FINANCING TOMORROW'S INFRASTRUCTURE

CHALLENGES AND ISSUES

Proceedings of a Colloquium October 20, 1995

Board on Infrastructure and the Constructed Environment

Commission on Engineering and Technical Systems

National Research Council

NATIONAL ACADEMY PRESS
WASHINGTON, D.C.
1996



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Financing Tomorrow's Infrastructure: Challenges and Issues FINANCING TOMORROW'S INFRASTRUCTURE CHALLENGES AND ISSUES Proceedings of a Colloquium October 20, 1995 Board on Infrastructure and the Constructed Environment Commission on Engineering and Technical Systems National Research Council NATIONAL ACADEMY PRESS WASHINGTON, D.C. 1996

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Financing Tomorrow's Infrastructure: Challenges and Issues NOTICE: The Board on Infrastructure and the Constructed Environment (BICE) is a continuing activity of the National Research Council (NRC) and advises the executive and legislative branches of government and the private sector on questions of science, technology and public policy related to above ground and underground construction; public facilities; infrastructure systems and services; the relationship between the constructed and natural environments and their interaction with human activities; and related issues of planning, design, construction, management, and use of the built environment. The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Bruce Alberts is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Harold Liebowitz is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Kenneth I. Shine is president of the Institute of Medicine. The National Research Council was established by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy's purposes of furthering knowledge and of advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Bruce Alberts and Dr. Harold Liebowitz are chairman and vice-chairman, respectively, of the National Research Council. Funding for this activity was provided through an agreement between the National Academy of Sciences and the National Science Foundation, Award number CMS-9505733, the U.S. Department of Commerce/Economic Development Administration, Award number 99-07-13779, the U.S. Department of Commerce/National Institute of Standards and Technology, Award number 43NANB510831, the National Science Foundation, Award number CMS-9633297, and the U.S. Department of Commerce/National Institute of Standards and Technology, Award number 43NANB611071. Library of Congress Catalog Card Number: 96-69107 International Standard Book Number: 0-309-05543-1 Additional copies of this report are available from: National Academy Press, 2101 Constitution Avenue, NW, Box 285, Washington, D.C. 20055 800-624-6242 or 202-334-3313 (in the Washington Metropolitan area) Copyright 1996 by the National Academy of Sciences. All rights reserved. Printed in the United States of America

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Financing Tomorrow's Infrastructure: Challenges and Issues BOARD ON INFRASTRUCTURE AND THE CONSTRUCTED ENVIRONMENT GEORGE BUGLIARELLO (chair) Polytechnic University, Brooklyn, New York Members CATHERINE BROWN University of Minnesota, Minneapolis NANCY RUTLEDGE CONNERY Public Works Infrastructure, Woolwich, Maine LLOYD A. DUSCHA Consulting Engineer, Reston, Virginia ALBERT A. GRANT Consulting Engineer, Potomac, Maryland SUSAN E. HANSON Clark University, Worcester, Massachusetts E. R. HEIBERG III Heiberg Associates, Inc., Mason Neck, Virginia RONALD W. JENSEN City of Phoenix, Arizona JAMES K. MITCHELL Virginia Polytechnic Institute, Blacksburg GARY T. MOORE University of Wisconsin, Milwaukee HAROLD J. PARMELEE Turner Construction Company, New York, New York STANLEY W. SMITH Consultant, McLean, Virginia RAYMOND L. STERLING Louisiana Tech University, Ruston, Louisiana CETS Liaison Representatives SAMUEL C. FLORMAN Kreisler Borg Florman Construction Company, Scarsdale, New York DEBORAH A. WHITEHURST Arizona Community Foundation, Phoenix ROBERT V. WHITMAN Lexington, Massachusetts Staff RICHARD G. LITTLE, Director, Board on Infrastructure and the Constructed Environment LYNDA STANLEY, Director, Federal Facilities Council SUSAN K. COPPINGER, Administrative Assistant LENA B. GRAYSON, Program Assistant

