Some policy makers and industry participants have proposed creating a national infrastructure bank or investment corporation in order to help address pressing infrastructure investment needs. These proposals appear to be driven by two primary objectives:
• Accelerate investment in critical infrastructure (through debt financing mechanisms and/ or General Fund transfers)
• Improve the allocation of limited resources by the federal government to those important investments deserving national attention
Although these investment and allocation objectives may be laudable, the means by which they would be achieved need to be clarified. Proposals to create a new special-purpose financing entity need to adequately address key questions about how the stated objectives would be achieved and why the proposed mechanism(s) would be the Pest way to achieve those objectives. (See Box 7-8.) Moreover, as with including some amount of infrastructure funding in an economic stimulus package, there is a risk that the focus on new or enlarged financing techniques may be seen as a substitute for generating revenue by raising taxes, expanding tolling, or developing other sources. The institutional mechanisms being proposed, whatever their merit, will not in and of themselves directly address the core problem of insufficient revenue to support needed investment.
The Commission understands policy makers' desire to begin to address the transportation infrastructure "underinvestment problem" and improve on the current federal funding mechanism. In assessing the current approach and potential options, the Commission recognizes the inherent value of the "user pays principle"-the link between who pays fees and taxes and who benefits from the improvements funded by those sources. Generally, the Commission believes that link should be strengthened, not weakened, and that the nation as a whole is not investing enough in surface transportation infrastructure-that current and future needs are significantly greater than existing resources. It acknowledges that existing resources are not always invested in an efficient manner through current procedures and programs (mindful that the Commission's mandate does not explicitly include that problem).
Assistance provided to certain projects through a new financing entity should supplement, not supplant, the federal support already available through existing programs and should be provided more efficiently with a stronger focus on accountability and performance. Policy makers and project sponsors may identify critical infrastructure requiring additional funding in order to get built or properly maintained. And they may identify the need for new or larger federal subsidies in doing so. For example, the government could provide more "front-end" assistance to help sponsors of major projects assess their feasibility and conduct planning and permitting activities prior to construction; it could enhance the TIFIA-type credit support provided for major projects through larger loans with more flexible payment features; or it could provide deeper subsidies through new tools such as tax credit bonds.
In order to justify the creation of a new special-purpose entity, the case must be made that the newly created entity will be more effective in delivering the financial subsidies than current programs. It might be argued that a new, separate entity with a narrow mission focused on project finance could be more efficient in selecting projects and accelerating investments. It also might be easier to create a special conduit for federal funds with a new entity. This could be accomplished, for example, by either identifying new revenue sources to fund the entity's activities or creating a new category of discretionary spending from existing General Fund or Highway Trust Fund sources. A new special-purpose entity also might receive special budgetary treatment, operating rules, and regulatory oversight that some policy makers believe would improve its effectiveness. If policy makers determine that a new special-purpose entity should be created to help deliver the intended subsidies, the following guidelines should be considered:
• The entity should use a series of objective evaluation criteria to improve the selection of infrastructure projects to receive federal assistance. This merit-based approach would give priority to those qualified projects yielding the highest societal returns. By using various policy tools (grants, credit assistance, and tax incentives), the entity could support a wide range of different projects having public, private, and nonprofit sponsors. The new entity should not be merely another financial assistance program its focus on enhanced project evaluation should encourage sponsors to identity new revenue streams, promote more effective governance, and spur further innovation in project development and operations.
• Assistance should be targeted to legitimate "investment gaps" such as projects or groups of projects that have national or regional significance or strong public benefits. Rather than provide redundant assistance (including grants, loans, and guarantees), the new entity should incorporate the existing relevant programs and modify them as appropriate. For example, this might entail relocating the TIFIA credit program from the U.S. DOT to the new entity and enhancing its financing tools. The responsibility for allocating highway/intermodal private-activity bond issuance authority and recapitalizing the state infrastructure banks also could be relocated to the new entity. Policy makers could give the new entity the responsibility for allocating tax credit bond issuance authority, should they decide to authorize that form of tax subsidy to assist state and local sponsors of certain major sponsors.
• Policy makers should be explicit about how the entity will be funded, based on the anticipated types and amounts of assistance to be provided. This will depend significantly on how much grant assistance (rather than loans or other credit assistance) is provided to those projects that are not revenue-producing. Loans and other credit instruments will require some level of capital reserves. And even tax subsidies provided through private activity bonds or tax credit bonds, while not requiring discretionary resources, will result in tax expenditures having a budget impact. If the special conduit is a federal entity, policy makers could decide to fund it out of an existing or new discretionary spending category. Or they could decide to dedicate a new revenue source to fund its activities. Any new revenue source should be linked to the investments being subsidized, to the extent practical, and General Fund subsidies should be carefully targeted and well justified. For example, policy makers could identify one or more freight-oriented fees to fund assistance for goods movement projects.
