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Infrastructure Development: Five Prescriptions for Progress

February 28, 2017

As I drive around my home city of Philadelphia, I am reminded of an important decision made in the early 1970s that has paid enormous dividends for the City’s infrastructure: the decision to use the newly-emerging financial tool of revenue bonds to finance the needed improvements for water, sewer, gas, and the airport.

The City of Philadelphia sold the first series of Water and Sewer Revenue Bonds on May 1, 1974. The current amount of outstanding revenue bonds is more than $3.2 billion. The modernization of Philadelphia International Airport, the city’s compliance with federal clean water requirements, and Gas Works’ satisfaction of customer storage and distribution needs have all been accomplished at no cost to the tax payers. Ratepayers—commercial and individual—have paid the fees that in turn continue to pay debt service on the bonds. The impact of this decision from the 1970s inspires some notion of how to fund physical infrastructure in 2017.

The American Society of Civil Engineers annually prepares estimates of the country’s physical infrastructure shortfall. The most recent estimate was that needs will exceed $3.6 trillion by 2030. While some may quibble with the precise estimates, no one would say that we are meeting our public physical infrastructure needs.

My prescription, based on more than 45 years of working in the public and private sectors, is fivefold:

First, federal, state, and local governments need to set priorities collaboratively. The Moving Ahead for Progress in the 21st Century Act, the Clean Water State Revolving Loan programs, and the Airport Improvement Program could all be used to collaboratively channel funding to needed infrastructure projects. No single governmental level can identify and prioritize all programs. There should be an explicit recognition of the joint dependencies of each level and a collaborative implementation process. Private sector providers must be included as well to get things financed and done as quickly as possible.

Second, funding needs to be supplied by capital markets that have confidence the funds will be wisely used and provide an appropriate return on a timely basis. There are many ways to do this, and all of them should be explored. Historically, local and state governments have used tax-exempt debt to fund many of their projects. The “tax-exempt privilege” is a subsidy to the issuers that benefits wealthy taxpayers as well. Many will argue that it is an inefficient subsidy. I will leave that argument for another day.

During the American Recovery and Reinvestment Act (ARRA), taxable state and local debt was issued under the banner, “Build American Bonds” (BABS). These bonds were designed to replace tax-exempt bonds, and a federal subsidy made them attractive and allowed funding of some projects that were not within the scope of such bonds. The interest on the bonds was taxed at the federal level thus providing a benefit to the federal government in return for its subsidy.

I believe that current infrastructure and other project finance needs could be at least partially met by a program similar to BABS called, “Guaranteed Taxable Debt” (GTD). This would be debt for infrastructure and other projects originated by units of state and local government and guaranteed by the federal government. Federal guarantees are not new. They have been used, in areas such as student loans and housing, to lower interest rates and create a secondary market for debt that has been deemed to have a public purpose. If appropriate underwriting criteria are applied and an appropriate guarantee fee charged, these efforts can be budget neutral or provide positive scoring for the federal government. The interest rate available to the local or state government would be similar to the tax-exempt rate.

The idea would be to have a state or local government develop a program—such as a toll road—get support from beneficiaries and approval from appropriate government agencies, apply to the Treasury for a guarantee, and go to the market for financing once the guarantee was in place. There are many questions - such as the purposes for which the debt would be issued, the nature of the underlying credit, and how governments would select projects— all of which can be answered through the collaboration described in point one.

Third, wherever possible, existing programs should be used as models or templates for new efforts. For example, if a major effort to fix aged water pipes was necessary, the Clean Water State Revolving Loan programs should be used as a model, though perhaps modified to take into account the GTD proposal described above. This allows all parties to use existing regulations and processes that are both familiar and proven. In ARRA, using proven processes was one of the factors that led to a speedy distribution of funds and a very low incidence of irregularities.

Fourth, an implementation network overseen by the White House should be put in place. In the ARRA, support and attention from the President and Vice President were essential to the program’s success. The ARRA network featured single, responsible individuals in more than 22 federal departments and agencies. Similar responsible individuals were identified in every state, territory, and many large cities and counties. There were twice-weekly communications between the White House and the agencies and similar communication with the responsible individuals outside the federal government. If there was a problem or an opportunity, the network could be invoked quickly to deal with it.

Fifth, public-private partnerships can be extraordinarily effective mechanisms for spreading risk and accessing private expertise in financing, construction, and operation of infrastructure. There are many excellent examples of joint ventures that have provided stimulus for development of important public assets. Financing techniques for public-private projects continue to evolve, and any federal effort should bring these techniques to the fore.

Infrastructure comes in many forms. For some places it is roads, bridges, sewers, etc. In other places it is health care facilities or key economic development investments. Communities around America are initially in the best position to define what infrastructure they need. The role of states and the federal government should be to stimulate local creativity, provide mechanisms for aggregating local efforts, and develop review and financing techniques that are efficient and beneficial. By following the five guidelines described above, our governments can make efficient progress on creating and improving the infrastructure needed to provide of its constituents. 

Contact Information

Fels Institute of Government
University of Pennsylvania
3814 Walnut Street
Philadelphia, PA 19104

Phone: (215) 898-2600
Fax: (215) 746-2829

felsinstitute@sas.upenn.edu