Four competing proposals for a national infrastructure bank — one from the Obama administration and three others in the House and Senate — are starting to take shape in Washington. Under each proposal, the US government would provide loans and loan guarantees to qualifying projects.
The bills are not expected to move through Congress before 2012 at the earliest.
The bank would be authorized to fund transportation infrastructure projects under all four proposals. It would also have authority under the House and Senate proposals to fund energy, water and other infrastructure projects.
The goal of each proposal is to use government loans and loan guarantees as seed capital to stimulate private infrastructure investment. An example of the potential multiplier effect is the experience with the Transportation Infrastructure Finance and Innovation Act or “TIFIA” program run by the US Department of Transportation that has been able to generate up to $10 in TIFIA financing, and up to $30 in total infrastructure investment, for every federal dollar invested in the program. There has also been a multiplier of 13 private dollars for every dollar of federal loan guarantee under the loan guarantee program for renewable energy, nuclear and transmission projects run by the US Department of Energy, according to a recent letter by Senator Maria Cantwell (D-Washington) to Senate leaders in support of the program.
The infrastructure banks have bipartisan backing. Both Republicans and Democrats are listed as cosponsors in the Senate. The concept also has the support of the AFL-CIO union movement and the US Chamber of Commerce.
The US government is struggling with huge budget deficits. The bank is seen by some as a way to stretch scarce federal dollars farther by using them as a carrot to get the private sector to build needed public infrastructure.
Four Senators — John Kerry (D-Massachusetts), Kay Bailey Hutchison (R-Texas), Lindsay Graham (R-South Carolina) and Mark Warner (D-Virginia) — introduced a bill in mid-March to create an American Infrastructure Financing Authority or “AIFA.” The bill is S. 652. It was referred to the Senate tax-writing committee on which only Kerry sits. Hutchison is retiring after 2012.
AIFA would be an independent agency. In its first two years of operation, AIFA would be authorized to make in the aggregate loans and loan guarantees of up to $10 billion per year. In years three through nine, AIFA would be authorized to make in the aggregate loans and loan guarantees of up to $20 billion per year. Thereafter, AIFA would be permitted to make in the aggregate loans and loan guarantees of up to $50 billion per year.
AIFA could finance transportation, water and energy infrastructure projects. To qualify for credit assistance, projects would need to involve at least $100 million in “eligible infrastructure project costs,” meet specified “economic, financial, technical, environmental and public benefits standards” and have a “dedicated revenue source” (either from tolls, user fees, availability payments or the like). AIFA would give priority to projects that “contribute to regional or national economic growth, offer value for money to taxpayers, demonstrate clear public benefits, lead to job creation and mitigate environmental concerns.” Additional consideration would be given to the ability to maximize private investment, among other factors. AIFA credit support would not be available to refinance existing infrastructure projects.
AIFA would provide loans and loan guarantees of up to 50% of a project’s “reasonably anticipated eligible infrastructure project costs.” Loans would have no more than a 35-year tenor, and would bear interest at rates not less than US Treasury securities of similar maturity. For direct loans, scheduled loan repayments would begin no later than five years after substantial completion of the project.
Prospective projects would be subject to a risk assessment, to be conducted by AIFA in conjunction with the federal Office of Management and Budget and a rating agency. At a minimum, the senior debt would need to have an investment-grade rating. A credit fee to cover AIFA loan assistance would apply to all AIFA-financed loans and loan guarantees. For AIFA-financed loans, the credit fee would be in addition to the base interest rate charged on the loan. Other credit and security terms typical of project financings — including similar security requirements — would be included as part of AIFA loan and loan guarantee credit documentation.
Five percent of AIFA funding would be set aside for rural projects. Rural infrastructure projects would only need to demonstrate $25 million in “eligible infrastructure project costs” to qualify for assistance.
As the NewsWire went to press, two Democrats — John Rockefeller (D-West Virginia) and Frank Lautenberg (D-New Jersey) — introduced a competing proposal in the Senate to create an American Infrastructure Investment Fund or “AIIF.” Their bill is S. 936. It went to the Senate Commerce Committee. The AIIF would be housed in the US Department of Transportation and be authorized to spend up to $5 billion in each of its first two years of operation. Its initial focus would be transportation projects. However, the sponsors said the intention is to broaden the scope to cover telecommunications, energy and water infrastructure projects after the first couple years.
White House Proposal
President Obama called in February 2011 for creation of a national infrastructure bank — called the I-Bank — to be capitalized with $30 billion in public money over a six-year period and with a mandate to finance transportation infrastructure projects only. The I-Bank would be housed within the US Department of Transportation.
