An Infrastructure Bank: Reinvesting in America

On Labor Day, President Obama announced a National Infrastructure Bank to direct our reinvestment in American infrastructure. In doing so, he returned to Wisconsin, the site of a seminal campaign speech on the topic. This week I released a book on this proposal and public-private-partnerships (P3s) - Obama's Bank: Financing a Durable New Deal (Cambridge University Press). It explains how Obama's plan looks a lot like FDR's own two-phased recovery only a twenty-first century version - one which leverages private, state, and local money.

In doing so, it reinforces the successful leveraging vehicles in the American Recovery and Reinvestment Act - Build America Bonds, the broadband program, high speed rail, clean energy projects, etc. These vehicles repaired bridges like the San Francisco Bay Bridge, financed the extension of the Dallas Area Rapid Transit system, retrofitted houses, helped erect wind farms, and made key investments in state-of-the-art batteries. We are even using the stimulus act Non-AMT Private Activity bonds to add lanes to our airports and deepen our ports so that we can once again become an export-led economy.

It is the part of the stimulus act that the media has largely ignored. We have heard little about the jobs that it has saved and created, the progressive projects it has financed, and how it will continue to keep Americans at work on road, bridge, power and school projects well past the close of this calendar year.

Like these stimulus act programs, the Infrastructure Bank can relay the foundation of our economy through progressive long term projects that are synced up with a medium term business cycle - allowing firms to plan ahead, which is essential for retaining and creating good jobs. Investing in what will make America competitive, a job producer, a promoter of equal opportunity, and an ensurer of national security.

On February 13, 2008, then-Senator Obama had first announced the Infrastructure Bank on the factory floor of the General Motors Assembly Plant in Janesville, Wisconsin as a campaign plank. The speech marked, at the time, a pivot by Obama away from the sole candidate to have opposed the Iraq War and toward positioning himself as the champion of America's economic recovery. In this landmark speech, Obama argued for redirecting our energies away from reconstructing Iraq and toward reinvesting in America.

Much has changed since that speech in 2008. However, when it comes to the reintroduction of the Infrastructure Bank, the two most significant milestones have been

(1) the recapitalization and re-regulation of the financial sector and
(2) the success of the leveraging vehicles within the stimulus act.

Obama's LaborFest proposal builds upon both of these successes. It is a deeply bi-partisan proposal with support from Congresswoman Rosa DeLauro, Senator Christopher Dodd, former-Senator Chuck Hagel, and Building America's Future led by Governors Ed Rendell and Arnold Schwarzenegger and also Mayor Michael Bloomberg. Representative DeLauro's bill promoting an Infrastructure Bank that invests across all public works sectors has support from investors such as former-Ambassador Felix Rohatyn and Bernard Schwartz, labor unions, the US Chamber of Commerce, and the bipartisan Building America's Future's coalition of governors and mayors across the country.

The Infrastructure Bank and Obama's other infrastructure proposals from Monday involve the government shifting its role in selecting, paying for, and carrying out infrastructure projects. For instance, instead of selecting projects based upon federal earmarks and formulas, the Infrastructure Bank will choose ones based upon merit criteria. Importantly, the Infrastructure Bank will finance leveraging projects. In other words, the government will co-invest in projects with the private sector, states, and localities. It is a way of doing more and better with less.

In fact, this approach has been embraced by Warren Buffet whose letter to his shareholders this year makes co-investment a cornerstone of his approach to utilities and railroads. Buffet believes that a social compact underpins this approach whereby private investors put up the enormous upfront capital needed to produce power generators and railroad projects in exchange for the government ensuring a fair long term return spread conservatively over decades.

Since the Iraq War large amounts of money have filled up private equity funds seeking access to productive investment in US public infrastructure. The proponents of using this money to fund our infrastructure argue that, in a time of scarce resources, it can allow us to pay for much needed projects. After all, in 2009 the American Society of Civil Engineers awarded the country a grade of 'D' on its infrastructure and called for over $2 trillion in investment. The broken levees of New Orleans, collapsed bridge in Minnesota and power outages in the Northeast are reminders of the real costs of degraded infrastructure.

Pension funds, sovereign wealth funds, our TARP banks, insurers and hedge funds all thirst for access to US infrastructure opportunities - they now mainly just sit on the sidelines, as the president explained at a meeting with his economic advisors last year. To date, blocked from fresh new projects, some of these investors have sought out already built ones to purchase - parking meter systems, toll roads, buildings, and other public assets. Many of these deals have not been structured in an optimal way as a front page Wall Street Journal article explained last week.

However, the Infrastructure Bank opens up the possibility of using this equity capital to solve our infrastructure needs. Many estimate, including President Obama on the campaign trail, that roughly $60 billion of government investment can generate a total of almost $450 billion into our public works. Our recent experience with private investment abuse in key sectors such as student loans and housing illustrates the risks that must be addressed in order to shepherd this capital into our public works. At the same time, unlike President George Bush's TARP program, President Obama's approach aimed to re-capitalize financial institutions in order to productively invest in the American economy. The aim of an Infrastructure Bank is to move this capital productively into the economy in a durable way that also addresses real risks.

The recapitalization of our financial institutions and their subsequent re-regulation has made it possible for us to begin to think about how they can now serve as agents in our recovery at the scale needed. Furthermore, the stimulus act created a range of leveraging vehicles that successfully began to move this class of investors - what McKinsey Global Institute calls the New Power Brokers - into our public works. The President's Council of Economic Advisors fourth quarterly report on the stimulus act released in July estimated that one dollar of this innovative federal money leveraged almost three dollar of co-investment from private, state and local sources.

We are in dire need of an Infrastructure Bank that can select projects on the merits and find ways of funding them. For this to happen effectively, it is now essential to shift our public discussions of TARP banks and other investors to include not only their culpability and responsibility for our economic mess, but also to the appropriate way of catalyzing their investments into vital public infrastructure.