important concept of state-level infrastructure banks, as reviewed in a companion paper by my colleague Rob Puentes.

In a way, then, the new paper represents a more encouraging follow-up to the story of pending federal policy roll-back I told earlier this year with colleagues from the World Resources and Breakthrough institutes.

Though Washington is gridlocked and retrenching, states are stepping up and inventing--once again. In that sense, clean energy, or “green,” finance banks look a lot like American federalism at its best.

Authors

Mark Muro
Ken Berlin

Publication: The Avenue, The New Republic

Image Source: © Fabrizio Bensch / Reuters

What Would an Infrastructure Bank Really Do?

Robert Puentes — Mon, 16 Jul 2012 15:00:00 -0400

Last week, the Congressional Budget Office released an important analysis on the potential efficacy, need, and impact of a national infrastructure bank (NIB.) While the idea remains stuck in political and policy limbo, the report is still highly relevant. Interest in the idea remains high, helping to inform the policy innovation happening in states like New York and cities like Chicago.

The CBO report is, as usual, careful and thorough. The analysts over there are super sharp and know what they're talking about especially--and obviously--when it comes to the impacts on the federal budget. (In fact, the section in the report about the budgetary cost of credit support is an important read.)

While the report raises some legitimate concerns let me make five quick points and provide a somewhat different perspective in order to make a stronger case for the NIB.

First, the CBO report focuses just on transportation infrastructure and even then just on the limited field of highway and transit projects. Of course, the revenue streams coming from ratepayers do make energy and water projects unique. But that's precisely the point and why those projects may be more appropriate for an NIB than traditional road projects that should be funded in the traditional way.

It remains that the greatest potential for an NIB is for a different set of complex investments such as ports (sea, air, intermodal) and rail (freight and passenger), renewable energy, dams, levies, water treatment facilities, and probably large-scale urban redevelopment projects.

The related second point is that an NIB would ideally focus on projects that are truly national in scope. Not that they're giant mega projects traversing the continent but that they connect to larger national goals. If we truly had a multi-modal freight plan, one could envision the NIB supporting projects necessary to fulfill its goals. Or else projects that are part of a national renewable energy strategy. Then because the projects have national purpose and intent, they should be granted priority and expedited through the federal review process. The point here is that a NIB shouldn't be established to enable us to keep doing what we've always done.

Third is that the establishment of an NIB would be a strong signal to the private sector that the national government is committed and open to private involvement in infrastructure financing and delivery. Today private sector financiers and investors are understandably frustrated by the lack of clarity about the rules of engagement that is--as in many states--a real hindrance to the development of the public-private partnership market.

The fourth point is that an NIB would provide technical assistance and expertise to states and other public entities that cannot develop internal capacity to deal with the projects themselves. Some of the most potentially transformative investments are inherently complex and require a mix of investors from all levels of government, across different federal programs, combined with the private sector, and even from other nations' sovereign wealth funds. Expertise to consider such deals and fully protect the public interest is paramount.

Last is the skepticism expressed by the CBO about the market for projects that fit the criteria I've described. A fair point, though there's probably a bit of chicken and egg thing happening. The establishment of an NIB with clear scope and criteria would undoubtedly result in a range of new and innovative projects. In fact, we're already seeing it here at the Brookings Metro Program.

Last year we challenged public and private leaders to send us their ideas for innovative, transformative investments. And the response was tremendous. We got transportation projects like the New International Trade Crossing in Detroit. We got energy projects like the Plains & Eastern clean energy transmission line in the Southeast. We got projects for education and research institutions like the Applied Sciences NYC. And we got redevelopment and placemaking projects to build out a new vision of the next American metropolis in San Francisco and Chicago. Whether or not these projects would all be supported by an NIB is hard to say, but the point is that these projects are out there and are likely just the tip of the iceberg.

I'm not naïve about this. Prickly issues around congressional jurisdiction, project selection, capitalization levels, and financing mechanisms are still unresolved and why the NIB remains as it has been for decades: the next greatest idea. In the meantime, Washington should pay attention to how states and metro areas are getting projects done in this challenging fiscal and policy environment.

Authors

Robert Puentes

Publication: The Avenue, The New Republic

Image Source: © Molly Riley / Reuters

More Elbow Room for India in Gas Contracts

Rahool Panandiker and Urjit R. Patel — Fri, 22 Jun 2012 17:04:00 -0400

The latest foray towards ensuring India’s energy security, the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline, is a welcome move. The signing of the TAPI deal has taken an eternity. That’s not surprising since alignment of the three “Ps” – politics, proximity and pipelines – critical to the gas market, is time-consuming. The TAPI deal helps to partially, but not fully, complete a vital component of the energy jigsaw: secure energy from multiple geographies to diversify supply risk; for India, Qatar represents a disproportionate share at over 80 per cent. TAPI opens up a ten million metric tonnes per annum (MMTPA) gas corridor, although it is at the cost of the pipeline passing through two conflict-ridden countries, one of which is openly hostile to India — supply disruption is within the realm of possibility; given limited capacity for storage (much like electricity), the consequent potential loss to downstream businesses in India can be large. According to the agreement, gas will be available to India from 2018 onwards at an expected landed cost of $13/per million British thermal unit (mmBtu). On a take-or-pay basis, the associated – directly or indirectly guaranteed – contingent liabilities are large.

Despite the TAPI deal, given India’s dire domestic gas supply situation, it is expected that a shortfall of up to 40 to 50 per cent of demand will need to be met by imported liquefied natural gas (LNG). Before the end of the decade, India will be among the largest LNG importers in the world. Concomitantly, significant regasification infrastructure is either being constructed or being planned, with indications that as much as 30 to 35 MMTPA capacity could come on line in the next few years. Much of the incremental capacity is yet to tie up LNG supply linkage, and thus will be hostage to the prevailing spot markets for both volumes and prices.

One can safely assume that a significant part of this capacity would look to long-term contracting to mitigate (price) volatility; the implication is that deals for an additional 90 to 100 million standard cubic metres per day of LNG at a lifetime value of almost $500 to $600 billion should be in the offing over the next few years, and some are already under negotiation.

