You do not need to look very
far to see what the government's newest response will be to stabilize the economic volatility in our country: public works spending, particul
arly in the
area of transportation infrastructure.
Similar to Roosevelt's New
Deal programs in the 1930s, this approach would be another significant
expansion of government....and on the heels of the federal bailout, which by
some estimates, is the largest intrusion of government in the private market in
history.
Highlighted by the
Minneapolis bridge collapse and the growing negative economic impacts caused by
traffic congestion, there is no doubt that this country has a large
transportation infrastructure deficit. So disproportionate spending increases
in transportation infrastructure might be welcome by some unusual allies and
may avoid the "socialist" accusations that usually follow such large
scale market manipulations.
Here is a great article
written by Ken Orski that discusses the background on the current issues
surrounding transportation infrastructure spending.
October 30,
2008
Support for Increased
Public Infrastructure Spending is Growing
The push to
increase investment in public infrastructure is gaining momentum. It is stoked
by the prospect of another "stimulus" (or "economic
recovery") package, a portion of which would be dedicated to roads,
bridges, transit and other public infrastructure. Supporting the initiative is
an influential coalition of trade associations, public interest groups and
labor unions including the American Road and Transportation Builders
Association (ARTBA), Associated General Contractors of America, National
Association of Manufacturers, American Public Transit Association (APTA),
American Society of Civil Engineers (ASCE), U.S. Conference of Mayors, and a
host of local governments.
While some
observers question the effectiveness of infrastructure spending as a short-term
economic stimulus on the grounds that public works projects cannot be launched
quickly enough, proponents, such as AASHTO’s John Horsley, argue that
there are many projects that could be advanced to construction within 90 days
if additional funds were made available. In a briefing paper prepared for an
October 29 congressional hearing on public infrastructure (see below), the
staff of the House Committee on Transportation and Infrastructure cites a
January 2008 AASHTO survey of State Departments of Transportation that
identified 3,071 "ready-to-go" highway and bridge projects at a total
cost of $17.9 billion. A further 559 "ready-to-go" transit projects
at a total cost of $8.03 billion have been identified in an October 2008 survey
by the American Public Transportation Association (APTA).
Congressional
Hearing on Public Infrastructure Investment
Support for
a second stimulus package was plainly on display at an October 29 hearing of
the House Transportation and Infrastructure Committee. The hearing was convened
at the request of House Speaker Nancy Pelosi to lay the groundwork for
legislative action in the next Congress.
Witnesses
gave the Committee ample ammunition why an economic recovery program with a
strong focus on infrastructure investments would be desirable. New Jersey
Governor Jon Corzine (D-NJ) and former Michigan Governor John Engler, now
president of the National Association of Manufacturers emphasized that the
initiative is needed not just as a short-term stimulus to create jobs and
assist in national economic recovery but also as part of a needed long term
strategy to repair and expand the nation’s infrastructure. Witnesses provided
many specific examples of ready-to-go projects. Lest the hearing be perceived
just as a forum for special interests to plead for increased funding for their
favorite local pork barrel projects, Committee Chairman James Oberstar stressed
the need for applicants to prioritize their wishlists based on objective standards
of need. He elicited a promise from Governor Corzine that he would
"strictly adhere" to doing just that.
John Irons,
Research and Policy Director of the Washington-based Economic Policy Institute,
was the only witness to address the issue of financing. He testified that, in
his view, the recovery package should be deficit financed. "While deficits
should not be ignored," he said, "deficit reduction must take a back
seat to short-term stimulus." Allowing a temporary increase in the
national debt next year to levels no higher than what we averaged in the 1990s
(46.1% of GDP) would allow room for about $900 billion in additional debt"
Irons testified. Infrastructure investments should be seen as an insurance
policy against a prolonged downturn, he added, to counter the argument about
the time lags encountered in construction contracts
Additional
support for increased spending on transportation infrastructure came from state
transportation officials. Meeting on October 20 in Hartford CT, the American Association
of State Highway and Transportation Officials (AASHTO) called for an overall
$545 billion investment in surface transportation infrastructure over a period
of the next five years (2010-2015). The recommended allocation would provide
$375 billion for highways, $93 billion for transit, $42 billion for freight
improvements and $35 billion for intercity passenger rail. Increased federal
funding would be coupled with national performance standards set to achieve
national goals.