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Financing Tomorrow's Infrastructure: Challenges and Issues Foreword The mission of the Board on Infrastructure and the Constructed Environment (BICE) is advise the government and private sector on matters within the scope of its charter that are of national interest. The national infrastructure is an essential underpinning of our economy and quality of life and is a source of both serious problems and opportunities. BICE is committed to reaching out to all parts of the infrastructure community by fostering a dialogue among experts from various fields to identify issues and contribute to their resolution. There are two basic issues concerning the infrastructure: how to make the infrastructure more efficient and affordable and how to finance it. The first issue was the subject of a colloquium held on March 24, 1995, that was focused on the challenges of providing future infrastructure in a changing and unfamiliar environment. The proceedings of that colloquium, The Challenges of Providing Future Infrastructure in an Environment of Limited Resources, New Technologies, and Changing Social Paradigms, are available from the National Research Council. The second issue—how to finance the infrastructure—is particularly critical at this moment because federal appropriations are, at best, going to remain at current levels, but will probably decrease. Thus it will fall more and more to state and local governments and members of the private sector to come up with innovative and creative ways to address this critical issue. This publication represents the proceedings of a colloquium, held on October 20, 1995, at the National Academy of Sciences, entitled Financing Tomorrow's Infrastructure: Challenges and Issues. The colloquium was an attempt to explore these issues in a social, political, and financial context, to examine models for successfully financing infrastructure projects, and to discuss new and innovative ways of dealing with contemporary realities. The opinions presented herein are solely those of the authors of the colloquium papers and do not represent the opinions or position of the Board on Infrastructure and the Constructed Environment, the National Research Council, or the National Academy of Sciences. These proceedings are offered by BICE as part of a series of outreach activities for discussing critical infrastructure issues.

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Financing Tomorrow's Infrastructure: Challenges and Issues Contents I.   OVERVIEW George Bugliarello   1     BALANCING PRESENT COSTS AND FUTURE BENEFITS Timothy J. Brennan   7     Public Policy toward Private Infrastructure Investments,   8     Public Projects: Resource Flows and Money Flows,   9     Borrowing from Ourselves,   10     Why Financing Matters,   11     Should We Build and for Whom?   13     Discounting,   14     Equal Standing: Adding Ethics to Economics,   15     Ethical Justifications for Discounting   17     Final Word to the Present,   18     Discussion,   18 II.   INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL Nancy Connery   21     DOMESTIC AGENDA Carol Everett   22     House of Representatives Report,   23     Economic Policy Institute Report,   25     U.S. Army Corps of Engineers Report,   25     Conclusion,   26     INTERNATIONAL PERSPECTIVE Frannie Humplick   28     CURRENT ISSUES IN INFRASTRUCTURE FINANCE Natalie R. Cohen   39     DISCUSSION OF THE MORNING PRESENTATIONS   45     TECHNOLOGY, INFRASTRUCTURE, AND COMPETITIVENESS IN A NATIONAL INNOVATION SYSTEM Deborah L. Wince-Smith   54     National Technology Innovation System,   56

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Financing Tomorrow's Infrastructure: Challenges and Issues     Financing Innovation,   61     Regulatory Obstacles,   63     Role of the National Laboratories,   65     Conclusion,   66 III.   FUTURE OF INFRASTRUCTURE FINANCE Bruce D. McDowell   67     DULLES GREENWAY: PRIVATE PROVISION OF TRANSPORTATION INFRASTRUCTURE Charles E. Williams   68     Discussion,   72     FLEXIBILITY IN INFRASTRUCTURE FINANCE Richard Mudge   76     Discussion,   81     PERSPECTIVE OF THE INVESTMENT COMMUNITY Ann L. Sowder   84     Discussion,   90     SOLUTIONS FOR LOCAL GOVERNMENT Paul S. Tischler   95     BIOGRAPHICAL SKETCHES OF COLLOQUIUM PARTICIPANTS   102

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Financing Tomorrow's Infrastructure: Challenges and Issues List of Tables and Figures TABLES 1   Responsibilities for Infrastructure Provision under Alternative Financing Arrangements   32 2   Value of Infrastructure Privatizations in Developing Countries   37 FIGURE 1   Publicly Guaranteed Private Loans Have Fallen   30

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