The I-Bank would provide loans, loan guarantees and grants for qualifying transportation projects. Qualifying projects would be chosen based, among other factors, on how large a return they are likely to provide on taxpayer investment.
The existing TIFIA program would be folded into the I-Bank, according to InfraAmericas.com. The TIFIA program provides credit assistance in the form of loans, loan guarantees and standby letters of credit for transportation projects of regional or national economic importance. It has been in operation since 1998. The goal of the TIFIA program is to draw private investment to supplement federal transportation dollars. Demand for TIFIA funding has outpaced supply since 2008.
Funding for the TIFIA program is used to offset subsidy costs associated with the provision of federal credit assistance for infrastructure projects. The Obama administration wants an increase in funding for the TIFIA program to $450 million per year from the current $122 million. According to the US Department of Transportation, the current levels of TIFIA funding can support more than $2 billion of federal credit assistance. According to the Obama administration, the proposed increase in TIFIA funding could stimulate up to $13.5 billion in infrastructure investment, inclusive of federal credit assistance. To put the funding levels into perspective, TIFIA received 34 letters of interest for more than $14 billion in credit assistance for the 2011 fiscal year.
Rep. Rosa DeLauro (D-Connecticut) and 44 other Democrats introduced a proposal in the House in January for establishment of a National Infrastructure Development Bank or “NIDB.” The bill is H.R. 402.
The NIDB would be an independent, wholly-owned government corporation with a 15-year charter. The bill would authorize the government to inject up to $5 billion a year from 2012 through 2016 for what it supposed to be 10% of the total share capital.
The NIDB would be authorized to fund transportation, environmental, energy and telecommunications infrastructure projects. Projects would be chosen based upon an analysis of project costs against a project’s “economic, environmental and social benefits.” Priority would be given to projects that “contribute to economic growth, lead to job creation and are of regional or national significance.”
Other factors that would be considered by the NIDB include a project’s ability to maximize private investment and public benefits.
The politics of an infrastructure bank are complicated.
Developers and financiers in the transportation sector are concerned that a national infrastructure bank could compete with TIFIA for funding. Some industry executives, including those who took part in a recent roundtable discussion about toll roads hosted by InfraAmericas and Chadbourne, would like to see the TIFIA program expanded, arguing that Congress could do more to advance infrastructure investment by expanding the proven and successful TIFIA program, rather than initiating a new, albeit modest, infrastructure investment model. (See a transcript of the roundtable starting on page 24 of this issue.)
The huge budget deficits at the federal level make it hard to fund any new initiatives.
Members of Congress on the appropriations committees may see such a bank as ceding control to an outside agency over how federal dollars are spent.
An historical antecedent for the bank is the Reconstruction Finance Corporation during the Great Depression. However, proposals to create technology or energy banks have been introduced in Congress for a number of years. None has made much progress. There was a push in the last Congress to create a clean energy bank, called CEDA, but the effort lost steam, and the November 2010 elections that shifted Congress of the House to Republicans and that brought a large incoming class of new members of Congress backed by the Tea Party and determined to scale back government did not improve the bank’s prospects.
Some analysts suggest Congress is more likely to expand existing federal aid programs than to create new ones. Three key members of Congress — John Mica (R-Florida), chairman of the House Transportation and Infrastructure Committee, Barbara Boxer (D-California), chairman of the Senate Environment and Public Works Committee, and James Inhofe (R-Oklahoma), the senior Republican on Boxer’s committee — have said they favor putting more money into the TIFIA program.
There are important lessons to be learned from recent experience with other federal infrastructure aid programs. It took six years from 2005 to 2011 before the loan guarantee program in the Department of Energy was working effectively. Many thought during the wait that an independent agency, perhaps modeled on the Overseas Private Investment Corporation, would have been able to move more quickly. In this respect, the AIFA and NIDB proposals, which offer specialized, independent infrastructure banks, are attractive models for a national infrastructure bank. In a similar vein, a national infrastructure bank should not be developed at the expense of other successful and established programs, like TIFIA.
Congress should also be concerned not to let a national infrastructure bank serve as a vehicle for funding pet projects and other politically popular, but economically dubious, projects. Some argue that an independent agency is better able to deflect political pressure.
Finally, the lessons of the TIFIA program demonstrate that, for a federal credit assistance program to reach its full potential, supply must keep pace with demand. Modest investments and unrealistic funding projections will do little to address the infrastructure funding gap.
Regardless of the outcome, the federal government will have no choice, given budget pressures, to look to the private sector to fill the infrastructure funding gap.