Developments in the gas sector in recent years underscore the importance of incorporating elbow room in contractual structures. Consider the following, possibly game-changing, sources of uncertainty for India and others, whose effects are still to fully work their way through the international gas market. First, the dynamic in the evolution of shale gas exports to countries outside the North American Free Trade Area that the US Department of Energy will calibrate. Second, supply from emerging shale geographies such as China, Mexico and South America. Third, the amount and cost of deep sea off-shore finds, for example in Australia. Fourth, since demand for gas, like for any other energy source, is a derived demand, it is subject to the vicissitudes of global growth, and key gas consumers (like the euro zone). Fifth, the likelihood of complete replacement of nuclear energy in Japan with alternative fuels. Sixth, industrial customers for gas, including fertiliser plants and power generators, in India will also have to manage marked rupee currency risk in the light of recent sharp fluctuations. Seventh, the changing correlation between oil benchmarks and Asian LNG landed cost.

While the economic rationale of a long-term contract is obvious enough, caution is warranted. In a gas-starved situation, it is easy to overlook the hidden perils that players can be exposed to. The value – and consequently value at risk – of a long-term contract in gas is critically dependent on the specific terms and conditions related to price, volume, flexibility and review mechanisms, as follows:

Contracts can allow for negotiating both specific formulae and scope for indexation (JCC, Henry Hub, oil products, Brent, local hub prices, etc), which would help identify the necessary risk-hedging mechanisms.
The capacity to make well-thought-out estimates of requirements in a supply-starved market may not seem critical, but examples of several European countries that have gone from starved to sated should impress upon us the importance of careful assessments of volume and frequency of requirements.
Flexibility clauses include those that allow for significant range in volume, destination and the rules that govern the consequent value split.
Embedded price reviews can help “reset” the fairness of the contract. Neither the seller nor the buyer is privy to the way the energy world may look in the future, hence flexibility for readjustments triggered by specific events is essential “insurance”.

All four sets of clauses need to be considered together to ensure consistency. A prudent approach to managing risks associated with volatility of “demand” in markets mandates that the terms and conditions of the supply contract adequately compensate for the entailed risks. A long-term contracting strategy, with all its inherent a priori “benefits”, will only deliver overall life-cycle gains when the objective of fuel security is combined with an apposite view of risk hedging.

Some exposures faced by buyers in India can be better managed if an India-oriented LNG price “marker” evolves. Thus far, India has been a passive price taker, specifically, at the high end of LNG prices contracted by Korea and Japan, countries that pay a hefty reliability premium but that are easily able to absorb the elevated cost on account of energy-efficient industrial processes and structures. In this context, it is instructive that China is a preferred customer — on a weighted average basis, it pays a lower price for imported gas compared to practically all other buyers in Asia.

In conclusion, a capacity to delve into the details of the contract structure, simulate different scenarios, draw insights from potential outcomes and hedge the relevant risks associated with long-term contracts has the potential to engender either a gas bonanza or a gas problem. The devil is in the details.

Authors

Rahool Panandiker
Urjit R. Patel

Publication: Business Standard

Image Source: Rupak De Chowdhuri / Reuters

New Approaches for Infrastructure Finance: State and Local Perspective

Robert Puentes — Wed, 11 Apr 2012 00:00:00 -0400

Editor's Note: This is the full text of Robert Puentes written remarks prepared for the Fifth U.S./China Investment Forum held April 11, 2012 at the U.S. Department of Treasury.

Undersecretary Brainard, Vice Chairman Xiaoqiang, thank you for the opportunity to be here today. This discussion about new ways to finance investments in U.S. infrastructure is very relevant and timely. Throughout the U.S., there is real interest in a new infrastructure vision to support a more productive and sustainable economy.[1]

This vision is made up of transformative investments that have to the power to change our economic trajectory through modern ports and gateways, intelligent transportation, renewable energy and cleantech installations, advanced telecommunications systems, and new, technologically-driven forms of economic development. Investing in infrastructure has the added benefit of providing much-needed jobs, especially in the construction industry where unemployment rates stubbornly remain twice the national average.[2]

The challenge is that the nation's economic recession and tense new focus on austerity means public resources for infrastructure are strained. As financial markets have contracted all actors are suffering under tightened credit supplies. Stretched budgets at all levels of government have led to a larger gap between infrastructure costs and revenues. As a result, meeting the nation's great needs for funding and financing infrastructure requires an "all of the above" strategy. This is especially true for state and local governments and elected officials, as I will explain. I firmly believe there is a clear need for a national infrastructure bank to finance multi-jurisdictional projects of national significance.[3]

However, in the absence of congressional action, states and localities are stepping in to finance the kind of major investments necessary to support the next economy. States and municipalities retain primary authority over selection, design, and control of the vast majority of infrastructure projects. How choices are made about which to fund is exceedingly complex and depends on funding sources, jurisdictional concerns, and political negotiations. Federal dollars for transportation and water mostly flow to the states who then work with their municipal counterparts to decide on specific investments. For transportation, this is also done in partnership with other entities on the metropolitan level such as the 400 metropolitan planning organizations and the multitude of special purpose bodies such as sea, airport, and toll road authorities and public transit agencies. Other areas of infrastructure, such as energy, telecommunications, and freight rail investments, are dominated by the private sector typically with federal and state regulatory oversight (see figure.) Public and Private Shares of Spending on Infrastructure, 2007[4]

Increasingly, public infrastructure investment is taking place through innovative finance tools, revolving loan funds, trusts, and so-called "banks." Most of these offer direct loans at low interest rates to public and private entities, while some also offer grants, loan guarantees, bonds, and other financial instruments. According to forthcoming Brookings research, since 1995 thirty-three states have used infrastructure banks and funds to invest nearly $7 billion in over 900 different projects. These projects range from local road maintenance and highway construction to emergency relief for damaged infrastructure. The structure of the banks and projects in which they invest reflect the diversity of needs and resources across the U.S.[5]

