(Matt Dellinger - Transportation Nation) The GOP takeover of the House has reshuffled the cards for transportation policy. Already, Republicans are floating the idea of pulling back stimulus funds for infrastructure—particularly high-speed rail—and they’ve proposed a moratorium on earmarks, a practice routinely defended by outgoing House Transportation Committee Chairman James Oberstar (D-MN). Last week, the National Commission on Fiscal Responsibility and Reform proposed a 15-cent hike in the gas tax. But will a new, more conservative Congress balk? It seems likely.
But there may be one reform on which the Obama Administration and the new House regime can agree: the creation of a National Infrastructure Bank, or NIB for short.
The hypothetical NIB has long held bipartisan appeal. Senators Hagel (R-NE) and Dodd (D-CT) co-sponsored a bill to create one in 2007, when then-Senator Obama was a long-shot primary candidate. At the beginning of this last congress, Connecticut Democrat Rosa DeLauro introduced a similar National Infrastructure Bank Development Act of 2009. All of its co-sponsors were Democrats, but that might say more about recent politics than the idea’s popularity. This past June, Ken Orski of Innovation Briefs quoted Florida Representative John Mica (R-FL), the presumptive chair of the next, GOP-led transportation committee, as saying that DeLauro’s proposal to fund the NIB at $25 billion over five years was “peanut brain thinking.” By which he meant it was too small. Mica argued that the bank would need at least $250 billion in capitalization. Why, $25 billion would barely be enough, he said, to finance three major projects in the New York metro area—the Second Avenue subway, the LIRR East Side Access project, and the now-infamous Hudson River tunnel.
Funny he should mention it. Pennsylvania Governor Ed Rendell told Transportation Nation last month that the recent ARC tunnel mess might have been avoided if there had been a National Infrastructure Bank in place. The last-minute attempt by USDOT Secretary Ray LaHood and New Jersey Senator Frank Lautenberg to weld together a public-private partnership to take on the risk of cost overruns was a noble idea, Rendell said, but one that’s nearly impossible to pull off. It’s far easier to make such partnerships work when they’re structured up front—the very thing an NIB is designed to encourage.
So what is this magical Infrastructure Bank? Economists and politicians of many stripes have heralded the NIB as an answer to our infrastructure funding problems, as a way to attract private investment, and as a mechanism to better tackle major projects of national and regional significance. Boosters make the NIB sound like free money, a bottomless pot of cash. Perhaps they gloss over the details because the NIB is complicated, a new concept for American infrastructure, and there are competing ideas about how it should operate.
But basically, the National Infrastructure Bank would be a wholly-owned government entity run by appointees and would supplement--and to some degree replace--the appropriations system we have now. It would be different in two ways: First, the selection of projects would be more focused and methodical. And secondly, the financing would be more varied, more privatized, and potentially unique to each project.
At a hearing of the House Ways & Means Subcommittee in May, Rep. DeLauro laid out the structure of the bank her bill would create. The President, with the advice and consent of the Senate, would appoint a five-member board of directors who would choose what projects to take on. Below them would be a nine-member executive committee, a five-member risk management team, a five-member audit committee, and so on. Using objective, merit-based criteria, these bank employees would choose worthy infrastructure projects that produced “clear economic, environmental, and social benefits,” DeLauro said. “This criteria might include a transportation project’s ability to reduce congestion, a water project’s public health benefits and an energy project’s ability to reduce carbon emissions.” In DeLauro’s bill, as in the earlier Dodd-Hagel version, the considerations include a project’s ability to encourage smart growth in urban areas.
Setting clear goals and using objective analysis, the thinking goes, would prevent the egregious earmarking of pet projects; it would avoid funneling precious money through levels of federal, state, and local decision-making that are too often at odds, and it would help make long-term projects--especially those that rely on the cooperation of overlapping political jurisdiction (such as the ARC tunnel)-- less susceptible to political whims. Another something new: five years after the bank is formed, the General Accountability Office would be directed to assess “the impact and benefits of each funded project, including a review of how effectively each project accomplished the goals prioritized by the bank’s criteria.” No such audit (or institutionalized curiosity) exists today.
For some, creating such a rational and reliable system for choosing projects is reform enough. Oberstar, who was no fan of private finance for transportation, proposed housing the NIB inside the DOT and funding it with taxes and fees, as with the Highway Trust Fund. Under that model, the NIB’s main function would be to dole out federal money in a more technocratic, less political way. (Though some would—and will—argue that the setting forth of objective criteria is political itself. The Obama Administration has been criticized by Republicans for awarding TIGER grants unilaterally.)
Even fellow Democrats and transportation advocates opined that Oberstar’s vision was flawed. Folding the NIB into the DOT would restrict its usefulness, because several categories of infrastructure—water, broadband and energy, for instance—would be outside its reach. As some critics have pointed out, an entity that gives away money might be more accurately described as a “foundation,” not a “bank.” Getting the private sector to invest in such a foundation (again, never a priority for Oberstar) would be a rather tough sell.
