AMERICA NEEDS ITS OWN INFRASTRUCTURE BANK / THE FINANCIAL TIMES COMMENT & ANALYSIS ( HIGHLY RECOMMENDED READING )

February 20, 2012 8:28 pm

America needs its own infrastructure bank

By Felix Rohatyn and Rodney Slater

America needs to invest in infrastructure. Despite signs of improvement, our economy is still in crisis. We could create millions of jobs by rebuilding our transport and water systems – ending the congestion that stifles our ports, airports, railroads and highways; increasing productivity; and empowering the US to compete with countries that are investing in infrastructure on a massive scale.


Infrastructure financing tools are available, providing Washington wants to use them. They could bolster investment by leveraging hundreds of billions of dollars in private and international capital.

 

The potential tools include a national infrastructure bank and other relatively minor legislative changes to encourage private investors off the sidelines. American mutual funds, pension funds and retail investors allocate relatively small portions of their $37,000bn in capital to new infrastructure initiatives.

Creating a national infrastructure bank is not a new idea but it finally may be gaining traction. Congresswoman Rosa DeLauro has introduced a House bill to create one, and Senators Kay Bailey Hutchison and John Kerry co-sponsored similar legislation in the Senate. President Obama also supports a such a project. So do the AFL-CIO labour group and the US Chamber of Commerce, organisations that differ sharply on many issues but unite in calling for the US to rebuild.


A national infrastructure bank could be independent and transparent. Government-owned but not government-run, it would have a bipartisan board and a staff of experts and engineers to plan projects based on quality and public need, not on politics. The bank would leverage public-private partnerships to maximise private funding and launch projects of regional and national significance with budgets of $100m or more.


The infrastructure bank also should have authority to finance projects by issuing bonds with maturities of up to 50 years. These long-duration bonds would align the financing of infrastructure investments with the benefits they create, and their repayment would allow the bank to be self-financing.


In addition to a national bank, state legislatures can encourage the creation of state infrastructure banks (32 states now have them) that can also sponsor PPPs. Congress can also promote private investment in infrastructure with two relatively small steps.


First, it should pass bipartisan legislation that has been introduced in both of its houses – by Senators Ron Wyden and John Hoeven, and Representatives Leonard Boswell and Ed Whitfield – that would allow state infrastructure banks to sell tax-credit “Trip” bonds to investors. These bonds leverage private capital by providing investors a federal tax credit in lieu of interest.


Second, Congress can expand the definitions of Real Estate Investment Trusts (Reits) and Master Limited Partnerships to include investments in assets such as roads, water, ports, airports, transmission lines, waste water and bridges.


Reits are publicly traded corporate entities that invest in commercial real estate and pay a reduced or zero rate of tax on their earnings. In turn, Reits must distribute 90 per cent of their income to investors. Similarly, MLPs are publicly traded partnership vehicles that do not pay federal and state income taxes and return income to partners.


Applying the Reit/MLP model to infrastructure assets would attract investment from the deep US retail and institutional investor market, dramatically increasing funding support for new projects. Projects that were once unable to attract support could become financially viable, and more infrastructure projects could be supported.


Yes, there would be short-term costs in making these changes. But in approving infrastructure financing vehicles, Congress would distinguish between capital investments and expenses, a distinction that ought to – but rarely does – underpin federal budgeting.


The federal budget should be a tool to encourage national investment, as it was when Thomas Jefferson purchased Louisiana and when Dwight Eisenhower built our super- highways. These great achievements proved public investment can generate vast returns. Investing in our infrastructure would prove it once again.


The writers are special adviser to the chairman and CEO of Lazard, and former US transportation secretary

Copyright The Financial Times Limited 2012.