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Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium (1996)

Chapter: II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL

« Previous: I. OVERVIEW
Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Infrastructure Challenges and Issues: A Panel

Nancy Connery, moderator

Consultant, Public Infrastructure

At this juncture, I think it is important to rethink the issue of the infrastructure. It is clearly not at the apex of public attention and policy. It had its day perhaps, and it may yet have another, but right now it is in a quiet phase. I have looked at this phase with some despair at times because I know all of us have worked hard to make public works issues a much more important aspect of public policy. But we know that the facilities and their problems are not going to go away. So, to the extent that we can, this is a good time to take stock.

The issue has become much more textured, I think, since we started 10 or 15 years ago counting up the wish list of things we would like to do or think we should do. It now has many ramifications, some of which were just brought home to us by Dr. Brennan. Our three panelists will provide insights on the challenges and issues in infrastructure finance that lie ahead. Although domestic and international infrastructure requirements differ in both type and degree, the relationship between a healthy infrastructure and economic vitality is universal.

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

Domestic Agenda

Carol Everett

Rebuild America Coalition

It is interesting that although the issue of infrastructure investment is on the political back burner right now, a proliferation of new reports is coming out on the subject. I have selected three of these reports to talk about today, reports that offer very different perspectives on the topic but all of which are important to a full appreciation of the dimensions of the issue. I will describe each report quickly, make a few comments, and then offer some final remarks on where we need to go from here.

The first report is a congressional report that was released this past January (1995) by the House Committee on Public Works and Transportation (recently renamed the House Committee on Transportation and Infrastructure). This report is entitled simply "National Transportation and Environmental Infrastructure Needs" and takes a fairly traditional approach. The second report was also released in January 1995, "The Case for Public Investment" prepared by the Economic Policy Institute (EPI), a Washington, D.C., think tank. This report takes a macroeconomic modeling approach to the issue of whether our nation should be investing more in infrastructure. The third report was prepared by the U.S. Army Corps of Engineers. It is called ''Living Within Constraints: An Emerging Vision for High Performance Public Works" and incorporates viewpoints from all of the major interest groups concerned with our nation's infrastructure.

The three reports are a good follow up to Dr. Brennan's remarks because they bring into high relief the whole question of what we "ought" to be doing as a nation versus what we "can" do. One of my theories after studying these three reports is that where you come out on the infrastructure investment issue has more to do with your initial assumptions about the flexibility of the federal government to solve these problems than about almost anything else.

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

HOUSE OF REPRESENTATIVES REPORT

Let me turn first to the House report. To produce this report, the House public works committee used data from industry and government experts and anecdotal from that can be described for the most part as physical or engineering analysis. Based upon this information, the House concluded that "there is a chronic underinvestment in the nation's infrastructure that is threatening our national economy and living standards." The report examines various categories of infrastructure.

Major portions of our national highway system are in substandard condition, severely impeding and inhibiting the economic growth and mobility that have been hallmarks of this system. Almost one-fourth of our highways are in poor or mediocre condition; another 36 percent are rated fair. One in five of the nation's bridges is structurally deficient, meaning weight restrictions have been set to limit truck traffic.

The nation's transit infrastructure has suffered greatly from a prolonged period of underinvestment that has curtailed service, reduced ridership, threatened the existence of many transit systems, and left substantial needs unmet. Almost one-fourth of the rail transit facilities are in poor condition, and one-fifth of the transit buses must be replaced as soon as possible. In virtually all areas, service levels are inadequate, reducing the mobility of millions of people who depend on public transit.

The nation's airport and airway system is steadily becoming more congested. Growth in passenger and air cargo traffic since deregulation in 1978 has been explosive. Passenger traffic is expected to double almost in the next decade, and cargo traffic is growing even faster. Currently, there are unacceptable flight delays at 23 of the nation's major airports. If no improvements are made, 33 major airports will have unacceptable delays by the year 2002.

The nation's deep-draft shipping ports, which handle 95 percent of our international trade, face severe access problems on both water-side and land-side. Major ports on all of our coasts have been confronted with serious delays in obtaining dredging permits and other necessary approvals. At the same time, land-side connections have often been ignored because they are not part of a well defined transportation program. As a result, shipments to and from ports face inordinate delays and congestion, often increasing shipping costs.

