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What’s needed to address the infrastructure deficit?

We’ve made the case for why Washington needs to get moving on an infrastructure investment package now—because it’s what’s needed to create jobs and get the U.S. economy moving again after years of sluggish growth.

Infrastructure is the backbone of the U.S. economy, and the nation’s “infrastructure deficit” is serious. The American Society of Civil Engineers estimates we need $3.6 trillion in infrastructure investment by 2020 to replace failing facilities and maintain the capacity needed by a growing economy and population.

Existing federal financing approaches, like the Highway Trust Fund, are insufficient to meet this need. So how can the federal government pay for this urgent priority? The key word is “partnership” between the public and private sectors. 

In this explainer video, SIFMA’s Michael Decker and RBC Capital Markets’ Chris Hamel explain how innovative public-private partnerships, or P3s, can play a vital role in addressing the infrastructure deficit:

New initiatives for infrastructure finance should recognize the need for a partnership among federal, state and local governments and private investors and developers. A comprehensive expansion of federal investment in infrastructure should incorporate the following recommendations.

Preserve the federal tax-exemption for interest earned by investors on bonds issued by states and localities to finance infrastructure projects. The majority of our nation’s infrastructure is financed, built and maintained by state and local governments through the use of tax-exempt municipal, or muni, bonds. The tax-exemption for muni interest is the single most important tool the federal government provides to lower the cost to states and localities of infrastructure finance. It should be preserved in its present form. (Project Invested has written previously on why taxing muni bond interest is “a bad idea that won’t die”).

Expand the use of “private-activity” tax-exempt bonds for infrastructure. State and local governments are permitted under the tax code to issue bonds on behalf of private borrowers for a limited list of uses, including infrastructure investment. However, issues of this type come with significant restrictions like volume limitations and application of the individual Alternative Minimum Tax, which raises the cost of financing. State and local governments should be able to issue tax-exempt bonds for infrastructure projects with private participation in the same manner that they issue bonds for purely public projects.

Promote the use of “design-build” as a procurement mechanism for infrastructure projects. How can we make existing infrastructure dollars go further? “Design-build” strategies can lower cost by procuring engineering and construction services from a single contractor. However, federal and state policies do not promote this approach and in some cases effectively prevent it. Federal and state infrastructure investment programs should provide incentives for the use of design-build by states and localities. This would allow federal, state and local developers the ability to finance more projects with the same limited resources.

Provide a tax credit for equity investors in infrastructure projects. Public-private partnerships between state or local governments and private developers can provide a meaningful supplement to purely public infrastructure development. The federal government should provide a tax credit to private investors who commit equity capital to infrastructure projects. To maximize efficiency, the credit could be sold to other investors and the proceeds used to defray project costs. Similar federal programs have already been successful in promoting investment in renewable energy generation and low-income housing; applying this thinking to infrastructure investment makes sense.

Expand federal grant programs. For decades the federal government has contributed significant resources to infrastructure investment through grants focused on highways, transit systems, airports, water and sewer systems and other areas. These programs are proven successes and should be expanded.

Expand alternative federal financing programs. In addition to grant programs, the federal government maintains credit support programs for infrastructure by, for example, making low-interest, subordinated loans for targeted infrastructure projects through programs like the Transportation Infrastructure Finance and Innovation Act (TIFIA) and others. These programs should be expanded and perhaps consolidated through a centralized “infrastructure bank”-type entity.

Reinstate “direct pay” bonds for infrastructure. In 2009 and 2010, the federal government operated program such as “Build America Bonds,” whereby states and localities could choose to issue bonds with taxable interest, instead of tax-exempt interest, and receive a partial reimbursement for their interest expense. These initiatives were successful in generating new investment in public infrastructure, and Congress should reinstate them on a permanent basis as a supplement to—but not a replacement for—tax-exempt bonds.

Permit the use of new financial instruments for infrastructure finance. Existing financing structures like Real Estate Investment Trusts and Master Limited Partnerships have been successful in providing an efficient means to invest in real estate and energy-related assets. These vehicles should be expended to incorporate infrastructure assets as well. In addition, Congress should permit the use of new financing structures such as Infrastructure Backed Securities, patterned after asset-backed securities, as a means of attracting alternative sources of capital to infrastructure investment.

Obviously, a comprehensive infrastructure investment package will need to include more than the aforementioned items. But these tools should be a part of any legislative approach to ensure the nation’s infrastructure needs are met in a cost-effective way.