Rational project selection is only half of what the NIB has the potential to do. Roy Kienitz, the Under Secretary for Policy at the DOT, made the case for a National Infrastructure Bank to a senate committee in September, saying: “we need a financing institution that can provide a range of financing options—grants for projects that by their nature cannot generate revenue, and loans and loan guarantees for projects that can pay for their construction costs or part of their construction costs out of a revenue stream.”
The most common form of “revenue stream,” of course, would be tolls, an idea from which the Obama Administration has not shied away. Others might include congestion pricing schemes, or dedicated tax revenue such as half-cent sales taxes for transit, or the much-anticipated Vehicle Miles Traveled tax. By supporting projects with solid revenue potential, the “foundation” would become a real, self-supporting bank, and private investors would have something in which to invest. In DeLauro’s bill, this is a central goal, not just a side benefit, of the NIB, which would be compelled to “maximize level of private investment… while providing a public benefit.” Among potential sources of investment DeLauro mentioned in the hearing were “pension funds, sovereign wealth funds, and insurance companies.”
Thus far, much of the modern transportation privatization in the US has consisted of long-term leases of existing toll facilities, a model that trades long-term revenue and profit potential to the private operator for a one-time windfall to hungry states and municipalities. But there’s no guarantee that the proceeds will go towards infrastructure, and as Felix Rohatyn, invariably identified as the man who saved New York from bankruptcy in the seventies, explained in a 2008 New York Review of Books essay co-written with Everett Ehrlich, “state and local governments too often sell highways and other transportation networks to private investors because they have been unable to raise tolls to sufficient levels, and as a result they risk selling these on the cheap or other bad terms.”
“A National Infrastructure Bank could redirect private efforts away from refinancing old facilities,” the authors continued, “to building new ones.” The bank would also offer more models and gradients of private investment by allowing pension funds and the like to purchase securities rather than lease roads. Rohatyn and Ehrlich imagine that the bank might “finance the projects but also resell the loans it makes to investors in capital markets, much as other assets are rebundled for investors. The receipts from these sales would allow a new round of lending, giving the bank an impact far in excess of its initial capitalization."
The way Rendell describes it, the private pieces of the deal would come together first, and grants would kick in for projects in which revenue fails to cover the entire cost. “It's similar to what we do in economic development deals,” he told me last month. “You fill in the gaps—some grant funding, some loan funding from the TIFIA program, some private investment, and you piece the deal together. It's like doing a hotel. The developers have X in equity, the bank is willing to loan them Y, but X and Y [don't get it done]. The bank thinks there's too much of a risk, but the government steps in and will give a $10 million grant for that $100 million project and bingo, that makes the project finance-able.
“Another example is Measure R in California where as you know the voters voted for a half-cent increase in the sales tax. You can bond off that, but in the first ten years L.A. will only get $5.7 billion,” he said. “The expanded rail line is like a $14 billion project, and they've got $5.7 billion. They would go to the infrastructure bank and ask for a loan of the other $8 billion and the infrastructure bank would make the loan, charge a modest, very small, interest rate and would get repaid because the half-cent sales tax keeps rolling in. And over time the infrastructure bank would make money on that loan, and it would allow L.A. to begin construction in the first decade rather than waiting until the second or third decade.”
Rendell is also quick to point out that the Infrastructure Bank is not a panacea. He believes a robust public investment of tax dollars is still necessary, and he’s not alone. As Representative Peter Defazio said at the May hearing, “We’re not going to toll every mile of Interstate. And there’s not a transit system in the world that makes money.” Even with an Infrastructure Bank in place, transit systems would still rely on taxes or fees, and Defazio believes the nation should raise and index the gas tax to ensure a high level of public investment.
Similar considerations will make it a challenge to get members of Congress from smaller states to support the Infrastructure Bank. The focus on projects with revenue potential and smart growth worries some rural lawmakers whose districts and states rely on federal largess to maintain long stretches of remote highway and water infrastructure. If the purse strings for infrastructure were ever completely controlled by a five-member board--however impartial--the outcry over earmarks could be replaced by an equal and opposite outcry against “tunnel vision” and “elitism.”
DeLauro’s bill, like its Dodd-Hagel predecessor, has sat in committee since its introduction (in this case, the House Energy and Commerce Subcommittee on Commerce, Trade and Consumer Protection). The big Infrastructure Bank idea, which was supposed to be part of stimulus, then the surface transportation reauthorization, then a jobs bill, is still lingering, waiting for a Congress that’s prepared to cooperate and appropriate the billions needed to seed it. Maybe the third time will be a charm. We’ll keep an eye out for Mica’s National Infrastructure Bank Act of 2011.