The nation's inland waterways have outdated and antiquated locks and dams that hinder the movement of coal, grain, and other bulk products. Delays in passing through these locks can cause significant increases in shipping costs. In 1990, 10 locks on the inland waterway system averaged more than three hours of delay per barge tow; while many other locks caused lesser delays. With

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

use of the inland waterway system expected to increase each year, delays are likely to increase. Fully 40 percent of the nation's locks are more than half a century old, and one lock on the Kentucky River is 150 years old. Nearly 90 percent of our locks and dams are too small to handle modern barge tows.

Our drinking water systems are also deteriorating. Many are using water pipes 100 years old or more. These outdated systems may spring leaks and are subject to widespread contamination. Contaminated water has caused 900 deaths and causes almost one million illnesses every year. In a two-year period, violations of federal drinking water standards were reported in 43 percent of the nation's drinking water systems, which supply water for 43 million people.

Our wastewater treatment infrastructure remains inadequate to the task of cleaning up the nation's waters. A third or more of our rivers, lakes, ponds, reservoirs, and estuaries remain polluted, as does almost the entire Great Lakes shoreline. Sewage treatment needs are especially urgent for metropolitan areas trying to remedy the problem of combined sewer overflows and small communities lacking independent financing ability.

I know some people in this audience are critical of the needs approach used by the House because, for the most part, it doesn't look at how systems are performing from an outcomes perspective. But I believe at this moment this is the best we can do to provide an overall picture of our nation's infrastructure. And for that reason the House report is invaluable.

Okay, so what does the House report conclude? First, national leaders must develop a strategy for meeting our vast transportation and environmental infrastructure needs, establish priorities with the greatest economic and environmental returns, and develop sources of funding. (The report covers a host of financing options but does not come out in favor of one set of strategies or another.)

Second, the House report concludes that the infrastructure issue must be elevated to the high level of public visibility that it deserves. (How to do this is something the Rebuild America Coalition has been struggling with for the past eight years.) The House committee believes that higher visibility will help develop a broad national consensus on infrastructure issues and that this consensus can be a springboard for action.

Finally, the House report supports establishing a federal capital budget and taking the highway, airport, and waterways trust funds off budget.

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

ECONOMIC POLICY INSTITUTE REPORT

In the second report, the Economic Policy Institute (EPI) takes a very different approach from the House public works committee. EPI is interested in spurring the growth rate of family incomes in our country. EPI starts off by saying that "for a quarter of a century following World War II, American families could count on rising living standards propelled by rising real wages. But over the last two decades family incomes have grown hardly at all, and what growth there has been has been a result of more workers per family, not higher wages." EPI asserts that to reverse this slide and ensure a healthy future for America's standard of living, we need to become more productive. The key to boosting productivity is investment, both private and public.

To support this thesis, EPI compares infrastructure investment in industrialized nations and finds that the U.S. ranks dead last in terms of infrastructure investment as a percentage of GDP. In 1992, for example, Japan invested roughly three times as much as the U.S. Moreover, EPI says that the value of America's stock of public infrastructure has been decreasing. During the 1960s and 1970s the public infrastructure stock grew steadily, according to EPI, but over the past decade it has fallen without interruption from nearly 55 percent of GDP in 1982 to less than 40 percent in 1992.

The EPI report concludes that, "however one measures it, the U.S. is not investing enough in public infrastructure and that we are paying a high price for this practice in terms of declining incomes and opportunities." It goes on to say that "if we do not reverse this trend the price will only rise. We owe much of today's living standards to yesterday's citizens who believed they had a shared obligation to invest in America's future. It is our obligation to our own future and to those who come after us to replenish our nation's capital stock."

U.S. ARMY CORPS OF ENGINEERS REPORT

The last report I want to discuss was prepared by the U.S. Army Corps of Engineers. The publication date says January 1995, but I believe it was released to the public in September. This report wraps up a three year effort to define a new federal strategy as a component of a broader national strategy aimed at bringing federal programs into better alignment with state, local and private sector needs. It builds on the fine work of the National Council on Public Works Improvement.