On the local level, Mayor Rahm Emanuel recently announced the creation of the Chicago Infrastructure Trust (CIT) as a market-oriented institution that attracts private capital interested in steady returns and makes investment decisions based on merit and evidence rather than politics. Like California's I-Bank it cuts across different types of infrastructure such as transportation and telecommunications, and like Connecticut's Green Bank it emphasizes the generation, transmission, and adoption of alternative energy. The CIT will be capitalized through direct investments from private financing organizations some of which have already expressed interest that could reach $1 billion or more in total investment capacity. The Chicago plan highlights an important point with respect to differences among states and municipalities in the U.S. today. While some states and cities are ambitiously pursuing innovative sources of infrastructure finance-such as partnerships with private and foreign investors-many others are not. For example, only 24 states undertook at least one public/private partnership (PPP) transportation project since 1989. Florida, California, Texas, Colorado, and Virginia alone were responsible for 56 percent of the total amount of all U.S. transportation PPP projects during this time.[6]

So why are some states more active in attracting private infrastructure financing? No doubt this is partly based on the unique conditions, traditions and cultures in certain places. But there are also a number of other, more practical, reasons. For one, it is difficult to attract private interest in public projects if investors do not know what kinds of projects are available. Latin American countries regularly pull together trade shows to showcase opportunities for Bus Rapid Transit projects, for example. Partly to address this problem in the U.S., California, Oregon, and Washington are partnering on something called a West Coast Infrastructure Exchange as a platform to spotlight and catalog specific projects, opportunities, and grow the market for private infrastructure firms to invest in domestic infrastructure. Next, other than the obvious legal authority that provides the necessary statutory allowance to get into contracts with a range of partners, state legislation is also essential to send a strong signal that a state is open to private and foreign involvement in infrastructure financing and delivery. It provides predictability for the private sector engaging in a partnership with the public sponsor. On the other hand, the lack of state PPP legislation can prove a real hindrance to the development of the PPP market. The 2007 failed $12.8 billion bid for the lease of Pennsylvania Turnpike would have benefited from having state PPP legislation in place before the negotiation began. Thirty-one states have PPP enabling legislation for highways, roads, and bridges, and 21 have PPP legislation for transit projects. Finally, many states simply lack the technical capacity and expertise to consider such deals and fully protect the public interest. To address this problem, countries, states, and provinces around the world have created specialized institutional entities-called PPP units-to fulfill different functions such as quality control, policy formulation, and technical advice. Today no less than 31 countries have a PPP unit at the national or subnational level. In the U.S., three states (Virginia, California, and Michigan) have established dedicated PPP units. Lastly, I want to briefly describe how metropolitan areas around the country are increasingly acting on their own to envision, design, and finance the next generation transportation system in America. Those places-especially in the West-are taxing themselves, dedicating substantial local money, and effectively contributing to the construction of the nation's critical infrastructure system.[7]

Transit projects in Denver, New Mexico, and the Salt Lake City area are all substantially financed by voter-authorized payroll or sales tax increases and epitomize the new spirit of bottom-up initiative. In metropolitan Phoenix, voters approved a proposition in 2004 that extended a half-cent sales tax for regional transportation for another 20 years. That bit of local effort will generate over $11 billion over time to expand regional transit service but, like Los Angeles' Measure R, it will also dedicate billions for freeway upgrades, additional lanes, and improved interchanges, including substantial improvements to the national interstate system. Other major metro areas like Las Vegas, Charlotte, St. Louis, Oklahoma City, Seattle, and Milwaukee have also gone to their voters for approval of ballot initiatives to fund a mix of light rail and bus lines, highway projects, commuter rail, and corridor preservation. A coalition of business and civic leaders in the Dallas Metroplex is pushing the state legislature to give metros in Texas the authority to do the same. In short, metropolitan areas across the country are laboring hard to keep up with system maintenance, enhancement, and expansion needs-even along national corridors-on which they are investing substantial local resources. At the Brookings Metropolitan Policy Program we are working with a set of high level civic, corporate, political, and philanthropic leaders across the U.S. on dedicated policy and research agenda that describes both the opportunities and challenges in financing the next generation of U.S. infrastructure investments. By doing so we hope to "crack the code" and lay out a federalist policy and practice agenda to expedite implementation, unlock the capital, and create jobs and economic value in the U.S.

[1] U.S. Department of Treasury and Council on Economic Advisers, “ A New Economic Analysis of Infrastructure Investment,” Washington: U.S. Department of Treasury, 2012.

[2] Bureau of Labor Statistics, CES Current Employment Statistics, Table A-14. “ Unemployed persons by industry and class of worker, not seasonally adjusted.” Washington: Bureau of Labor Statistics.

[3] Robert Puentes,“ Testimony on the Proposal for a National Infrastructure Bank, Committee on Ways and Means Subcommittee on Select Revenue Measures,” Washington: U.S. House of Representatives, May 13, 2010.

[4] Sources: Congressional Budget Office, "Public Spending on Transportation and Water Infrastructure", “ "Relation of Fixed Investment in Structures (by type) in the Fixed Assets Accounts to the Corresponding Items in the National Income and Product Accounts." Does not include private spending on vehicles.,” Washington: Bureau of Economic Analysis, November 2010.

[5] It is important to note that rather than bringing a tough, merit-based approach to funding, many state infrastructure banks are simply used to pay for the projects selected from the state's wish list of transportation improvements, without filtering projects through a competitive application process. A better approach would be for states to evaluate projects according to strict return on investment criteria. Such an approach is analogous for how the federal government should establish a national infrastructure bank. See: Robert Puentes, “ "State Transportation Reform: Cut to Invest in Transportation to Deliver the Next Economy",” Washington: Brookings, 2011.

[6] Emilia Istrate and Robert Puentes,“ "Moving Forward on Public Private Partnerships: U.S. and International Experience with PPP Units",” Washington: Brookings, 2011.

[7] Mark Muro and Robert Puentes,“ "Helping Those Who Help Themselves",” Washington: The New Republic, The Avenue, May 27, 2010.

Authors

Robert Puentes

Publication: Fifth U.S./China Investment Forum, U.S. Department of Treasury

Building a National Infrastructure Bank

Robert Puentes — Tue, 07 Sep 2010 17:23:00 -0400

Reviving a plan for a national infrastructure bank, President Obama used his Labor Day address to announce a $50 billion dollar package for making improvements to bridges, roads and railways across the country. Senior Fellow Robert Puentes applauds the move as a good first step in a long process that will require more money, thoughtful planning and great deal of interagency cooperation.

