Chairman, Oberstar, Representative Mica, and Members of the
Committee, thank you for inviting me to testify today on the question of "financing
Over the past several decades, we have accumulated a
sizeable public infrastructure deficit.
As a result, a variety of infrastructure bottlenecks-traffic congested
roads, clogged ports, and an antiquated air traffic system, to mention just a
few-have begun to undercut our economy's efficiency and undermine our quality
One of the reasons for this infrastructure deficit is that
our system for financing infrastructure has become increasingly inadequate with
the passage of time and has not kept up with the practices of other advanced
industrialized economies. That is why I am generally supportive of the
various legislative proposals this Committee is now studying-in particular, the
National Infrastructure Bank Act of 2007 (S. 1926 and H.R. 1301), introduced by
Senators Christopher Dodd and Chuck Hagel in the Senate and Representatives
Keith Ellison and Barney Frank in the House, and the National Infrastructure
Development Act of 2007 (H.R. 3896), introduced by Representative Rosa DeLauro,
which would establish a National Infrastructure Development Corporation and its
subsidiary, the National Infrastructure Insurance Corporation, as wholly owned
government entities. It is also why I
favor the establishment of a federal capital budget, as I explain later.
The way we currently fund infrastructure in this country is
flawed. At the federal level,
infrastructure is funded largely out of general revenues and the highway trust
funds. Thus, it is not surprising that
in recent years political concerns over the budget deficit together with
competing short-term spending needs have crowded out public infrastructure
At the state and local level, the great majority of
infrastructure is funded through the municipal bond market as well as through
state and local budgets. But over the
past decade or two, increased federal mandates for social spending, balanced-budget
requirements, debt limitations, and increased competition among states to keep
taxes low have restrained state and local borrowing as well as spending. The current economic slowdown and turmoil in
the housing and credit markets threaten to further constrain state and local
infrastructure spending. Because states
and municipalities rely heavily on property and sales taxes, the housing correction
and consumer slowdown are creating a budgetary crisis for many state and local
governments. As of January of this year,
24 states were either facing a shortfall for FY 2009 or were expecting
budgetary problems in the next year or two.
The expected shortfalls are likely to accelerate as home foreclosures
increase, property values decline, and consumer spending falls. New capital projects will be one of the first
victims of this budgetary crisis.
Thus, our nation's infrastructure deficit will actually get
worse unless we change the way we finance infrastructure investment. The major impediment to closing the
infrastructure deficit is not a lack of available capital or high interest
rates. Notwithstanding recent credit problems and bank liquidity concerns, the
world is still awash in capital and long-term interest rates remain near
historical low levels. In fact, there is
no shortage of privately held funds to help pay for infrastructure
reconstruction and development if it is undertaken in a market-sensitive
manner. As Transportation Secretary Mark
Peters recently noted, "there is upwards of $400 billion available in the
private sector right now for infrastructure investment." Likewise, even with today's bank credit and
liquidity problems, there are literally trillions of dollars available for
high-quality debt investments through both domestic and international
markets. The amount of funds held by
central banks, sovereign funds, and global pension funds is estimated to be
approaching $30 trillion-and growing fast.
public pension funds alone have more than $3 trillion in assets; moreover, they
have a long-term investment outlook that is consistent with the stable returns
that infrastructure assets generate.
I would like to offer three recommendations for how we can
take advantage of these large pools of capital-in the short term by more
imaginatively using our existing capacity to borrow and over the slightly longer
term by improving our system for financing infrastructure investment by
pursuing the legislation proposed by Senators Dodd and Hagel and Congressmen
Ellison and Frank and by Congresswoman Rosa DeLauro.
1. Make a Large Down
Payment on our Infrastructure Deficit as Part of a New Economic Recovery
My first recommendation is for the federal government to
make a significant down payment on the public infrastructure deficit as part of
new economic recovery program. The
stimulus package passed by Congress earlier this year was too focused on
providing a short-term boost to consumption, and will be too small and too
transitory to create a sustainable recovery given the size of the housing and
credit bubble, and the role that the housing played in sustaining consumption
levels over the past decade. A second
stimulus program will be needed that is longer in duration and that is more
focused on investment and creating new jobs.
By making public infrastructure spending the centerpiece of
a new economic recovery program, we would be able to accomplish several urgent
public policy goals simultaneously. We would
close the public infrastructure investment gap at a time of low borrowing
costs; we would provide the economy a significant boost in investment and job
creation that it is needed to put the economy on a new growth path that is less
dependent on housing and debt-financed consumption; and we would make the
economy more productive and efficient over the longer term by eliminating
costly bottlenecks and by crowding in new private investment.
Public spending on infrastructure is the most effective way
to counter an economic slowdown caused by the unwinding of a major asset
bubble. And funding public infrastructure
by issuing long-term Treasury Bills is still the lowest cost way to finance
much needed public infrastructure improvements.
