Five Reasons Why BUILD is Better

Across the country, job-creating infrastructure projects are stalled for lack of investment from cash-strapped federal, state, or local governments. Imagine the progress our country could make and the millions of jobs we could create if we could multiply our money by mobilizing the private sector to improve the nation’s transportation, water, and energy systems.

As America struggles to create jobs for the nation’s more than 29 million unemployed or under employed,¹ it’s widely acknowledged that our outdated infrastructure is a drag on the economy. A multi-billion dollar program of infrastructure investment would no doubt create good jobs and increase our competitiveness.

But, in an era of budgetary constraints the federal government simply cannot foot the entire bill. The American Society of Civil Engineers projects a five-year deficit of over $973 billion² for water and transportation infrastructure alone—equal to 247% of what the federal government spent in those areas from 2005 to 2009.³ Clearly, in the current fiscal environment it’s unlikely that a more than tripling of direct federal infrastructure investment is on the horizon. At the same time, state and local governments are also facing budget shortfalls that make maintaining—let alone increasing—infrastructure spending a challenge.

However, the way most infrastructure is currently funded, private capital is severely underutilized. Only a fraction of the trillions of dollars in sovereign wealth, hedge, and pension funds seeking long-term, stable avenues for investment are being used to rebuild America. Sovereign wealth funds alone have an aggregate value of $4.1 trillion, and are seeking to invest some of those resources in infrastructure development. A number of America’s foreign competitors have actively courted such sources of financing for their own infrastructure upgrades.⁴ Despite our need for infrastructure financing, America has not been as aggressive in pursuing such investors.

The recently introduced BUILD Act (Building and Upgrading Infrastructure for Long-Term Development Act), a bipartisan bill introduced by Senators Kerry, Hutchison, Warner, and Graham, would change that. By establishing the American Infrastructure Financing Authority (AIFA) to make loans and loan guarantees for up to half the cost of major projects in transportation, water, and energy infrastructure, the BUILD Act will create new incentives for investment and provide private capital with a new entryway into the infrastructure market. The AIFA’s improvements on the current system would make it possible to use private financing to create jobs and close the infrastructure gap without drowning the federal budget in more red ink.

This memo lays out five reasons why the BUILD Act would improve our current system of infrastructure funding.

Five Reasons Why BUILD is Better

1. It Stretches Dollars by Moving from Grants to Loans

Much of federal infrastructure funding is dispensed in the form of direct spending through formula allocations to states and annual appropriations. These are scored as single year federal spending. In any given year, $1 billion in appropriated spending means $1 billion that must be paid for or tacked on to the deficit. For FY2010, this amounted to $52 billion for highway and mass transit grants alone.⁵

However, in the current fiscal environment, the federal government is simply incapable of providing enough financing year after year to make the improvements needed to advance our economy. The BUILD Act offers an alternative model by providing loans and loan guarantees rather than direct grants for construction. The difference in terms of impact on the federal budget is stark.

Since the loans and guarantees under AIFA are long-term credit vehicles as opposed to year-to-year spending, they score differently. The Congressional Budget Office (CBO) scores against the budget only the subsidy cost (amounts not expected to be recouped through principal, interest, and fee payments) of the loan or guarantee, rather than the entire amount. For example, the Administration estimates a subsidy cost of 20% for direct loans made by its proposed National Infrastructure Bank.⁶ At that rate, a $100 million loan would score at a cost to the federal budget of only $20 million. Loan guarantees under the existing Transportation Infrastructure, Finance and Innovation (TIFIA) program have a subsidy rate of 10%,⁷ meaning that a $100 million loan guarantee would come at a cost of $10 million.

But under AIFA, because loans will be paid back with interest and fees will be charged on guarantees, loan recipients—not the government—will ultimately bear the subsidy cost. Much like the U.S. Export-Import Bank, which has supported more than $400 billion in U.S. exports at no cost to the government, AIFA will generate revenue and become self-sustaining over time.⁸ This fact, combined with the dollar-stretching capabilities of its credit instruments, means the AIFA will use less taxpayer money to build far more.

This is crucial in light of America’s two separate, serious financial challenges: a $2.2 trillion overall infrastructure gap (including aviation, water, energy, rail, roads, bridges, schools, and other systems)⁹ that hampers economic growth, and a $1.5 trillion annual budget deficit that has led to calls for cuts across all sectors of government. Not only do these shortfalls have their own negative consequences for the American economy, but each one makes the other harder to address. The BUILD Act will allow our nation to tackle our infrastructure deficiencies without expanding our budget deficit.