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Infrastructure Bank Proposal Would Spur Economic Growth

William A. Galston — Tue, 07 Sep 2010 09:59:00 -0400

On Monday, President Obama advanced several steps to boost economic growth and job creation, including a national infrastructure bank. In doing so, he resuscitated a proposal, initially offered during his campaign, that enjoys substantial support among legislators in both the House and Senate as well as from workers, firms, and organizations involved in transportation, communication, and construction.

This move reflects, I suspect, the president’s recognition that traditional demand-side stimulus runs up against limits in downturns sparked by financial crises. If individuals and households are burdened with excessive debt, they are more likely to use additional resources from tax cuts and transfer payments to pay down that debt than to make purchases they otherwise would have foregone. And if businesses do not foresee rising consumer demand, they will be reluctant to hire additional workers. In these circumstances, stimulating new investment in infrastructure represents a promising alternative strategy.

Much will depend on the architecture of this proposed institution. There is widespread agreement that it should focus on large regional initiatives that cut across jurisdictional lines and that its decisions should be made by a board of governors insulated from traditional political pressures. To reach the scale at which it could make a real economic difference, it must be able to leverage a modest amount of publicly provided capital to attract much larger amounts of private capital, which would demand a reasonable rate of return. To provide it, most projects the bank funds would have to generate revenue streams from user fees and other sources. The bank could supplement these fees with subsidies that reflect the gap between the private goods projects generate and the public goods whose value cannot be recaptured from individual beneficiaries.

The president’s proposal faces an uncertain fate. With the mid-term election campaign in full swing and political polarization at its highest level in more than a century, cooperation across party lines will be hard to achieve—even though the initial senate bill was introduced with bipartisan support just a few years ago. In the longer term, a bank structured to reduce politically motivated earmarks and to expose proposed infrastructure projects to a market test might attract a broader base of support than is now in evidence.

But whatever its immediate prospects, President Obama’s proposal offers a welcome new direction in an increasingly shrill and decreasingly productive economic debate. It shifts the focus toward the kinds of public action that can help build a more efficient and competitive economy in the long run. And it recognizes a key reality: the consumer-led model of economic growth on which we have depended for decades has hit a wall. It’s time for investment to lead the way, with new partnerships between the public and private sectors. Done right, the infrastructure bank would represent not only a new institution, but also a new paradigm.

Authors

William A. Galston

Image Source: © Brian Snyder / Reuters

Economic Growth and Institutional Innovation: Outlines of a Reform Agenda

William A. Galston — Tue, 01 Jun 2010 17:54:00 -0400

Policy Brief #172

Why Institutions Matter

When experts and pundits are asked what the president and Congress should do to promote economic growth, they typically respond with a list of policies, often mixed with stylistic and political suggestions. Few focus on institutional change, which is too easy to conflate with yawn-inducing “governmental reorganization.”

This neglect of institutions is always a mistake, never more than in times of crisis. Throughout American history, profound challenges have summoned bursts of institutional creativity, with enduring effects. The dangerous inadequacies of the Articles of Confederation set the stage for a new Constitution. The Civil War resulted in three amendments that resolved—at least in principle—our founding ambivalence between the people and the states as the source of national authority, between the states and the nation as the locus of citizenship, and between slavery and the equality the Declaration of Independence had proclaimed and promised. Similarly, the Federal Reserve Board, Bretton Woods international economic system, Department of Defense, National Security Council, CIA, Congressional Budget Office and Department of Homeland Security all arose through changes occasioned by great challenges to the nation.

Today’s economic crisis is reflected in three distinct but linked deficits—the fiscal deficit, the savings deficit and the investment deficit. Meeting these challenges and laying the foundation for sustained economic growth will require institutional as well as policy changes.

RECOMMENDATIONS

Today’s economic crisis is characterized by three distinct but linked deficits—the fiscal deficit, the savings deficit and the investment deficit. Meeting these challenges and laying the foundation for sustained economic growth will require institutional as well as policy changes. The following institution-based recommendations would help the nation meet the current economic crisis and could help prevent future crises of similar destructiveness.

To promote fiscal sustainability, change longterm budget procedures and create empowered commissions—answerable to Congress but largely insulated from day-to-day politics.
To boost savings, consider new mandatory individual retirement accounts as a supplement to Social Security.
To improve public investment, create a National Infrastructure Bank with public seed capital—this entity would mobilize private investment and force proposed projects to pass rigorous cost-benefit analysis as well as a market test.

Today’s polarized political system is an obstacle to reform in every area, including the economy. A multi-year collaboration between Brookings and the Hoover Institution produced a series of suggestions. At least two of those suggestions are worth adopting:

Alter redistricting authority, so state legislatures can no longer practice gerrymandering.
Experiment, in a few willing states, with compulsory voting—to move politicians away from the red-meat politics of appealing only to their bases, which now dominate elections, and toward a more moderate and consensual politics.

Institutional reform

Promoting fiscal sustainability

Setting the federal budget on a sustainable course is an enormous challenge. If we do nothing, we will add an average of nearly $1 trillion to the national debt every year between now and 2020, raising the debt/ GDP ratio to a level not seen since the early 1950s and sending the annual cost of servicing the debt sky-high. Restoring pay-as-you-go budgeting and putting some teeth in it are a start, but not nearly enough. We need radical changes in rules and procedures.

One option, recently proposed by a bipartisan group that includes three former directors of the Congressional Budget Office, would change the giant entitlement programs: Social Security, Medicare and Medicaid. The new rules would require a review every five years to determine whether projected revenues and outlays are in balance. If not, Congress would be required to restore balance through dedicated revenue increases, benefits cuts or a combination. After a financial crisis in the early 1990s, Sweden introduced a variant of this plan, which has worked reasonably well.A number of Brookings scholars—including Henry Aaron, Gary Burtless, William Gale, Alice Rivlin and Isabel Sawhill—have suggested a Value Added Tax (VAT) as part of a program of fiscal and tax reform. Burtless offers an intriguing proposal that would link a VAT to health care finance. Revenue from the VAT would be dedicated to—and would cover—the federal share of health care programs. If the federal cost rises faster than proceeds from the VAT, Congress would have to either raise the VAT rate or cut back programs to fit the flow of funds. The system would become much more transparent and accountable: because the VAT rate would appear on every purchase, citizens could see for themselves the cost of federal support for health care, and they could tell their representatives what balance they prefer between increased rates and reduced health care funding.