For these reasons, we should use the necessity of a second stimulus
package to close the public infrastructure deficit by dramatically increasing
public infrastructure spending over the next two years. And we can do so without an equivalent
increase in the budget deficit, since the deficit would widen in any case as
tax revenues decline because of falling incomes for businesses and individuals
and since public infrastructure spending would create new jobs and economic
activity and thus increase tax revenues.
In comparison to other stimulus measures, such as cutting
taxes, public infrastructure investment would have the advantage of directly creating
more jobs, particularly more good jobs, and thus would help counter the
negative employment effects of a collapsing housing bubble. For example, the U.S. Department of
Transportation estimates that for every $1 billion in federal highway
investment, 47,500 jobs would be created.
Similarly, a recent California
analysis concludes that each $1 billion of transit system improvements,
including roadways, would produce 18,000 direct new jobs and nearly the same
level of induced indirect investment.
Public infrastructure investment not only creates jobs but
generates a healthy multiplier effect throughout the economy by creating demand
for materials and services. The U.S.
Department of Transportation estimates that for every $1 billion in federal
highway investment more than $6.2 billion in economic activity would be
generated. By comparison, tax cuts and
tax rebates are estimated to produce only 67 cents in demand for every dollar
of lower taxes. In short, public
spending on infrastructure is the best way to provide long-term stimulus to the
economy at the lowest cost and at the same time make it more productive and
Contrary to conventional wisdom, a public infrastructure
program can be implemented in a sufficiently timely way to help counter an
economic slowdown, in addition to providing long-term benefits for the economy.
There are a number of ways to accelerate projects already planned and to
provide federal guarantees and financing for state and local governments to speed-up
spending on long-delayed public infrastructure improvements.
2) Establish a
National Infrastructure Bank and Supporting Regulation.
My second recommendation relates to the proposed new
programs for federal support of non-federal infrastructure investment. If properly designed, they would
significantly improve our system for financing infrastructure investment.
State and local governments account for the lion's share of
our nation's public infrastructure spending.
For many years, the U.S.
municipal bond markets have functioned well, allowing state and local
governments to finance much of their infrastructure needs through the debt
markets. But as noted earlier, state and
local governments are experiencing new borrowing constraints as some states and
localities bump up against debt ceilings or face increased borrowing costs because
of deteriorating credit ratings and conditions.
Moreover, our current financing structures do not allow states and
localities to take advantage of the large institutional pools of capital, such
and European pension funds, that are available for infrastructure financing.
For these reasons, the federal government will need to do
more in the future to bear the cost of infrastructure investment and to assist
state and local governments with the financing of their infrastructure
needs. It can do so by offering federal
guarantees to help keep borrowing costs for state and local governments low and
by creating new institutions to help state and local governments borrow more
efficiently and to tap large pools of capital.
In these respects, the proposed National Infrastructure Bank (NIB) and
the proposed National Infrastructure Corporation (NIDC) move us in the right
direction and would help modernize the way we finance infrastructure.
First, the proposed NIB and NIDC would give us the capacity
at the federal level to issue long-term general-purpose and specific-project
infrastructure bonds enabling us to tap more easily the private capital markets
for financing public infrastructure. The
bonds could be as long as 30 to 50 years in maturity, thereby providing an
attractive financing vehicle for infrastructure improvements that have a useful
life of several decades.
Second, the proposed NIB and NIDC would lower the borrowing
costs for state and local governments by offering federal guarantees for state
and local projects as well as by providing direct grants and start-up
financing. A federal guarantee for state
and local projects would lower the interest rates state and local governments
need to pay in the municipal bond market by 50 to 100 basis points, saving
state and local taxpayers millions of dollars each year.
Third, the NIB and NIDC would help remove politics from the
funding equation, thus eliminating the standard political objections to public
infrastructure projects as just "pork-barrel" politics. They would do so by providing a professional,
non-partisan justification for needed infrastructure spending. The NIB, for example, would have a
five-member independent board that would be appointed by the president and
confirmed by the Senate. It would also
have a professional staff to carry out a thorough review of projects based on
return on investment and their contribution to the public good.
In these ways, the proposals for the establishment of a NIB
or a NIDC would considerably improve our system of financing public
infrastructure. But in other ways, the
proposals do not go far enough to enable state and local governments to tap the
large pools of institutional capital I mentioned earlier. In particular, there are two shortcomings in
the proposed entities as they are now envisioned-for which I have two
The first limitation relates to the question of
capitalization. The Dodd-Hagel and Ellison-Frank bills would establish an
initial $60 billion ceiling on the mount of the aggregate outstanding
obligations the NIB can assume, which is low relative both to our
infrastructure financing needs and the market's potential appetite for
infrastructure investment. Moreover, the
NIB, as currently envisioned, would not in fact operate like a bank but rather
more like an agency with no capitalization, thus limiting its ability to create
leverage the way infrastructure development banks in other countries do. The House proposal for a National
Infrastructure Development Corporation (NIDC) would have the advantage of
operating more like a bank in that it would be capitalized and would be able to
use leverage to make loans and to issue and sell debt securities. But its initial capitalization of $3 billion
in the first year (with a ceiling of $9 billion over three years) is too
limited to address the scale of the nation's infrastructure needs.
