InfrastructureWhy the U.S. needs an infrastructure bank

Published 18 January 2010

The U.S. aging infrastructure will eventually constrain economic growth; government alone can no longer finance all of the nation’s infrastructure requirements; a national infrastructure bank (NIB) could fill the gap; the NIB could attract private funds to co-invest in projects that pass rigorous cost-benefit tests, and that generate revenues through user fees or revenue guarantees from state and local governments; investors could choose which projects meet their investment criteria, and, in return, share in project risks that today fall solely on taxpayers

The U.S. investment in its physical infrastructure is far below what is necessary to meet the nation’s needs. Infrastructure spending in real dollars is about the same now as it was in 1968 when the economy was a third smaller. No wonder the American Society of Civil Engineer gave America’s infrastructure a failing grade of D in its 2009 report. Twenty-six percent of the U.S.’s bridges are structurally deficient or functionally obsolete, and 188 cities have “brownfield” hazardous waste sites awaiting clean up and redevelopment, according to the engineering society.

Three members of President Obama’s Economic Recovery Advisory Board — Charles Phillips, who is president of Oracle Corporation, Laura Tyson, a professor at the Haas School of Business at the University of California, Berkeley, and Robert Wolf, CEO and chairman of UBS Americas – write in the Wall Street Journal that state and local governments account for about 75 percent of infrastructure spending, and most are reeling from budgetary shortfalls. In addition, the contraction of monoline insurers (specialized insurers that guarantee repayment of bonds) has made it much more difficult to issue infrastructure bonds. “This has caused a growing backlog of economically justifiable projects that cannot be financed. Among the projects most at risk are projects of national or regional significance that span multiple states,” the three write.

The U.S. aging infrastructure will eventually constrain economic growth. This is why the president’s Economic Recovery Advisory Board, an independent bipartisan group of business, academic and labor leaders of which we are members, recommends the establishment of a National Infrastructure Bank (NIB). The purpose of the bank is to invest in merit-based projects of national significance that span both traditional and technological infrastructure — roads, airports, bridges, high-speed rails, smart grid and broadband — by leveraging private capital.

Phillips, Tyson, and Wolf note that infrastructure banks have proven successful elsewhere in the world, most notably in the European Union where the European Investment Bank has been operating successfully for over fifty years. That bank is one of the top five issuers of debt in the world. In 2008, it lent €58 billion ($81 billion) to finance projects, and had a target of $112 billion last year.

“It’s time we accept that government alone can no longer finance all of the nation’s infrastructure requirements. A national infrastructure bank could fill the gap,” the three write.

We believe that the NIB should be structured as a wholly owned government entity to keep borrowing costs low, align its interests with the public’s, and avoid the conflicting incentives of quasi-government agencies. We also recommend that the NIB be run by a government-appointed board of professionals with the requisite expertise to evaluate complex projects based on objective cost-benefit analysis. Today, projects are subject to the uncertainties of the opaque congressional appropriations process, which is how we end up with proverbial and actual bridges to nowhere.

The U.S. private sector raised more than $100 billion in dedicated infrastructure funds in recent years, but most of that money is being spent on infrastructure projects outside the United States. “The NIB could attract private funds to co-invest in projects that pass rigorous cost-benefit tests, and that generate revenues through user fees or revenue guarantees from state and local governments. Investors could choose which projects meet their investment criteria, and, in return, share in project risks that today fall solely on taxpayers.”

Phillips, Tyson, and Wolf write that the NIB would not only help the United States meet the infrastructure needs of the future, but it would also support the economy’s recovery over time. According to a study by Moody’s Economy.com, an increase in infrastructure spending of $1 increases GDP by about $1.59. This spending creates real jobs, particularly in the construction industry, which accounted for about a quarter of the U.S. total job losses last year and shed another 53,000 jobs in December alone. Construction could face years of anemic growth, and the NIB could help boost this sector. “We are not advocating make-work projects, but wiser and timelier investment in sorely needed projects of national significance,” the three write. They conclude:

President Obama has proposed $25 billion in federal funding for a national infrastructure bank in his 2010 budget. Whatever the amount of initial funding, we think it’s important to establish the bank now and then justify its continued funding based on its performance and investment returns.