A Bank for Infrastructure Funding
Legislation moving through Congress could help states and localities finance public works projects.
The $5.25 billion Panama Canal expansion could be a gold mine for U.S. ports along the Gulf and the East Coast.. But first, they have a few upgrades to make if they expect to compete for the anticipated surge in trade traffic. So where will the money come from to ready these ports? And what about money to finance other major infrastructure needs? Michael Likosky, director of the Center on Law and Public Finance at New York University, sees a national infrastructure bank as one answer. As bipartisan legislation to create such a bank inches its way through Congress, I tuned into a briefing via telephone by Likosky, sponsored by RBC Capital Markets, on how such a bank might work. What follows is an edited transcript of his remarks.
How the bank will work: The bank starts with the initial capitalization of $10 billion, then moves to self-sufficiency, and does loans and loan guarantees in the sectors of water, transportation and energy. It is a multi-sector bank, designed to finance multi-sector projects so you can package water, transportation and energy together.
How the bank differs from the Transportation Infrastructure Finance and Innovation Act (TIFIA): The TIFIA program has generally been for large marquis projects. To date, it has been a 10- to 12-state program. The states that have needs for TIFIA loans generally are high population states that can sustain it. The infrastructure bank has been conceived as a 50-state bank, and so it has a much broader reach. It is going to be more about volume and less about doing a cluster of projects. That said, the two are complementary in that a TIFIA project can pick up support from the infrastructure bank at the same time. Including another federal agency or federal program in a TIFIA package makes the package more attractive to investors, particularly if a water or energy component gets added.
Like TIFIA, the state bank is for transportation only. The program's been around since the Clinton administration and has never taken off as a national program. That said, an expanded state infrastructure bank program could use national infrastructure bank programs to enhance its own financing.
The number of projects a national infrastructure bank could support: The estimates have been around $500 billion of deal flow [or, in other words, $500 billion in business or investment opportunities]. That's a conservative estimate, particularly at a time when there's a lot of uncertainty in Europe. The U.S. is considered a jurisdiction of opportunity. So we're likely to see an infrastructure bank leverage a lot more money than some of the estimates. When you provide a loan or a loan guarantee, and the risk assessment of the project is taken into consideration, the federal government's only going to withhold a certain amount of what it lends. So if it's a $340 million loan, that might only require withholding $34 million. With the export/import bank and international banks in the U.S., the experience has been that the amount withheld becomes smaller and smaller.
Prioritizing projects: A national infrastructure bank's purpose is to help increase state and local deal flow and private-sector deal flow. The national bank itself isn't going to be a place that has a list of priority projects. This is not a top-down institution. So what we end up with is our state and local governments beginning to move toward priority lists of projects. In many states this is happening; there is starting to be a priority list of what types of projects would be particular candidates for public-private partnerships. As the transportation bill has moved forward, we're getting a clearer idea of what gaps are going to be left in the marketplace where an infrastructure bank is going to become particularly useful.
A concrete example of a priority project that would be an infrastructure bank candidate is the expansion of the port in Spartanburg, S.C., so it can handle the larger Panama Canal ships. We're talking about a range of different sectors that are involved, both freight rail, intermodal freight rail and dredging the port, but we're also talking about other types of port build-up manufacturing. The idea is to ramp up manufacturing in the ports at the same time that the expansion happens. What the infrastructure bank would aim to do is increase the pie of available capital with the recognition that we have to achieve fairly high growth rates -- 6 percent -- in a fairly sustained way in order to handle the employment crisis. So in those areas where there's the greatest amount of economic growth possible, that's where the infrastructure bank comes in as especially useful.
Bank project financing vs. traditional tax-exempt project financing: I see them as enhancing the tax-exempt bond market by bringing in -- as the Build America Bonds did -- a new class of investors: pensions, sovereigns and insurers that don't always have the appetite or the tax profile for the tax-exempt. On another front, the bank is an enhancer of the tax-exempt bond market in that there's a slice of projects today that are more amenable to public-private partnerships or require a tax-exempt, private-activity bond enhancer or some sort of additional type of revenue source. For instance, in New York, Gov. Andrew Cuomo is talking about reinvesting in Buffalo. There's going to be a certain amount of tax-exempt bond usage to regrow Buffalo, but there's also going to be a movement to bring in other sources of financing. The tax-exempt bond market and the infrastructure bank will reinforce one another.
Facilitating public-private partnerships: The infrastructure bank is coming in to handle two main risks associated with public-private partnerships. [The main one] is closing risk. In the U.S. public-private partnership market today, it is very hard and very expensive to get to close with a project. What an infrastructure bank will do is decrease the likelihood of closure of a project because there will be an additional federal champion involved, additional federal underwriting and higher underwriting standards. The bank also has a best practices unit in it, so there'll be some technical assistance to state and local governments that often run into problems closing projects because there's not the capacity to assess bids. That's another aspect that the federal bank is meant to support.