Another option draws on the experience of the Base Realignment and Closure Commission, which enables the military to surmount NIMBY politics and shut down unneeded bases. The basic idea is straightforward: once the independent commission settles on a list of proposed closures, Congress has the option of voting it up or down without amendment. A similar idea undergirds the president’s “fast-track” authority to negotiate proposed trade treaties, which Congress can reject but cannot modify.

Suitably adapted, this concept could help break longstanding fiscal logjams. Here is one way it might work. Independent commissions with members from both political parties could submit proposals in designated areas of fiscal policy. To increase bipartisan appeal, each proposal would require a super-majority of the commission. In the House and Senate, both the majority and the minority would have the opportunity to offer only a single amendment. This strategy of “empowered commissions” changes the incentive structure in Congress, reducing negative logrolling to undermine the prospects of proposals that would otherwise gain majority support.

Empowered commissions represent a broader strategy—using institutional design to insulate certain activities from regular and direct political pressure. For example, the Constitution mandates that federal judges, once confirmed, hold office during “good behavior” and receive salaries that Congress may not reduce during their term of service. (By contrast, many states subject judges to regular election and possible recall.) In another striking example, members of the Board of Governors of the Federal Reserve Board are appointed to 14-year non-renewable terms, limiting the ability of the executive branch to change its membership rapidly and removing governors’ incentives to trim their policy sails in hopes of reappointment. Additionally, action by neither the president nor any other entity in the executive branch is required to implement the Fed’s decisions, and Fed chairmen have been known to take steps that vex the Oval Office.

This strategy is controversial. Officials with populist leanings often argue that fundamental decisions affecting the economy should be made through transparent democratic processes. The counterargument: experience dating back to the founding of the republic suggests that when interest rates and the money supply are set at the whim of transient majorities, economic growth and stability are at risk.

Boosting savings

An adequate supply of capital is a precondition of long-term economic growth, and household saving is an important source of capital. During the 1960s, U.S. households saved 12 percent of their income; as recently as the 1980s, that figure stood at 8 percent. By 2005–2006, the savings rate dipped into negative territory, and today it stands at a meager 3 percent. In recent years, funds from abroad—principally Asia— filled the capital gap. But evidence is accumulating that foreign governments have reached the limit of their appetite (or tolerance) for U.S. debt. To avert a capital shortage and soaring interest rates, which would choke off growth, we must boost private savings as we reduce public deficits.

For a long time, tax incentives for saving have been the tool of choice. But as evidence mounts that these incentives are less effective than hoped, policy experts are turning to alternatives. One rests on a key finding of behavioral economics: default settings have a large impact on individual conduct and collective outcomes. If you require people to opt in to enter a program, such as 401(k) retirement plans, even a modest inconvenience will deter many of them from participating. But if you reverse the procedure— automatically enrolling them unless they affirmatively opt out—you can boost participation.

To achieve an adequate rate of private saving, we may need to go even further. One option is a mandatory retirement savings program to supplement Social Security. Workers would be required to set aside a fixed percentage of earnings and invest them in generic funds—equities, public debt, private debt, real estate, commodities and cash. For those who fail to designate a percentage allocation for each fund, a default program would take effect. (Participants always would have the option of regaining control.) As workers near retirement age, their holdings would be automatically rebalanced in a more conservative direction. One version of this proposal calls for “progressive matching,” in which low-earning individuals receive a subsidy equal to half their payroll contributions; those making more would get a smaller match along a sliding scale, and those at the top would receive no match at all.

This strategy requires careful institutional and programmatic design. To ensure maximum benefits to wage earners, the private sector would be allowed to offer only funds with very low costs and fees. To ensure that the program actually boosts net savings, individuals would be prohibited from withdrawing funds from their accounts prior to retirement; except in emergencies, they would not be allowed to borrow against their accounts; and they would be prohibited from using them as collateral. And a clear line would be drawn to prevent government interference in the private sector: while government-administered automatic default investments would be permitted, government officials could not direct the flow of capital to specific firms.

Improving public investment

The investment deficit has a public face as well. Since the early 19th century, government has financed and helped build major infrastructure projects—roads, bridges, ports and canals, among others, have spurred economic growth and opened new domestic and international markets. Recently, however, public infrastructure investment has fallen well short of national needs, and often has been poorly targeted. Americans travelling and working abroad are noticing that U.S. infrastructure is falling behind not only advanced countries’ but rapidly developing countries’ as well. A study by Emilia Istrate and Robert Puentes of Brookings’s Metropolitan Policy Program, presented in a December 2009 report entitled “Investing for Success,” documents three key shortcomings of federal infrastructure investment: it lacks long-term planning, fails to provide adequately for maintenance costs, and suffers from a flawed project selection process as benefits are not weighed rigorously against costs.

Istrate and Puentes explore several strategies for correcting these deficiencies. One of the most promising is a National Infrastructure Bank (NIB), to require benefit-cost analyses of proposed projects, break down financial barriers between related types of investment (facilitating inter-modal transportation, for example), and improve coordination across jurisdictional lines. The NIB could be funded through a modest initial infusion of federal capital designed to attract private capital. Projects receiving loans from the NIB would have to provide for depreciation and document the sources of funds to repay the face amount of each loan, plus interest. In short, the NIB would be more than a conduit for the flow of federal funds; it would function as a real bank, imposing market discipline on projects and making infrastructure investments attractive to private capital, partly by providing flexible subordinated debt.

Istrate and Puentes identify diverse problems that designers of an NIB would confront. Insulating the selection process from political interference would pose serious difficulties, as would providing federal seed capital without increasing the federal deficit and debt. Requiring the repayment of loans could skew project awards away from projects that cannot easily charge user fees—wastewater and environmental infrastructure projects, for example. Despite these challenges, a properly designed bank could increase the quantity of infrastructure investment while improving its effectiveness, reducing bottlenecks and promoting economic efficiency. The potential benefits for long-term growth would be considerable.