Support
for the stimulus bill is not unanimous
Support for
a stimulus bill and increased infrastructure spending is not unanimous. In
another congressional hearing, held concurrently by the House Ways and Means
Committee, witnesses offered a more skeptical view. Governor Mark Sanford
(R-SC) opened his testimony with a ringing plea not to approve the contemplated
stimulus package, arguing that the money "may in fact further infect our
economy with unnecessary government influence and unintended fiscal
consequences." "Common sense voices from both sides of the aisle are
raising red flags about our national deficit," he warned. Government
spending has grown 57 percent this decade alone and if the stimulus passage is
passed, this year’s budget could top $1 trillion — adding to the over $10
trillion national debt, Sanford said. State debt across the country has also
increased by 95 percent over the past decade because of "unsustainable
spending growth," he added.
Another
skeptical witness, economist Alan Viard of the American Enterprise Institute,
argued that, while in theory, increasing infrastructure spending could reduce
the severity of a recession, in practice timing lags make it difficult to
deliver the stimulus at the time it is needed. He cited the Congressional
Budget Office and a long list of economists in support of his conclusion.
Long
contracting lead times was also the reason why the White House and
Transportation Secretary Mary Peters have come out in opposition to the
stimulus package, with Peters citing past experience with time lags encountered
in construction contracting. On Capitol Hill, House Minority Leader John
Boechner (R-Ohio) added to the skeptical opinion, saying that he would reject
any bill that includes "hundreds of billions in new pork-barrel spending
masquerading as economic stimulus."
Ronald Utt,
transportation analysts at the Heritage Foundation pointedly reminded people
that infrastructure provided and operated by the private sector, such as
pipelines, electric power plants, transmission grids and telecommunication
networks do not seem to suffer from an "investment deficit. "Our
infrastructure is deficient only where it relies on the public sector for
maintenance and rehabilitation," Utt wrote in an October 23 Heritage
Foundation commentary entitled "Is America’s Infrastructure ‘Crisis’ Just
Another Crisis for Socialism?". According to Utt, the solution is not to
pour more billions of dollars into a public works program but to begin shifting
more responsibility for the maintenance and operation of infrastructure from
the public to the private sector. It’s an observation that may have
considerable merit, but nonetheless is full of irony in these days of what is
becoming the largest expansion of the federal government’s role in the economy
since the 1930s.
Private
Investment in Infrastructure
The
transportation stakeholders are not the only ones supporting greater investment
in infrastructure. That also seems to be the sentiment of private investors.
Infrastructure is one of the "rare bright spots in a tumultous
market" wrote editors of Financial News. Several executives of
private equity firms whom we encountered at a recent New York meeting,
concurred.
While the
age of highly leveraged deals may be over, they said, there are still billions
of dollars in domestic and foreign infrastructure funds waiting to be invested
in transportation facilities. Toll roads appeal to long-term investors because
they generate strong demand even in times of slower economic growth and produce
steady and predictable cash flow relatively unaffected by economic downturns.
And long-term investors such as pension funds and insurance companies require
stable, income-oriented investments to match their long-term liabilities and
payout obligations. Given the current volatility of the equities market, the
low interest rates of the government bond market and the risky nature of
investments in corporate credit instruments and real estate, infrastructure is
now seen as a "safe haven" for long-term investors, a senior bank
official told us. The reported decline in toll revenue in recent months is seen
as a passing phenomenon tied to a recessionary economy. In the long run, toll
roads have lost none of their revenue earning potential.
Of more
consequence to the prospects for private investment in infrastructure, the
private equity executives warned, is the nature and extent of the expected
government oversight to be placed upon private toll concessions. If the capital
market should conclude that legal restrictions and regulatory barriers placed on
such concessions are too onerous and burdensome, investors (especially foreign
investors) may decide that investing in U.S. infrastructure is not worth the
trouble and they will turn instead to infrastructure investment opportunities
abroad. Such a decision, in the judgment of the private equity executives,
would be most unfortunate for it would deprive fiscally strapped state and
local governments of a much needed source of capital to modernize and expand
public infrastructure.
Calls tor
increased spending on public infrastructure began before the current push for a
stimulus package. We called attention to them already one year ago ("The
Infrastructure Financing Debate is Gaining Momentum", NewsBrief, November
2007) and again in March of this year ("The Problem of Infrastructure
Deficit is Attracting Growing Attention, NewsBrief No.9, March 2008). The
infrastructure debate was triggered by the bridge collapse in Minneapolis, an
incident that jolted the public into realizing that we have allowed our
transportation infrastructure to seriously deteriorate through decades of
under-investing. But the earlier debate always assumed that additional spending
on infrastructure would require new sources of funding and a major financial
contribution by the states. The stimulus advocates, on the other hand, are now
pushing for deficit financing and a 100 percent federal share.
