By Jay M. Tannon, Patton Boggs LLP
For several years, Congress and the administration have debated the merits of a national infrastructure authority or bank to act as an infrastructure financing catalyst. However, as with so many other issues, Washington has failed to act. During those years of inaction, American infrastructure has continued to deteriorate.
According to the World Economic Forum, the U.S. now ranks 25th among nations in the quality of its infrastructure. The 2013 Report Card for American Infrastructure, issued by the American Society of Civil Engineers, awarded our nation a D+. The ASCE 2013 Report Card estimates that over $3.6 trillion must be invested by 2020 to bring our infrastructure up to competitive international standards. The public coffers are simply inadequate to reach that goal. Private capital must be induced to help make these long term and crucial societal investments.
While profoundly meaningful instruments, public finance and TIFIA1 have not solved America's infrastructure problems. These instruments have us in 25th place with a recent grade just above failing. Creation of a TIFIA equivalent for water infrastructure — WIFIA — would also have a material positive impact.2 Yet without more innovative measures, we will remain on a path to mediocrity.
While our national power grid remains vulnerable, bridges deteriorate or even approach collapse, commuting times lengthen, locks and dams weaken, water and sewer systems age, air and rail systems evoke third world comparisons, and American competitiveness suffers, other nations use infrastructure to drive economic development and improve the quality of life. Who truly wishes to fly through airports like LAX or JFK? Cross the Skagit River Bridge or any of the other 70,000 functionally obsolete or structurally deficient bridges? Ride in outmoded rail cars across aging rail tracks? Drink water carried by the decades old, corroded systems found in so many American cities? Depend upon any power authority to withstand severe weather? Rely upon a levee or dam designed during the early decades of the 20th century? Continue to suffer on overcrowded roads during the daily commute to work?
How many countries will lead the 21st century without plentiful supplies of energy and its reliable, efficient delivery? Without abundant clean water? Without transportation networks that move goods, services and the national workforce safely and efficiently? Without modern academic, health care and civic facilities?
Nations that fail to invest in state of the art infrastructure will not lead in the 21st century. Infrastructure investment drives short-term, intermediate term and long-term growth in jobs and gross domestic product. The ASCE 2013 Report Card estimated the impact of increasing U.S. infrastructure spending by roughly $200 billion per year between 2013 and 2020. The report concluded that the added infrastructure investment would support over three million jobs, increase trade by more than one trillion dollars, and boost GDP by over three trillion dollars. The latter figure exceeds the entire GDP of Brazil and is roughly the combined GDP of India and Mexico.
Most countries advancing in the 21st century have already made infrastructure a national priority. Most of these nations routinely utilize private capital, private engineering and construction, as well as private operation and maintenance to achieve the highest quality infrastructure and lowest life cycle cost. However, most of these nations also have a national infrastructure bank or financing authority to leverage public dollars and attract private investment. One example of such an authority is the European Investment Bank (EIB), founded in 1958 and owned by the European Union member countries. The EIB leverages private investment to provide large infrastructure loans that must be repaid with interest. Through this process the EIB has successfully financed high speed rail projects, motorways, bridges, power plants, as well as water projects, health care and other social infrastructure. Brazil, Mexico and China are examples of other nations with national infrastructure finance authorities.
The U.S. must compete on a more level playing field. We must act to sustain our economic development and improve our quality of life. We must give ourselves additional proven tools to attract greater public and private sector investment in infrastructure. That said, we must act judiciously and in a bipartisan manner.
National infrastructure financing authority proposals have been floating around Capitol Hill since 2006. Most are moribund. One new entrant is the innovative Partnership to Build America Act (H.R. 2084) introduced in May 2013 by Rep. John Delaney (D-Md.) and co-sponsored by 19 Democrats and 19 Republicans in the House.