Creating the Political Conditions for Reform

The rise of political polarization in recent decades has made effective action much more difficult for the U.S. government. Polarization has impeded efforts to enact even the progrowth reforms sketched in this paper. A multiyear collaboration between the Brookings and Hoover Institutions—resulting in a two-volume report, Red and Blue Nation?, with Volume One published in 2006 and Volume Two in 2008— has mapped the scope of the phenomenon. This effort has shown that, while political elites are more sharply divided than citizens in general, citizens are more likely now to place themselves at the ends of the ideological spectrum than they were as recently as the 1980s. With a smaller political center to work with, even leaders committed to bipartisan compromise have been stymied. The fate of President Bush’s 2005 Social Security proposal illustrates the difficulty of addressing tough issues in these circumstances.

It might seem that the only cure for polarization is a shift of public sentiment back toward moderation. The Brookings-Hoover project found, however, that changes in institutional design could reduce polarization and might, over time, lower the partisan temperature. Here are two ideas, culled from a much longer list.

Congressional redistricting

While population flows account for much of the growth in safe seats dominated by strong partisans, recent studies indicate that gerrymanders account for 10 to 36 percent of the reduction in competitive congressional districts since 1982. This is not a trivial effect.

Few Western democracies draw up their parliamentary districts in so patently politicized a fashion as do U.S. state legislatures. Parliamentary electoral commissions, operating independently and charged with making reasonably objective determinations, are the preferred model abroad.

Given the Supreme Court’s reluctance to enter the thicket of redistricting controversies, any changes will be up to state governments. In recent years, voter initiatives and referenda in four states—Washington, Idaho, Alaska and Arizona—have established nonpartisan or bipartisan redistricting commissions. These commissions struggle with a complicated riddle: how to enhance competitiveness while respecting other parameters, such as geographic compactness, jurisdictional boundaries, and the desire to consolidate “communities of interest.” Iowa’s approach, where a nonpartisan legislative staff has the last word, is often cited as a model but may be hard to export to states with more demographic diversity and complex political cultures. Arizona has managed to fashion some workable, empirically based standards that are yielding more heterogeneous districts and more competitive elections.

Incentives to participate

Another depolarizing reform would promote the participation of less ideologically committed voters in the electoral process. Some observers do not view the asymmetric power of passionate partisans in U.S. elections as a cause for concern: Why shouldn’t political decisions be made by the citizens who care most about them? Aren’t those who care also better informed? And isn’t their intensive involvement an indication that the outcome of the election affects their interests more than it affects the interests of the non-voters? While this argument has surface plausibility, it is not compelling. Although passionate partisanship infuses the system with energy, it erects road-blocks to problem-solving. Many committed partisans prefer gridlock to compromise, and gridlock is no formula for effective governance.

To broaden the political participation of less partisan citizens, who tend to be more weakly connected to the political system, several major democracies have made voting mandatory. Australia, for one, has compulsory voting; it sets small fines for non-voting that escalate for recidivism, with remarkable results. The turnout rate in Australia tops 95 percent, and citizens regard voting as a civic obligation. Near-universal voting raises the possibility that a bulge of casual voters, with little understanding of the issues and candidates, can muddy the waters by voting on non-substantive criteria, such as the order in which candidates’ names appear on the ballot. The inevitable presence of some such “donkey voters,” as they are called in Australia, does not appear to have badly marred the democratic process in that country.

Indeed, the civic benefits of higher turnouts appear to outweigh the “donkey” effect. Candidates for the Australian Parliament have gained an added incentive to appeal broadly beyond their partisan bases. One wonders whether members of Congress here in the United States, if subjected to wider suffrage, might also spend less time transfixed by symbolic issues that are primarily objects of partisan fascination, and more time coming to terms with the nation’s larger needs. At least campaigns continually tossing red meat to the party faithful might become a little less pervasive.

The United States is not Australia, of course. Although both are federal systems, the U.S. Constitution confers on state governments much more extensive control over voting procedures. While it might not be flatly unconstitutional to mandate voting nationwide, it would surely chafe with American custom and provoke opposition in many states. Federalism American-style also has some unique advantages, including its tradition of using states as “laboratories of democracy” that test reform proposals before they are elevated to consideration at the national level. If a few states experiment with compulsory voting and demonstrate its democracy- enriching potential, they might, in this way, smooth the path to national consideration.

Conclusion

In challenging times, political leaders undertake institutional reform, not because they want to, but because they must. Our own era—a period of profound economic crisis—is no exception. Even in circumstances of deep political polarization, both political parties have accepted the need to restructure our system of financial regulation.

As well, recognition is growing that we face three key challenges—a fiscal deficit, a savings deficit and an investment deficit—that have eluded control by existing institutions and, unless checked, will impede long-term economic growth. The question is whether we will be able to adopt the needed changes in an atmosphere of reflection and deliberation, or whether we will delay until a worse crisis compels us to act.

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Authors

William A. Galston

Creating Banks for Transportation Infrastructure

Robert Puentes — Thu, 13 May 2010 00:00:00 -0400

Good morning Chairman Neal, Ranking Member Tiberi, and members of the Committee. I am pleased to appear before you this morning and very much appreciate the invitation.

From time to time, collapsed bridges, failed dams, and ruptured water pipes remind us of the need for increased investment in the maintenance of U.S. infrastructure. Overall, we know that the condition of our infrastructure is generally declining, especially in metropolitan areas. There is also growing concern that the infrastructure that exists today is woefully obsolete, geared more for a prior generation than for the challenges of the 21st century.

The federal government spends about $65 billion each year on infrastructure—transportation, energy, water and environmental protection [1]. While the figure is not negligible, the investment in infrastructure is only 2.2 percent of total federal spending. More than three-quarters of this spending consists of transportation grants to state and local governments ($50.4 billion) [2].

While most of the attention has been on increasing funding for projects, there are also renewed calls to improve the way the federal government invests in infrastructure. Today, the federal government generally does not select projects on a merit basis, is biased against maintenance, and involves little long term planning. In this context, there is interest in a new federal entity for funding and financing infrastructure projects through a national infrastructure bank.

Mr. Chairman, I believe that while a national infrastructure bank is not a panacea, if appropriately designed and with sufficient political autonomy, it could improve both the efficiency and effectiveness of future federal infrastructure projects of national and regional importance [3].