My first recommendation, then, is to suggest that the
Congress properly capitalize any national infrastructure financing entity it
approves so that it can leverage its capital like most development banks do. Again, take the case of the proposed
NIB. If it were properly capitalized and
operated more like a bank, the NIB would be able to make loans and loan
guarantees some five times its initial capitalization. Thus, it would be able to finance $300
billion in new infrastructure projects as opposed to merely $60 billion,
greatly expanding the amount of financing available for infrastructure
investment. Even the very conservative
European Investment Bank allows for leverage of two and half times it
Second, the NIB and NIDC, as now conceived, would do little
to help state and local governments attract larger institutional financing,
because they do not explicitly allow for the pooling of privately created
infrastructure-backed loans. The problem
that state and local governments now face is that any one bond issuance is in
most cases just too small to attract institutional interest. Large institutional funds and central bank
managers prefer to focus on bond issues in the range of $500 million and above,
with many preferring bond issue above $1 billion. In addition, large institutional investors
are not attracted to municipal bonds because they do not generally benefit from
their tax-exempt status. For these
reasons, they do not participate in the municipal bond market in any active
way. The issuance size and lack of
liquidity of the municipal bond market therefore limits the range of investors
and drives up the cost of issuing bonds.
To overcome this problem, an infrastructure bank should have the
authority to bundle various state and local bonds, and to offer the larger
bundled instruments to large institutional investors much like Fannie Mae and Freddie
My second recommendation, therefore is that any new
government agency or bank not only be properly capitalized but that it have the
explicit authority to pool, package, and sell existing and future public
infrastructure securities in the capital markets. Such an entity should also have the in-house
capability to originate infrastructure loans and thus the ability to fund
itself through the international capital markets. With this authority and this capability, a
NIB or NIDC would be able to channel private finance into public infrastructure
almost immediately. As importantly, they
would be able to tap financing from large institutional investors-from large
U.S. and European pension funds, insurance companies, central banks, sovereign
wealth funds, and other institutional investors. Thus, they would allow us to raise more capital
for public infrastructure investment more efficiently and at a lower cost than
we can do through the municipal bond market as it now exists.
3) Establish a Federal
My final recommendation is for the government to move as
quickly as is feasible to capital budgeting, which is needed to help us
establish better spending priorities and develop a more sensible approach to
fiscal responsibility. As is well known,
a capital budget would separate in a transparent way long-term capital
expenditures (for which borrowing is appropriate) from current operating
expenses (which normally should be covered by tax revenues). It would thus not
only make our government more accountable for its spending priorities. But as importantly, it would give us the latitude
to finance big public infrastructure investment projects when needed without
the constraints of fitting expenditures in any one budget year.
For this reason, the establishment of a federal capital
budget is a necessary complement to the creation of a national infrastructure
bank or financing entity. Current
federal budget principles treat public infrastructure investment as if it were
an ordinary operating expense.
Expenditures on public infrastructure thus show up in the budget in the
year they are expended even though the infrastructure may have a useful life of
several decades. In requiring upfront recognition
of the costs of public infrastructure investment, the current budgeting rules
places infrastructure investment projects at a disadvantage, because those
projects would seem expensive relative to other government purchases.
Lumping together current government expenditures and public
investment as the federal budget now does makes no sense since public
investment is different from current government expenditures in both character
and economic consequences. Capital
budgets are used by private businesses-as well as by most cities and
states-because they help management distinguish between ordinary operating
expenses that a company routinely incurs during the course of doing business
and extraordinary ones that add to a business's capacity to grow and thus
should be depreciated over a number of years. Like most business investment, most public
investment, especially most public infrastructure projects, should be paid for
over the useful life of the investment.
Moreover, the fact that public infrastructure investment earns a return
on investment in the form of higher productivity and increased tax revenues
should be reflected in how we account for it.
Capital budgeting would allow us to better reflect the true
cost of public infrastructure investment in any one given year because it would
allow us to depreciate the expense over the useful life of the investment. It would thus eliminate the distortions in
the budget that large public infrastructure projects can create and thus reduce
the bias against funding them. At the
same time, it would create more budgetary discipline because it would force us
to do a more thorough evaluation of various government expenditures to
determine productive from unproductive projects.
In summary, a federal capital budget would not alone
correct the problem of chronic underinvestment in public capital. But it would eliminate the disadvantage public
infrastructure now suffers from in the appropriations process. As importantly, it would make possible a more
rigorous assessment of our spending priorities and help negate some of the unfounded
concerns over the budget deficit that now work against public infrastructure