The major impediment is not political but rather our governance structure.
Infrastructure in the United States is in a state of disrepair. We are spending $245 billion annually to build and repair our infrastructure, but estimates of the annual need are well over $1 trillion. The growth in demand for all modes of transportation significantly exceeds population expansion. In many places, failure to respond has led to severe congestion and long delays in freight movement. There needs to be a new strategy to develop the right infrastructure in the right places.
There is little disagreement, nor are there partisan differences, on the need to improve our infrastructure and capture the associated economic and job-creating benefits. Both presidential candidates had infrastructure investment on their campaign agendas. President-elect Trump declared that renewing infrastructure would be an important initiative in his administration.
What is not clear is how to do it. We believe the major impediment is not political but rather our governance structure. The role of the federal government in infrastructure investment is fragmented, leading to confused implementation. We suggest a new partnership involving the three levels of government, the private sector and system users. This can be accomplished with limited additional public revenues because an improved governance system that identifies good investments in infrastructure will lead to economic development and wealth creation that generates revenues to repay the investments.
New Paradigm to Renew Infrastructure
The key is to capture revenues created by infrastructure and use these funding streams to repay debt and equity that finances the investments. The funding can come from user fees and value capture methods from those who benefit from the projects, as well as increases in property values caused by improvements. To achieve this, we must first improve our governance to make it easier to harness funding and integrate the deployment of infrastructure.
The new paradigm would tap private financing for infrastructure investments. With low interest rates there are large quantities of investible funds. Federal participation can assist in the marketability of the investments, which would reduce borrowing costs. This approach calls for governments to apply business principles in making infrastructure investment decisions. These plans will allow investors to assess levels of risk and return on investment. A well-functioning market can then be developed that will attract new investment opportunities.
The new paradigm calls for more integrated federal priorities for infrastructure. The current federal approach is characterized by fragmented programs with different financing, permitting and administrative procedures. State and local governments also provide major funding, and design and operate their infrastructure. But their investment decisions may not be consistent with national priorities. Nor is there a process for coordination among governments. This approach calls for strengthened partnerships across our intergovernmental system to ensure that plans are consistent with national goals.
There are several similar programs already in place, including:
- Public-private partnerships
- Transit-oriented development
- Value capture programs such as tax increment financing
- Institutions several states have created with the authority to collect payments from users and landowners
These approaches are still in the nascent stage, but they have been successful. They are flexible, can be customized to a project, and stimulate local and private support to reduce demands on the federal government.
Coordinate Credit Enhancement Programs and Create a National Infrastructure Fund
In the recently enacted Fixing America’s Surface Transportation Act, Congress established the Bureau of Innovative Finance, which will coordinate multiple credit enhancement programs in transportation. There are 10 credit enhancement programs and four Infrastructure Finance Centers. Some are program-specific and preclude integrated investment strategies and each has its own set of eligibility provisions. An essential first step is to integrate these multiple instruments.
The objective of federal participation is to facilitate investment by reducing market risks and thus lowering interest rates. Here are three risk-reduction strategies:
- Diversify funding streams and spread risks over different program areas
- Diversify the purchasers of securities
- Sufficiently capitalize federal credit enhancement programs
In President-elect Trump’s plan, tax credits would be used to capitalize credit enhancement programs that leverage private investments. In partnership with state and local governments, the leverage ratio could be 10:1. If funds are coupled with existing grant programs, the amount should be sufficient to meet our national needs. This approach, based on market risk assessment and rigorous cost-benefit and ROI analysis, should improve project selection, project management, and the marketability of state and local securities.
A recent report from the International Monetary Fund found that using debt financing in this period of low interest rates can substantially increase the multiplier effect of investments on economic growth. This could serve as an economic stimulus, generating additional tax revenue for all levels of government. This reinforces the attractiveness using debt financing as opposed to our traditional pay-as-you-go approach to fund public infrastructure.
A prosperous economy depends on healthy infrastructure. The opportunity to realize this potential is within reach without a major expenditure of federal funds. The major changes needed are administrative reforms. Specifically:
- A National Infrastructure Fund should be established, administered by the Treasury Department, integrating the financial administration of existing credit enhancement programs and capitalized with proceeds from tax reform.
- State, local, and regional governments qualify for credit enhancements if they undertake the environmental streamlining called for in the new Federal Improvement Permitting Council. They will also need to develop business plans including funding from beneficial use streams, including tolls, fees, value capture from the investments and other grants.
- Federal programs should be streamlined to consolidate separate regulatory requirements and funding streams.
This article is part of a series of Memos to the President, highlighting advice from leading academics and practitioners in public administration for the incoming president and his team. The series was developed by the National Academy of Public Administration, the American Society of Public Administration and George Mason University’s Schar School of Policy and Government. Click here for more information and links to the full set of memos.
Photo: Flickr user Anthony Quintano