Background

A national infrastructure bank (NIB) is a targeted mechanism of financing infrastructure. A development bank in essence, an NIB would have to balance the rate-of-return priorities of a bank with the policy goals of a federal agency. The creation of such a special financing entity for infrastructure has been discussed in policy circles for at least 20 years.

Across the Atlantic, the European Investment Bank (EIB) has been functioning successfully for the last 50 years, playing a major role in connecting the European Union across national borders. The EIB has nearly $300 billion in subscribed capital by all the 27 European Union member countries. In 2009, the EIB disbursed over $70 billion, mainly on transportation, energy and global loans [4]. While not trying to maximize profit, EIB functions as a bank, not as a grant-making mechanism. The EIB raises funds from capital markets and lends them at higher rates, keeping its operations financially sustainable. It offers debt instruments, such as loans and debt guarantees, and technical assistance.

While it may take different forms, NIB proposals in the U.S. generally envisage an entity that improves the federal investment process in infrastructure assets that meet some measure of significance and accelerates the investments in such projects [5]. The focus is on multi-jurisdictional or multi-modal projects with regional or national impact.

Yet despite this general agreement about the purpose of an NIB some outstanding questions remain. For one, it is unclear whether it would be limited to certain sectors, such as transportation, or if it would allow for applications from a variety of infrastructure areas. Another is its governance structure, upon which the budgetary impact of federal investment through an NIB depends heavily. Here there are myriad options. It could be housed within a federal agency, established as a government-owned corporation (like Amtrak), or as a shareholder–owned corporation (like government sponsored enterprises) [6]. The precise structure, then, influences what types of funding and financing it would provide.

The Potential of a National Infrastructure Bank

If correctly structured, an NIB may introduce a federal investment process that requires and rewards performance, with clear accountability from both recipients and the federal government. There are several advantages:

Better selection process. At its heart, an NIB is about better decisionmaking of infrastructure projects. The bank would lend or grant money on a project basis, after some type of benefit/cost analysis. In addition, the projects would be of national or regional significance, transcending state and local boundaries. The bank would consider different types of infrastructure projects, breaking down the modal barriers. This would be a giant step from the current federal funding for infrastructure, most of which is disbursed as federal aid transportation grants to states in a siloed manner.

Multi-jurisdictional projects are largely neglected in the current federal investment process in surface transportation, due to the insufficient institutional coordination among state and local governments that are the main decisionmakers in transportation. The NIB would provide a mechanism to catalyze intergovernmental cooperation and could result in higher rates of return compared to the localized infrastructure projects.

An NIB would need to articulate a clear set of metropolitan and national impact criteria for project selection. Impact may be assessed based on estimated metropolitan multipliers of the project. This criterion would allow the bank to focus on the outcomes of the projects and not get entangled in sector specific standards. Clear evaluation criteria would go a long way, forcing the applicants, be it states, metros or other entities, to have a baseline of performance. This change, by itself, would be a major improvement for the federal investment process, given that a major share of the federal infrastructure money goes to the states on a formula basis, without performance criteria.

Keeping recipients accountable. An NIB would have more control over the selection and execution of projects than the current broad transportation grants. It would be able to enforce its selection criteria, make sure that the projects are more in line with its objectives, and have oversight of the outcomes of the projects.

The new infrastructure entity should require repayment of principal and interest from applicants. This would bring more fiscal discipline and commitment from the recipients to the outcomes of the project.

The extensive use of loans by an NIB contributes to the distinction between a bank and another federal agency. The interest rates charged to the state and local recipients of NIB loans might be set to slowly repay the initial injections of federal capital, while still maintaining a sufficient capital base.

Correcting the maintenance bias. The mere establishment of an NIB would not correct for the problem of deferred maintenance. However, through the selection process, it could address the current bias by imposing maintenance requirements to recipients including adequately funded maintenance reserve accounts and periodic inspections of asset integrity.

Better delivery of infrastructure projects. An NIB could require that projects be delivered via the mechanism offering best-value to the taxpayer and end user. The design-bid-build public finance model has been the most commonly used project delivery method in the transportation sector in the United States. Until very recently, there has been little experimentation with other delivery contracting types.

Evidence from other federal states, such as Australia, shows that private delivery saves money on infrastructure projects.

Filling the capital structure of infrastructure projects. Although the United States has the deepest capital markets in the world, those markets are not always providing the full array of investment capital needed—especially for large infrastructure projects with certain credit profiles. This has been even more obvious during the current recession, with the disruptions in the capital markets. An NIB could help by providing more flexible subordinate debt for big infrastructure projects. Generally bonds get investment-grade ratings, and have ready market access, only if they are senior obligations with secure repayment sources. For more complicated project financings that go beyond senior debt, there is a need for additional capital, such as equity capital or subordinated debt.

Other Considerations

As currently proposed, an NIB would receive annual appropriations from Congress and its board would have to submit a report to the President and the Congress at the end of each fiscal year. Establishing an NIB as a shareholder-owned entity would help shield it from political influence. However, there is also a trade-off between independence and the cost of borrowing. If an NIB is a federal agency, it may draw upon the Treasury’s low interest rates to finance its activities. If it is a shareholder–owned entity, it would incur higher costs of borrowing than the Treasury, so the loans going to recipients would have to be at higher interest rates [7].

Therefore, the budgetary and debt impact of federal investment through an NIB depends heavily on its governance structure. Unless the NIB is a shareholder-owned corporation its investment would be included in the federal budget. If it has the power to issue its own bonds and it is not a shareholder-owned corporation, its debt would be on the federal books. In any other case, it would be treated like other federal agencies, funded through appropriations and included in the federal budget. The federal government would have to pay for increased spending which is likely to add to the federal debt.

The mandate of an NIB in practice would also overlap with the mandates of other existing programs. There are two major issues arising from this problem: how would an NIB use the existing agency expertise and how would other federal agencies relate to this new entity? If the sharing-of-expertise is accomplished through detailing personnel from other agencies, the other federal agencies may have indirect control over NIB.

One example is the Transportation Infrastructure Finance and Innovation Act program. TIFIA, which dates from 1998, was created to help finance transportation projects of national or regional significance. The program is managed by the Federal Highway Administration and provides three forms of credit assistance – secured (direct) loans, loan guarantees, and standby lines of credit to a wide range of public and private entities. TIFIA has proven very popular this year with a record 39 loan applications, requesting $13 billion in finance assistance—far more than the program’s $1.5 billion dollar annual budget [8]. The recently-announced National Infrastructure Investments program (also known as the TIGER II Discretionary Grant Program) recognizes demand for the federal finance assistance, allowing up to $150 million of its funds to be used for TIFIA payments [9].