• Policy makers should consider the financial policy concerns introduced by the concept of a federal or national-level bonding program, including the relative cost effectiveness of this approach. The obvious question that must be answered is, "Bonding against what revenue source(s)?" Debt issued by a federal entity and backed by the full faith and credit of the U.S. government is tantamount to additional General Fund borrowing and spending. While urgent national needs might justify some level of general subsidies for certain improvements, the Commission does not recommend increasing reliance on general borrowing and spending as part of a sustainable long-term strategy for investing in transportation infrastructure. State and local governments commonly issue special revenue bonds to finance transportation infrastructure projects. At the federal level, however, the issuance of special-purpose debt is problematic for two reasons: Any new special purpose borrowing program would be less liquid and more expensive (not counting the additional expenses associated with establishing and managing the new bureaucracy) than the Treasury's general borrowing programs. And even if a special-purpose entity issued non-recourse debt, it is doubtful such obligations would be free from an implied backing of the U.S. government. Alternatively, the entity could obtain lendable funds by borrowing from the U.S. Treasury through a direct federal credit program. In this way it would not need to issue its own securities in the credit markets. Nor would it need to be "capitalized" and maintain a substantial balance sheet, as would a start-up, stand-alone financial institution. Using federal credit would allow the entity to offer loans and guarantees at the lowest possible rates to project borrowers. It also only requires federal appropriations to fund a fractional reserve (the subsidy cost) for each of the loans it provides or guarantees. Offering federal credit assistance to project sponsors would be particularly advantageous in light of the volatility currently affecting the credit markets and the heterogeneous nature of the infrastructure assets to be financed. | Potential government credit assistance, financing incentives, tax subsidies, and direct funding contributions should be thought of as a continuum in terms of the degree of subsidy provided and should be carefully targeted to clearly identified investment needs or market gaps. |
• Policy makers should carefully consider how well a new entity would allocate discretionary resources relative to existing agencies and programs. Implicit in some proposals is an assumption that a new entity, independent of the U.S. DOT and having a narrower mission focused on certain kinds of infrastructure investment, would be more effective in selecting projects and managing resources. It would be important for any new entity to acquire the expertise necessary to evaluate financing proposals from across modes or even among infrastructure sectors. Congress also must consider how a new entity would coordinate its activities with the U.S. DOT and other existing agencies and programs.
BOX 7-8: KEY QUESTIONS ABOUT FINANCING OBJECTIVES OF INFRASTRUCTURE FINANCING ENTITY PROPOSALS | ||
The Commission has identified the following key questions that policy makers should consider and be able to answer with respect to any new infrastructure financing entity. In order, these questions deal with: | ||
1. The critical infrastructure improvements being targeted 2. The types of (existing or new) financing assistance necessary or helpful in accelerating the investments 3. The sources of revenue used to fund the investments and repay any financing assistance 4. The control over resource allocation 5. The federal budgetary impact and other policy issues Targeted Investments • What are the critical infrastructure investments being targeted that deserve federal attention and new or additional federal assistance? • Are these projects too big to be funded by any single locality or state or otherwise need additional support? • Do the public benefits warrant new or additional federal support? • Do the projects not have access to existing government programs or other sources of funding? Or are those sources insufficient? Financing Assistance • Do the projects/investments have dedicated revenues (either user- backed or tax-backed) that can repay capital raised through borrowing? • Do they have insufficient access to existing sources of financing (debt and equity that can be obtained through the capital markets or various public and private sources)? • Are the revenue sources sufficiently limited or uncertain that the projects require new financing tools and deeper public subsidies in order to obtain financing? | • Is it necessary, appropriate, or more cost-effective to provide financing assistance at the federal level instead of the state or local level? • Is the desired federal support addressing an "investment gap," such as a lack of development resources for major projects, or is it simply substituting for monies that could be raised at the state or local level through private capital markets? Funding Assistance • Do the projects/investments have insufficient dedicated revenues and instead require grant assistance or other subsidies tantamount to grants? • If so, how much of this funding support should come from the federal government (due to broad public benefits or vital national interests)? • Why can't such projects receive the appropriate federal support through existing programs? • Is a new special-purpose entity proposed in order to help justify the imposition of new national-level revenue streams to fund new grants or other subsidies for the targeted projects? • Will funding be derived from general sources, and if so what is the logic of not relying on fees paid by users or direct beneficiaries? And, would any general revenue support be a supplement to, not a replacement for, user fees? Resource Allocation • Who will control the allocation of resources (select projects)? Is the new | special-purpose organization intended to be a federal or non-federal entity? • Is the allocation of resources intended to be discretionary, on a project- by-project basis? Or is some extent of formula or minimum allocation desired to achieve "balance"? • Is the initiative intended to specifically encourage or facilitate user-backed projects with some level of private participation in the development, financing, operation, and maintenance of the facilities? • Is a new special-purpose entity proposed in order to "carve out" some federal resources from the current authorizations/appropriations process and/or remove the responsibility for allocating these resources from the U.S. DOT? Budget Impact • What is the budgetary cost of the proposal? If the entity is federal, its borrowing and spending activities will be scored as budget authority and outlays in the federal budget. If the entity is non-federal, the budgetary impact depends on the subsidies provided, potentially including how they are used. Depending on the entity's structure and the subsidies provided, will the scored budgetary cost be less than, similar to, or greater than that associated with providing the same level of assistance through existing agencies and programs? • What is the economic cost of the proposal (the long-term present-value cost, beyond the near-term budget impact)? Are there long-term federal liabilities (direct or implied) associated with it? |