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Financing America’s Infrastructure

Putting Global Capital to Work
Published:   June 9, 2008

Today the New America Foundation released a policy paper by Douglas Rediker and Heidi Crebo-Rediker, co-directors of the New America Foundation's Global Strategic Finance Initiative. The executive summary is pasted below. Also, see a PDF of the entire policy paper: http://www.newamerica.net/files/Financing_America_Infrastructure.PDF

Contact: Erin Drankoski, 202-997-8727, drankoski@newamerica.net. For further information on New America's Global Strategic Finance Initiative and Economic Growth Program, click here.

Executive Summary

America's basic infrastructure is outdated, worn, and in some cases, failing. Most experts agree that it is inadequate for meeting the demands of the 21st-century global economy. If we are to remain competitive, we must invest in capital assets like roads, ports, bridges, mass transit, water systems, and broadband infrastructure. Many other countries-both rich and poor-see investing in infrastructure as imperative for economic survival and success in an increasingly competitive economic environment. But the United States has lagged in infrastructure investment, in both relative and absolute terms. We are spending less than 2 percent of GDP on infrastructure, while China and India are spending 9 percent and 5 percent of GDP, respectively.[i]

If the nation's infrastructure needs are apparent, so too are the limits on available funds in federal, state, and local government coffers. In this presidential election year, we can see these limits clearly, as the nation's spending priorities are magnified by electoral politics. Although significant government funding will likely continue to play a key role in the development of public infrastructure, the scale of our funding needs increasingly compels us to look beyond government to close the financing gap. It is for this reason that public support for private sector infrastructure investment is essential.

The good news is that while the federal government struggles to find funds to address its spending needs there is abundant private capital for infrastructure investment. An estimated $400 billion in global funds are available for equity investment in infrastructure, and the funds available to support the debt component amount to several trillion dollars if we include global central bank reserves, global pension funds, and sovereign wealth funds.[ii] Rather than focus on these large pools of global capital as a threat, we should view them as an opportunity. So, while we have enormous infrastructure financing needs, there are also enormous pools of capital available for investment. The trick is to bring the two together in a commercial, sustainable, and politically acceptable way.

The U.S. municipal bond markets have functioned well for many years, channeling private capital into financing certain elements of U.S. infrastructure. But current budgetary constraints and other market conditions mean that municipal finance is no longer adequate to meet the challenge of financing the scale of investment needed. And our current financing structures are unable to take advantage of the large pools of capital that are available for infrastructure financing.

We recommend two initiatives to help finance U.S. infrastructure needs beyond direct government grants. First, we suggest the enactment of legislation and the development of regulations to facilitate the origination and issuance of public sector covered bonds in the United States, which will provide a market-based, efficient, and secure mechanism to attract capital for infrastructure investment. Second, along the lines of a proposal by Congresswoman Rosa DeLauro (D-CT) last year,[iii] we recommend that the federal government consider the creation of a new, government-owned and -capitalized infrastructure financing entity-a National Infrastructure Finance Enterprise-that would pool, package, and sell existing and future public infrastructure securities in the capital markets. The proposed entity would also seek to develop an in-house capability to originate infrastructure loans and would be able to fund itself through the international capital markets.[iv] We believe that the entity should be capitalized at a far higher level than proposed in the DeLauro bill. Further, its scope should extend beyond that of the National Infrastructure Bank as currently proposed by Senators Christopher Dodd (D-CT) and Chuck Hagel (R-NE).[v]

Despite the current climate of suspicion and distrust regarding capital markets and financial engineering techniques, we believe that this should not preclude their responsible use in the future to help address infrastructure problems that require the investment and deployment of large amounts of capital.



[i] Robert L. Reid, "The Infrastructure Crisis," Special Report, Civil Engineering (Online Magazine of the American Society of Civil Engineers), January 2008, http://pubs.asce.org/magazines/CEMag/2008/Issue_01-08/article1.htm.

[ii] As of April 2008, global central bank reserves were estimated to exceed $6 trillion; OECD pension funds were estimated to total approximately $18 trillion; and sovereign wealth funds were estimated to exceed $3.5 trillion. These three pools of capital are expected to grow at a tremendous pace over the coming years. See "Foreign Investment and Sovereign Wealth Funds," Douglas Rediker and Heidi Crebo-Rediker http://www.newamerica.net/files/GSFIWorkingPaper1.pdf.

[iii] The National Infrastructure Development Act of 2007 (HR 3896) was introduced by Congresswoman DeLauro on October 18, 2007.

[iv] There is historical precedent for this. NIFE could be established much like Fannie Mae at its inception, before it became a publicly held, exchange-listed, government-sponsored enterprise.

[v] The Dodd-Hagel National Infrastructure Bank Act of 2007 would establish a federal bank that could prioritize and assist with the financing of infrastructure projects of substantial regional or national significance, using both public and private capital.