How to Rebuild U.S. Infrastructure From the Ground Up

By Robert Puentes

As the U.S. works to rebuild and re-orient its economy, infrastructure should be near the top of the "to-do" list. It appears that government and business leaders understand the paramount importance of infrastructure to maximizing economic growth and opportunity, so the question is how to proceed.

Unfortunately, with state and local budgets stretched to the bone, the focus is not on investments to boost the economy, but on fiscal retrenchment. States like Arizona and California are contending with massive cyclical and structural shortfalls that amount to 33 percent and 21 percent of annual stable expenditures, respectively. Yet these constraints should open up possibilities -- and argue the need -- for a mix of public and private financing models for infrastructure. Even as budget crises continue to roil in city halls and in state houses around the country, there is money available in capital markets, pension funds, and even through foreign financiers who are ready and willing to invest in the right kind of U.S. infrastructure.

Most of the action is going to come from the ground up, beginning with forward-thinking mayors focused on solving problems and delivering results. Whether it's a high-speed link to O'Hare airport, university expansion in downtown Phoenix, health information technology in Orlando, critical transport projects in Los Angeles, or a rail extension in Denver, these folks are not waiting around; they are in action mode.

While a lot is happening, there is much more to do. A poll by the financial advisory firm Lazard shows strong willingness for states to consider private investments rather than increasing taxes, cutting budgets, or taking on more debt. But too often deals get mired in political muck. The private sector is now seeking more legislative certainty prior to bidding on projects and has little appetite for negotiating transactions subject to legislation or other major political approvals.

States can help broker the complex infrastructure partnerships between the public and private sectors. While half of the states have enacted enabling statutes for public/private partnerships, the wide differences between them make it time-consuming and costly for private partners wishing to engage in multiple states to handle the different procurement and management processes. States should move to enact comprehensive legislation that is accountable, transparent, and permanent.

They should also push the federal government to play a helpful role by creating standards and providing technical advice to be considered in public/private deals. A model to consider is a type of special unit, which exists in about 25 countries worldwide, to perform important functions such as quality control, policy formulation and coordination, and technical advisory. In the U.S., the primary purpose of such an entity would be to provide technical, nonā€binding information, assistance, and advice to states and metropolitan entities.

Another way to shake loose some of this private capital is through the oft-mentioned National Infrastructure Bank. This is a merit-driven approach for green-lighting a range of infrastructure projects that have the highest return on investment. By providing loans and other lines of credit for worthy projects, we can tie these investments directly to the elements of a productive American economy.

One of the eligibility criteria for projects an infrastructure bank would help finance should be the extent to which the infrastructure project maximizes private investment. So the private sector would be involved both on the borrowing side, being able to apply for financing alone or in partnership with public entities and to add its own private equity to the projects, and on the lending side, through purchase of NIB bonds.

Competition around the world for this capital is intense. Europe has been able to take advantage of private interest in infrastructure because of the European Investment Bank, which has been functioning successfully for the last 50 years, playing a major role in connecting the European Union across national borders. The EIB raises funds from capital markets and lends them at higher rates to both public and private entities, keeping its operations financially sustainable.

If we do this right, we should be able to look back at this moment in history and recognize this is when everything changed: when we focused and prioritized investments in our economic engines, corrected the mistakes of the past, and took infrastructure out of its box and connected it to other areas of policy.

This article available online at:

http://www.theatlantic.com/business/archive/2011/02/how-to-rebuild-us-infrastructure-from-the-ground-up/71687/