TIFIA is illustrative because it highlights the significant demand for this type of financing tool for infrastructure projects. There are, however, three important differences between TIFIA and the general concept of an NIB. One is that TIFIA is only available for transportation projects and other infrastructure sectors such as water are not eligible. The second related point is that TIFIA is run out of the Department of Transportation and not a stand-alone entity or housed in the Treasury Department, as some have proposed an alternative for an NIB. Third is that an NIB is generally expected to also provide grants to uniquely eligible projects whereas TIFIA is only a credit program.

Lastly, there has been some discussion of an NIB using tax-preferred bonds or federal bonds in order to capitalize the bank. Here there is some overlap with a new federal program known as Build America Bonds (BABs). This committee recently supported a bill to extend that program through 2013. Started up in the stimulus package with issuance expectations of $4 to $5 billion, uptake of this new lower-cost borrowing tool now exceeds $97 billion [10]. While the BABs are very popular they are largely funding local improvements such as school and sewer improvements, many of which would not meet an NIB’s criteria for regionally or nationally significant projects.

Conclusion

A more competitive U.S. economy needs a better infrastructure system. In a time of limited resources, improving the federal investment process should be a priority over finding ways to merely increase the amount of funding for infrastructure.

If designed and implemented appropriately, a national infrastructure bank would be a targeted mechanism to deal with new federal infrastructure spending. An NIB would provide a better project selection process for neglected federal investment in infrastructure, such as capital projects across jurisdictions and state borders, but also there would be more rigorous evaluation of projects across different types of infrastructure.

Yet an NIB is not a silver bullet for dealing with infrastructure reform, either. It would not overhaul the current federal investment, but be limited only to new projects funded through its mechanism. In the end, an NIB should be thought of as a precision tool and not a blunt instrument.

[1] Office of Management and Budget, 2010: Analytical Perspectives, 2009, pp. 36, table 6-2. This does not include spending on community and regional development, because this spending requires finer separation of expenses.

[2] Congressional Budget Office, “Issues and Options in Infrastructure Investment,” 2008.

[3] Emilia Istrate and Robert Puentes, “Investing for Success: Examining a Federal Capital Budget and a National Infrastructure Bank,” Brookings, 2009.

[4] European Investment Bank, “EIB Group: Key Statutory Figures,” 2009.

[5] See e.g.,: National Surface Transportation Infrastructure Financing Commission, “Paying our Way,” 2009.

[6] Congressional Budget Office, “Issues and Options in Infrastructure Investment,” 2008.

[7] The issue of the relative cost-effectiveness to borrowers of the NIB loans being funded through direct federal credit—subject to the Fair Credit Reporting Act—instead of through external sources of debt capital is a more complicated technical issue, outside of the scope of these remarks.

[8] American Association of State Highway and Transportation Officials Journal, “TIFIA Loan Applications Total $13 Billion,” Washington, April 2, 2010.

[9] They are so-named because of their similarity to a program created in the American Recovery and Reinvestment Act of 2009: the Transportation Investment Generating Economic Recovery, or “TIGER Discretionary Grant.”

[10] U.S. Department of the Treasury, “Treasury Releases New Build America Bonds Data,” TG-692, May 6, 2010.

Authors

Robert Puentes

Publication: House Committee on Ways and Means

A National Infrastructure Bank and the Federal Investment in Surface Transportation

Emilia Istrate — Fri, 29 Jan 2010 00:00:00 -0500

At the Congressional Transportation Finance Forum organized by the American Association of State Highway and Transportation Officials (AASHTO), Emilia Istrate discussed with congressional staff the current National Infrastructure Bank proposals.

She explained the current framework of the federal investment in transportation and its associated limitations. In addition, Istrate presented the current National Infrastructure Bank (NIB) proposals. Istrate argued that an NIB, designed appropriately and with sufficient political autonomy, would be a targeted federal investment mechanism in projects of metropolitan and national significance. However, an NIB is not a funding source, a solution to the problems of the current federal transportation system or a replacement of the current federal funding for transportation.

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Emilia Istrate

Publication: Congressional Transportation Finance Forum

Investing for Success: Examining a Federal Capital Budget and a National Infrastructure Bank

Emilia Istrate and Robert Puentes — Thu, 10 Dec 2009 13:29:00 -0500

Today’s fiscally constrained environment demands a new approach to infrastructure policy, allowing us to upgrade our existing infrastructure, expand choices in moving people and goods (and ideas), ease the burden on household budgets, and help us attain energy independence. Spending must produce real gains in productivity, inclusion, and environmental sustainability—the foundation of short- and long-term prosperity. In this time of limited resources, improving the federal investment process should be prioritized over finding ways to merely increase the amount infrastructure spending.

This brief examines the current federal investment process and the extent to which a federal capital budget or a national infrastructure bank (NIB) would improve it. It finds that creating a federal capital budget would provide little improvement for the federal decisionmaking process on infrastructure financing. However, while the more modest NIB is no silver bullet, if appropriately designed and with sufficient political autonomy, it could improve both the efficiency and effectiveness of future federal infrastructure projects of national significance.

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The Federal Capital Budget and Lessons for a National Infrastructure Bank

Emilia Istrate — Wed, 10 Jun 2009 00:00:00 -0400

At an expert roundtable at the Brookings Institution, Emilia Istrate discussed the federal capital budget idea and lessons for the current National Infrastructure Bank proposals.

Istrate argued that the while federal capital budget is an ambitious and wide-ranging change to the federal budget, it comes with more problems than solutions. A National Infrastructure Bank, on the other hand, would be a much smaller endeavor than a federal capital budget. Designed appropriately and with sufficient political autonomy, the National Infrastructure Bank would be a targeted mechanism for federal investment in projects of metropolitan and national significance. The experience of the federal capital budget shows that any progress towards a National Infrastructure Bank can be achieved only if the idea gains support both in Congress and from the Obama administration.

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Emilia Istrate