National Op-Ed - Create a Solid Foundation for Infrastructure in the 21st Century

The “Partnership to Build America Act” introduced by Congressman John Delaney finances the creation of transportation, energy, communication, water, and education infrastructure through the “American Infrastructure Fund” (AIF). The fund is seeded with repatriated corporate earnings and has a focus on fostering public-private partnerships. The American Society of Civil Engineers (ASCE) supports the bill, cautioning that “the nation’s deteriorating infrastructure will cost American families $3,100 annually in lost income and suppress the growth of the country’s Gross Domestic Product (GDP) by $3.1 trillion by 2020.” This is why it is essential for congress to find new, innovative ways to pay for infrastructure in America.  The AIF is just such a policy tool.

A Dire Need for Investment

The 2013 ASCE Report Card for America’s Infrastructure gives the nation’s infrastructure a cumulative grade of D+, with $3.6 trillion of investment needed by 2020. Both roads and transit received a D grade. For transit alone, there is a $25 billion annual funding gap between current funding levels and those needed to maintain a state of good repair. This is on top of the $78 billion backlog needed to reach that state of good repair. Our nation’s highways will require $101 billion in annual capital investment just to maintain their current condition, and $170 billion to improve the overall state of repair. Current funding levels of $91 billion annually mean that highways are not even being maintained, and the portion of roads in good condition - current only 46% - will continue to drop. Large portions of the nations infrastructure is nearing, at, or beyond the designed lifespan, which means that in the coming years there’s going to be a large amount of new repair work to be done. This is on top of the enormous backlog of repair work that’s been put off. The longer we delay investment, the more serious the problem becomes.

The American Investment Fund

The Partnership to Build America Act creates a dedicated source for financing infrastructure across the country. Taking advantage of $50 billion in seed funding, it unlocks $750 billion in investment potential for local and state governments. The bill creates an independent non-profit entity, wholly-owned by the US Government and subject to registration and compliance with the SEC, named The American Infrastructure Fund (AIF). AIF provides loans and guarantees to state and local governments for financing qualified infrastructure projects. Non-profit infrastructure providers can also utilize the fund, provided they are sponsored by a state or local government.
Unlike traditional federal funding, the governments would be required to pay back the loans at a market rate determined by the AIF. Since it is the responsibility of the state or local government to pay back the loan, the system places no burden on federal taxpayers. State and local governments have many options to fund the infrastructure over the long-term, including user fees and taxes. The AIF provides the immediate availability of large capital needed for critical long-term investment infrastructure provides. The AIF can also invest in equity securities for projects in partnership with state or local governments - think “buying stock” in a particular project. The AIF provides funding for the project, in return for an ownership share of the project. This continues a trend of pushing transportation planning and responsibility down from federal to state and local levels.

Fifty Billion Dollars

The AIF leverages an initial $50 billion to creates a self-sustaining $750 billion investment capacity. But where does that first $50 billion come from? The AIF would be funded with the sale of $50 billion worth of Infrastructure Bonds, sold with a 50 year term, fixed 1% interest, and no federal guarantee. US corporations would be encouraged to purchase these new bonds, because each $1 invested in the bonds comes with the ability to repatriate tax-free some amount of oversees earnings. For many domestic corporations, these funds are trapped in countries where they can’t be used, rendered inaccessible by a reluctance to pay US taxes. The latent demand to access this money, estimated to total $1.3 trillion for all US corporations (source), motivates the sale of the Infrastructure Bonds.
The amount of credits received for each $1 of bond purchased will be set by the market willingness to take advantage of the tax-free access to their money. Using a reverse dutch auction to sell the bonds, market forces will provide the least amount of tax-free benefit to corporations while guaranteeing the government will sell all $50 billion in bonds. (for the economically curious, see footnote for an explanation of a reverse dutch auction.)

The market-rate established by the auction translates into an effective tax rate; for example, if the market settles on a $4 per $1 bond rate it is similar to an 8% tax rate. By law, the tax-exempt credit is capped at $6 per 1$ bond (Source). Proposals for a tax-holiday on repatriated funds are often proposed but The Partnership to Build America Act is a far better policy, as it channels corporate desires into the creation of an extremely useful and powerful investment in rebuilding America (The Guardian).

Let’s Change the Transportation Paradigm

This is an opportunity to kindle investment and foster a robust infrastructure financing mechanism. The AIF creates a stable and accessible financing option available to states, regional, and local governments. The AIF is a resource isolated from the politically volatile transportation policy bills, and available to any qualified infrastructure project. This allows unparalleled flexibility to pursue local transportation innovation for all modes of travel. Anything from bike lanes to bullet trains, the American Infrastructure Fund created by the Partnership to Build America Act will help us build it.


Optional Economic Footnote: Reverse Dutch Auction

A traditional dutch auction allows for an instant determination of market demand, pricing goods at the highest possible price that simultaneously guarantees the entire stock will be sold (Investopedia). The format is named for the dutch tulip auctions that allowed growers to quickly fetch the best price for their flowers. It is useful for situations where one seller has a limited stock of a uniform bulk product that many buyers will want in varying quantities, and thus frequently finds use for public stock initial public offerings. A dutch auction maximizes the price per unit, connecting one seller with many buyers. A reverse dutch auction connects one buyer with many sellers, thus minimizing the price per unit - in this case minimizing the $ of tax-free repatriation allowed per $1 bond purchase.

Resources

Full text of the bill, HR 2084

2013 ASCE Report Card for America’s Infrastructure