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The Sad Story Of The National Infrastructure Bank

By: Joyce Miller

December 01, 2011

The idea of a national infrastructure bank was first introduced in Congress almost two decades ago, and, earlier this year, it looked like it might finally pass. The BUILD Act, which would create a non-political national infrastructure bank, was conceived by John Kerry (Dem-Mass), and had bi-partisan support in the Senate, where it was also sponsored by Senators Kaye Bailey Hutchinson (Rep-Texas), Lindsay Graham (Rep-SC) and Mark Warner (Dem-Va). It was strongly backed by President Obama, who had first talked about the concept during the 2008 Presidential campaign, and again in 2011. The BUILD Act and the bank also had the rarely-seen combined support of both organized labor and the business community. It was endorsed by both the AFL-CIO and the U.S. Chamber of Commerce.

The BUILD provision for a national infrastructure bank was included in the $447 billion Rebuild America Jobs Act proposed by President Obama. That, broader bill, however, failed to pass the Senate on November 3, 2011 on a party-line vote, when every Republican (including Senators Hutchinson and Graham) voted against it along with two Democratic Senators. The stand-alone BUILD Act might pass in the Senate in 2012, but it will have a hard time in the House, where no companion bill has been introduced yet and where it is strongly opposed by Representative John Mica (Rep-Fl), Chair of the powerful Transportation and Infrastructure Committee.

What is the national infrastructure bank and why should we care? The national infrastructure bank would be a government-owned entity initially seeded by a $10 billion federal contribution that would be used to leverage large sums of private investment in commercially viable, bankable infrastructure projects. It is intended to complement, not substitute for, existing federal funding programs. Although it would initially be federally funded, it is expected that the bank will become self-sustaining after a few years, as it will invest in financially viable projects that will provide a return on investment.

Like other financial institutions, the infrastructure bank would also derive revenue from charging fees such as application, transaction and loan guarantee fees for the use of its services. As well, it would provide due diligence and underwriting services by seasoned, professional, investment staff. Projects would be selected on the basis of merit, have to be a minimum of $100 million in size (except for a small rural carve-out), have a dedicated, positive source of revenue and be of national and regional significance. Projects would also provide a major benefit and be in the areas of transportation infrastructure, water infrastructure or energy.

The proposed bank could lend up to up to 50% of a project's cost, or provide loan guarantees. It would lend at approximately the Treasury rate, which is lower than any other source of capital, in effect providing a subsidy to the projects at no cost to the federal government. Loans would have a maximum term of 35 years, a much longer term than would be available through conventional bank loans. This is particularly important for infrastructure assets, as it reduces the monthly cost of debt service by stretching the payments over the life of the project. Loan guarantees also reduce the cost of capital by reducing the repayment risk to private lenders so that lenders will lend at a lower interest rate. Eligible projects could be privately or publicly owned and the financing package could include local, state or federal funds in addition to the private capital, which could take the form of debt or equity. Applicants could be public or private entities.

The infrastructure bank's ability to provide a long-term source of capital at a lower interest rate than commercial loans, reducing the average cost of capital for the projects and the amount of their periodic debt service payments thereby increases their feasibility. The revenue streams from infrastructure projects, which are used to cover debt service and operating costs, are usually derived from user fees such as tolls, fares and charges for use and these must be kept affordable. Infrastructure projects generally cannot support a high cost of capital because they cannot generate sufficient revenues to cover high debt service payments and still be affordable to users.

The bank would be an innovative way to incentivize private investment in new infrastructure projects, especially for new alternative energy and energy efficiency projects. It would blast away the sector silos created by existing legislation and agency priorities, which erect major barriers to creative alternative energy infrastructure projects because they force projects into narrowly defined sectors such as energy, water, transportation and agriculture. In turn, this would facilitate cross-sector projects - for example conversion of municipal solid waste into biodiesel fuel which could reduce reliance on fossil fuel for transportation or generating electricity, or the use of agricultural water reservoirs to generate power for local use by covering them with microfiber covers embedded with photovoltaic cells (PV) which could generate solar power as well as conserve water by reducing evaporation. Covering reservoirs with PV generators would also cut the distance over which power is transmitted, increasing available power, and reduce costs and demand on the grid.

So how was this important bill derailed? Republicans have not allowed any legislation proposed by the President to pass, hence the party-line negative vote in the Senate, even by those Republicans who support the bank. Opposition has come from conservatives and tea party supporters, particularly in the House, who view the bank as an undesirable expansion of the role of government and as a new form of government expenditure, something seen as inherently bad. The conservative priority of reducing the national debt creates pressure to block any new spending, no matter how necessary the program. Senator Hatch (Rep-Utah) argued during the floor debate that the proposal was just another spending bill while Senator Lieberman stated "While the goals of the infrastructure bill are worthy, I believe that the most important thing we can do to improve our economy... is to dramatically reduce the debt... unless we can put our economy on sound financial footing by reining in our debt, all additional stimulus efforts will be for naught."[1]

There is some hope that the stand-alone Kerry bank proposal might pass in 2012. Speaker Boehner may decide that the bill belongs under the jurisdiction of the Energy and Commerce Committee and not Transportation and Infrastructure, where it will definitely be blocked. But as long as the conservatives in Congress make deficit reduction their top priority, and as long as they continue to believe that only tax cuts for the wealthy (the so-called 'job creators') and not spending will stimulate the economy, the prognosis is poor.

[1] Wong, Scott. "Senate Gridlock: Both Parties Block Jobs Bills — Scott Wong —" Politics, Political News — 3 Nov. 2011. Web. 01 Dec. 2011.

Joyce Miller, is a partner with Kaminski Partners LLC, a newly formed merchant bank and advisory, where she is Managing Director for Infrastructure and Energy. She also serves as a Director of the Empire State Development Corporation, which oversees all of New York State's economic and business development activities and financings. Ms. Miller has many years of experience in the interaction between government and finance. She has advised Senator Kerry's and President Obama's staff on the formation of a national infrastructure bank. She is currently working on creation of a special purpose vehicle for pension fund investment in infrastructure.

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