2. BUILD Identifies a Potential One Trillion Dollars in Private Investment

Under the current direct spending system, federal funding can finance a significant portion of a project and is often accompanied by a state or local government match. For example, the federal government pays 90% of costs for highway interstate bridges, such as the I-35W Bridge in Minneapolis that collapsed in 2007.¹⁰ Other examples include the Federal Highway Administration’s High Priority Projects¹¹ and Federal Transit Administration’s New Starts and Small Starts¹² programs, under which the federal government provides 80% of the funding for selected projects.

Estimates, however, place potential global private investment in infrastructure at more than $1 trillion annually, as hedge, pension, and sovereign wealth funds increasingly seek secure, long-term investments.¹³ There is no reason why America’s infrastructure should not benefit from this tremendous pool of resources. The BUILD Act creates an avenue by which the U.S. can tap this available capital to upgrade our infrastructure.

The AIFA will use credit instruments to attract investment. In fact, the BUILD Act requires that at least half of a project’s cost be financed by non-AIFA funds. By moving private capital off of the sidelines and into American bridges, railroads, and power plants, the AIFA will leverage taxpayer dollars many-times over and cost-efficiently begin to close the nation’s infrastructure gap. In each of its first two years BUILD would be authorized to provide $10 billion in loans and guarantees, with $20 billion authorized per year for years three through nine. It’s been estimated that, depending on the percentage of federal matching capital used, under AIFA, this potential $160 billion in direct assistance could generate between $320 and $640 billion in total investment over the first decade of operations.¹⁴

3. BUILD is Targeted to Big Projects with Economic Merit

The most effective catalysts for economic growth and job creation are those projects that go beyond localities to impact entire regions and make nationwide connections. These undertakings, however, are often the most difficult for state and local governments to launch, due to cost and cross-jurisdictional disconnects.

For example, the Southeast High-Speed Rail Corridor, which stretches from Virginia to northern Florida, contains some of the fastest-growing metropolitan areas in the nation and the region is expected to grow 26% by 2030. High-speed rail service connecting these cities could tap the region’s potential and be a major catalyst of commerce, with a projected $30 billion in economic development, and 228,000 jobs.¹⁵ However, the recent elimination of high speed rail funding in the FY11 budget¹⁶ may—literally—keep projects in this, and similar regions, from leaving the station.

The AIFA will target just this type of development by financing projects that cost a minimum of $100 million and that have true economic merit—meaning they will create jobs, generate revenue, and have widespread growth effects. By drawing in private capital, and providing coordination across city and state lines, the AIFA will enable significant, strategic improvements that are all too often thwarted by our current system.

The BUILD Act also recognizes the unique value and scale of rural infrastructure. By setting a lower minimum of $25 million for rural projects, the legislation allows for a fair distribution of benefits across all regions of the country.

4. BUILD Takes Politics out of Infrastructure Spending Decisions

Project selection has, to this point, been sullied by inefficient and politicized funding allocation. The most recent transportation authorization bill included more than 6,300 earmarks, benefitting individual Congressional districts, but overlooking larger regional and economic needs.¹⁷ The BUILD Act takes politics out of the process and puts project selection in the hands of an independent, bipartisan Board of Directors and CEO appointed by the President and confirmed by the Senate. They will focus on economic benefits rather than parochial interests. And because the AIFA would provide only loans and loan guarantees, only projects that pass the initial market test of attracting private capital would be able to move forward.

5. BUILD Reduces Cost Overruns

Another factor that has hampered the effectiveness of infrastructure investment is the prevalence of cost overruns. Estimates have placed cost escalation on transportation projects in North America at almost 25%.¹⁸ By limiting assistance to loans and loan guarantees, the AIFA would inject private sector discipline into supported projects by giving project managers a financial incentive for efficient execution. Since loans and loan guarantees must ultimately be repaid, borrowers will have extra motivation to ensure that construction is completed in a timely and economical manner.

Additionally, the BUILD Act provides for strict oversight of the AIFA to ensure that the board operates with integrity and financial prudence. Treasury’s Inspector General would provide initial oversight to the AIFA, with an independent AIFA Inspector General to be created after five years. An independent auditor would review the AIFA’s books, and the AIFA will be required to commission an independent assessment of its risk portfolio.

Conclusion

Looking into the future, America’s success will hinge in large part on how well our infrastructure supports commerce, travel, and living standards. Other countries realize this and are moving full-steam ahead. And while America cannot lose this race, in today’s budget environment we cannot expect government to be the sole financier of our infrastructure overhaul.

The BUILD Act is a novel approach to a vexing problem. It brings in the private sector and modern financing techniques to leverage scarce dollars into abundance. It’s hard to imagine America investing what it needs to win the future without such innovative approaches.