Could the BRIDGE Act be the solution for infrastructure?
New legislation introduced by ten U.S. senators called the BRIDGE Act acknowledges that the likelihood that Congress will increase the gas tax or other infrastructure grants is “bleak.” BRIDGE would create a new form of government sponsored entity (GSE) called the Infrastructure Financing Authority (IFA).
The proposed legislation, led by Virginia Senator Mark Warner, would create an authority that would operate independently of the federal government to make loans and loan guarantees to projects that have sufficient cash flows to repay the loans.
The key provisions of the BRIDGE Act:
· The BRIDGE Act includes broad eligibility for funding:
Projects would have to be at least $50 million in size, and be of national or regional significance to qualify. Five percent of the Authority’s overall funding would be dedicated to projects in rural regions, and rural projects would be required to be $10 million in size.
· The BRIDGE Act addresses current gaps in infrastructure financing
The Authority would finance no more than 49 percent of the total costs of the project in order to avoid crowding out private capital. Loans and loan guarantees would be subject to modest additional fees, which will allow the Authority to quickly become self-sustaining over time.
· The BRIDGE Act establishes independent, non-partisan operations:
Having project finance experts in-house will help states and localities go toe-to-toe with private sector partners to ensure that taxpayers are getting good value for our investments through public-private partnerships. The Authority would operate independently of existing federal agencies, led by a Board of Directors with seven voting members and a CEO, all of whom would be required to demonstrate proven expertise in financial management and be confirmed by a vote of the Senate.
A 2007 CBO report outlines funding sources and project types in 2004. The numbers are outdated, but the general breakdown remains somewhat static:
Since decisions about infrastructure and its funding is now done at the state and local level, there is an enormous political challenge for this proposed legislation. The creation of the Infrastructure Financing Authority appears to reduce participation by state and local governments by serving mainly to backstop private money.
There should be the ability for state and local governments to borrow without private investors as co-investors. For example, consortiums of states should be welcome to borrow for multi-state water projects.
If the Federal Reserve could buy these loans in the way it has been buying $85 billion a month of U.S. Treasuries and mortgage backed securities, this legislation would make sense.
The Australian Productivity Commission is conducting a study on the costs and efficiencies of building public infrastructure in Australia. Like America, Australia funds infrastructure through public and private means, but ultimately it is paid for by taxation and government borrowings. From the Productivity Commission’s Public Infrastructure: Provision, Funding, Financing and Costs Terms of reference:
While alternative financing and funding models offer opportunities to reduce the immediate call on governments, it should be noted that the application of new models is not a panacea. Ultimately infrastructure can only be funded through taxation, borrowings or direct user charges. There are difficult trade-offs to consider given increasing demand and competing priorities.
The Australian inquiry is looking at privatization and the use of government funds. It will also study the cost of building infrastructure and how it can be done more productively.
I suggest three additions to Senator Warner’s legislation:
- Add a research component to the IFA that mirrors what the Australian Productivity Commission is doing to figure out how to build infrastructure more efficiently and for reduced cost.
- Add a system where state and local government can borrow from the IFA without partnering with private investors.
- Amend Section 14 2(b) of the Federal Reserve Act to allow these infrastructure bonds of sufficient maturity to be purchased by the Federal Reserve as part of quantitative easing or open market operations.
There have been many legislative versions of an infrastructure bank or new federal financing mechanism proposed in the Congress. I’m not sure this one will have any more traction politically than the previous ones. But if Senator Warner could link it to legislation that allows the Federal Reserve to buy these bonds and involve state and local governments more deeply he might have a winner.