The Delaney bill encourages American companies to repatriate on the order of $200 billion in offshore earnings tax-free, provided those companies purchase $50 billion of 50 year, 1 percent infrastructure bonds to finance an “American Infrastructure Fund” (AIF). Those bonds would not be federally guaranteed. The AIF would allocate its funds as loans and loan guarantees to state and local governments proposing specific infrastructure projects as well as co-invest with state and local governments in project equity securities. The bill also requires at least 25 percent of AIF funds to be awarded to projects involving 20 percent or greater private funding support.
Assuming $50 billion could be secured through the Delany bill's repatriation plan and further assuming an AIF multiplier effect of up to 15 times, the Delaney bill could create as much as $750 billion dollars of the estimated $3.6 trillion needed for American infrastructure projects over the balance of this decade.
For all its merits, the Delaney bill may be an overly ambitious place to start in a city paralyzed by partisanship and never far from the next election. Some partisans will see the Delaney proposal as a giveaway to big companies; some will see it as too costly; some will see it as allowing too much politics into project selection; and some will simply decry it as more big government.
Another new proposal is being championed by Sen. Mark Warner (D-Va.). This legislation, slated to be formally introduced in the coming days, may lack the boldness of the Delaney proposal, but it presents perhaps the most viable national infrastructure financing option yet.
Warner's proposal would create a professionally staffed, independent national infrastructure financing authority (“IFA”) with a one-time federal capital investment of $10 billion. Much like the Export-Import Bank, the IFA would create evergreen funding by successful, market driven extensions of credit, not by more federal appropriations. The IFA would offer credit and credit enhancement for the most compelling energy, transportation and water projects around the country.
The Warner proposal would take the politics out of project selection, because the IFA would employ independent professionals to make decisions rather than political appointees within a government bureaucracy. While the IFA will offer low, long-term financing or credit enhancement commitments, it will do so on a commercial basis so that taxpayers make money while rebuilding the vital infrastructure that concurrently improves their lives and enhances the economic success of this country.
To drive more support, the Warner legislation should be linked with congressional efforts to streamline regulatory processes, such as proposals advanced by Sen. Portman (R-Ohio) or Sen. McCaskill (D-Mo.). Once an independent IFA selects an infrastructure proposal as meritorious, federal agencies — such as the Department of Energy, Department of Transportation and especially the Environmental Protection Agency — should then be required to approve or disapprove a project within months or a single year, not over several years. Expedited regulatory review for nationally identified and vetted projects can only serve the national interest.
To garner more support, especially on the Republican side of the aisle, perhaps proponents of an IFA should consider reducing another barrier to American infrastructure projects: litigation. Should an IFA designate an infrastructure project as a national priority, all litigation to slow or prevent that project should operate on a loser pays system, as in Canada and the United Kingdom. There is little doubt, of course, that the Trial Lawyers Association would aggressively move to quell any such legislative attempt.
Yet given the exceedingly high stakes with respect to our global competitiveness, we must not allow the perfect to be the enemy of the good. Accelerating regulatory review and discouraging tenuous but vexing litigation would surely have a material positive impact on stimulating private investment in infrastructure and launching many important projects. While laudable, these proposals should not hold an IFA hostage.
We as the body politic must get out of our own way and accelerate the rebuilding of American energy, water, transportation and social infrastructure. We need a professionally staffed and independent national infrastructure financing mechanism owned and initially funded by our taxpayers as a matter of enlightened self- interest. Why wait any longer to add this important means of leveraging our public and private capital so as to strengthen the very foundations of our economy?
America needs an IFA to rally the private and public sectors to address our critical infrastructure needs. We must finish this important debate, and we must act. We have no more time to lose.
Jay M. Tannon is a partner at Patton Boggs LLP where he focuses on private equity and infrastructure. His clients have included Fortune 100 and 500 companies as well as leading international private equity funds. Much of Mr. Tannon's work has been in the energy, transportation and communications sectors. He has been recognized among “The Best Lawyers in America” for 18 consecutive years and as a Martindale rated preeminent attorney for more than 20 years. Mr. Tannon co-founded Novus Energy Partners and InfraLinx Partners.
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