Which
point of view prevails will depend upon internal discussions among fiscal
conservatives and liberals within the Democratic party, since the Democrats are
virtually assured control of Congress, probably with expanded majorities. On
Capitol Hill, conservative Blue Dog Democrats will argue that, with this year’s
deficit potentially approaching $1 trillion, now is not the time to abandon the
pay-as-you-go rules which hold that any spending increases must be offset by
equivalent new revenues (or spending cuts). The liberals, on the other hand
will argue that, with a deepening recession and growing unemployment, containing
the deficit is the last thing on their mind. That posture was epitomized by a
remark by House and Means Chairman Charles Rangel (quoted in the Wall Street
Journal, October 30): "For God’s sake," he said, "don’t ask me
where the money will come from. I’m going to the same place [Secretary of the
Treasury] Paulson went."
THE
NATIONAL INFRASTRUCTURE BANK
Along side
the stimulus package, the concept of a National Infrastructure Bank (NIB)
figures prominently among the infrastructure financing initiatives to be
considered in the next Congress. The purpose of the bank would be to provide
financial assistance to major public infrastructure projects "not
adequately served by current financing mechanisms." The concept has been
endorsed by presidential candidate Barack Obama and Speaker Nancy Pelosi as
well as by a number of private and public sector figures such as Pennsylvania
Governor Ed Rendell (D-PA), former Treasury secretary Larry Summers and Senate
Banking Committee chairman Christopher Dodd (D-CT).
The Bank, as
initially proposed by Senators Christopher Dodd (D-CT) and Chuck Hagel in their
bill, S.1926, has been resurrected in a fresh and more elaborate form by
Everett Ehrlich and Felix Rohatyn in a recent article in The New York Review
of Books ("A New Bank to Save Our Infrastructure," October 9,
2008). Both Ehrlich and Rohatyn had been key figures in the CSIS Commission on
Public Infrastructure that had produced the original 2007 report recommending
the National Infrastructure Bank.
In its new
version, the National Infrastructure Bank would replace the various modal
programs as the source of capital for highways, mass transit, airports and
other public infrastructure. Rather than receiving grants through pre-set
federal formulas and congressional earmarks, states and other levels of
government would come to the Bank with investment proposals they wished to
pursue. Unlike NASTRAC, the entity proposed by the National Transportation
Policy and Revenue Commission, the bank would not act on a top-down comprehensive
plan for the nation’s infrastructure. Proposals for infrastructure investment
would continue to come up from state and local level. What would change
is the way projects are selected for funding. The Bank would rate projects and
set funding priorities using a set of objective criteria reflecting regional or
national significance, productivity and economic benefit.
The authors
have proposed that the Bank’s capital would come from the funds now dedicated
to existing infrastructure programs — about $60 billion annually.
Alternatively, the Bank could obtain its own capital by issuing long-term bonds
backed by its loan portfolio. The Bank could also rebundle its loans and sell
them to investors in the capital markets (not unlike Fannie Mae’s subprime home
mortgage securities but presumably backed by sounder, income-producing
projects.)
Whether
Congress could be persuaded to adopt an Infrastructure Bank along the lines
proposed by Messrs Ehrlich-Rohatyn is an open question. Asking Congress to cede
control over the federal public works programs, surrender its power to make
infrastructure investment decisions, and abolish all modal distinctions seems
far-fetched. Along with some members of the Transportation Infrastructure
Financing Commission, we think a more promising (and more congressionally
acceptable) model for the Bank would be the already existing Transportation
Infrastructure Finance and Innovation Act (TIFIA). The TIFIA program, which has
been in existence since 1998, provides federal credit assistance to
transportation projects of substantial regional or national significance.
Projects must be eligible for federal assistance under Title 23 and generate a
dedicated stream of revenue from user fees. TIFIA assistance can take the form
of secured loans for construction and permanent financing (for a term of up to
35 years); loan guarantees to institutional lenders making loans for projects;
and lines of credit that may be drawn upon to supplement project revenues.
Endowing the proposed National Infrastructure
Bank with TIFIA-like authority while expanding and liberalizing TIFIA’s
conditions (e.g. by adding Title 49 (transit) to the category of eligible
projects, substantially increasing its capitalization, and lifting the ceiling
on credit assistance (currently at 33 percent of project costs) would
accomplish all the purposes of the Dodd-Hagel bill while preserving the
existing balance of power between federal and state government.