President Obama is proposing to create a national infrastructure bank to encourage and promote investment in America’s infrastructure and create jobs. With monotony, we have been told that our nation’s economic well-being depends on a strong infrastructure foundation. Yet despite its fundamental importance, the gap between what we have and the infrastructure we need continues to grow.
Public funds are generally used to provide the initial capital for an infrastructure bank. That money is used to support infrastructure projects. Upon repayment, the funds are then lent out again to support additional projects.
The initial capitalization and continuing revenue can be used in a number of ways. The infrastructure bank can lend directly to selected revenue producing projects. It may leverage its initial capitalization by providing loan assistance to infrastructure projects, use loan repayments as dedicated revenue to support bond issuance and provide additional loan assistance with the bond proceeds. The bank can also use its capital to guarantee bond issues by other entities such as local government or public-private partnerships.
With this in mind, the president has proposed the creation of a national infrastructure bank to encourage increased investment infrastructure as a new initiative. Actually the concept is not new.
Under the 2005 Federal Highway Authorization bill, known as SAFETEA-LU, all states were given the authority to establish state and even regional infrastructure banks. This followed a period during the 1990s when at different times anywhere from 10 to 39 states were allowed to experiment with these banks under a series of federal pilot programs.
A state infrastructure bank (SIB) offers several major benefits. First, it allows a state to leverage existing scarce resources. States can build more projects with fewer dollars and accelerate construction, especially for projects whose economic benefits can be identified and captured. This approach ameliorates the impact of inflation on construction costs and allows benefits like job creation, private sector income and tax revenue to be realized sooner than they would be using traditional infrastructure investment.
Second, by offering an array of financing tools such as low-interest loans, refinancing and construction financing, an SIB can increase flexibility by tailoring financing packages to meet specific project needs. Closely related, infrastructure banks can facilitate projects that are financially tenuous by providing lines of credit or insurance.
Equally important, the availability of a menu of financing tools coupled with the ability to have other debt paid before the infrastructure bank loan is paid back can attract private capital and local government funding, further enhancing a state’s ability to husband scarce infrastructure funding resources.
A third benefit to creating an SIB is the opportunity for states to develop a self-renewable, insulated source of future capital. Simply put, an SIB recycles resources by re-loaning funds as they are repaid. The repaid funds effectively become state resources. In addition to increased leverage and additional flexibility, this allows states to develop and control their own source of capital.
Finally, for states that can work past their deep and abiding distrust of bankers, a SIB can gain greater leverage and make even more funds available for infrastructure investment by issuing debt against its own equity capital. This accelerates the recycling of loan repayments, increases the magnitude of available infrastructure resources and provides for a larger financial canvas with which to work.
The same concept President Obama is proposing on the federal level can be used to provide capital funds to support the improvement of a state and region’s infrastructure network. Given the commonwealth’s pressing needs, we should look seriously at creating a state infrastructure bank to help fill the infrastructure financing gap.
originally published: November 30, 2011