This is an excellent report and very comprehensive in terms of coverage of the infrastructure topic. My remarks today cannot in any way do justice to its breadth and depth. Because I am running out of time, I am only

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

going to talk about how it approaches the issue of whether America should be investing more in public works infrastructure.

In my opinion, this report seems to say that the nation's financial resources are so constrained that it is not productive to discuss what the optimal level of infrastructure investment should be. Yes, the report says, ''public infrastructure investment does matter to economic growth and productivity," but because in reality "there is little, if any, new funding available for increased public works spending anyway," we have "moved beyond arguments over whether America is truly underinvesting in public works, or whether public investment really matters to the economy."

Following this line of thought, the report concludes with recommendations for maintaining what we have better, focusing on demand management and low cost solutions. This report sees a much reduced financial role for the federal government than the first two reports do.

CONCLUSION

Getting back to the theory I presented at the beginning of my talk, I believe the world views described in these three reports are natural extensions of the organizations they represent. For example, EPI's focus on a federal solution is logical for an organization whose mission is to think broadly about national economic problems but has no implementing authority. I also find it reasonable that the House recommends a more conservative federal role than in the past now that Congress is arguing over a smaller and smaller discretionary budget and feels increasingly powerless faced with a budget deficit problem of seemingly insurmountable proportions. The Corps, on the other hand, is a federal agency. I am only guessing here, but I expect the range of solutions that it can envision is somewhat restricted by what is currently acceptable to the administration. It would, therefore, make sense that the Corps sees the nation's options as pretty constrained right now—more constrained than EPI or Congress.

So, where should we go from here? In my opinion, all of these world views are important to understanding the full complexity of the infrastructure investment question and need to be carried forward into an effort to achieve a consensus on a national infrastructure investment strategy. And how should we go about developing a consensus on a national infrastructure investment strategy? A first step would be to update the National Council on Public Works Improvement report card, which rated America's infrastructure performance in "Fragile Foundations." This will be a difficult undertaking, if it is to be done right, but we need a way of communicating to the American public how this

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

nation is doing in terms of moving people and goods, disposing of our wastes, and providing safe drinking water. "Doing this right" will mean utilizing the path-breaking research findings of the National Research Council on measuring and improving infrastructure performance.

After that, I think we need to convene a national conference that brings together all of the players at the national, state, and local levels, including the private sector. Everyone seems to know that the rules are changing in Washington, but what the new rules mean for the different players in the infrastructure delivery partnership are not clear. I believe a conference would do a great deal to clarify roles and provide guidance on how to sift through the various infrastructure financing options.

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

International Perspective

Frannie Humplick

World Bank

The information I will be reporting on comes from a World Bank report that came out last year. Assuming that the public sector will be limited in its ability to finance infrastructure in the future and that, therefore, we have to look at alternatives outside the public sector, I will not look at government infrastructure funds or municipal funds because those are still options in public investment.

In terms of scale, developing countries at present are spending about $200 billion a year as a group on infrastructure. About 90 percent of that investment is financed by the public sector, either through tax revenues or by borrowing in ways that the public sector mediates. What is interesting is that infrastructure investment in developing countries is a large fraction of public investment and also of total investment. The share of infrastructure as part of total investment is between 20 and 30 percent, depending on whether the country is a low-income or a middle-income country. As a share of public investments, the percentage is even higher—more than 30 percent and, in some cases, up to 60 percent.

This is an interesting trend because, with two exceptions, in developing countries infrastructure investments have been continuously privatized. The exceptions are road infrastructure, which has largely remained in the public sector, and power generation in countries with limited energy resources where most generation and transmission have remained in the public sector. Water supply and other areas of infrastructure have been provided by lower levels of government and, in some cases, the private sector. Public investment in infrastructure covers mostly road and energy infrastructure.

The infrastructure problem, internationally as well as domestically, has a number of characteristics. The first one is maintenance. When we talk about infrastructure, $200 billion a year is invested in new capital or the major

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

rehabilitation of existing capital. Not usually included are expenditures on maintenance or operating costs, which come under the current budget. To show you what the scale of the problem is, I will use a ratio developed by the International Monetary Fund from our projects around the world for macroeconomic and planning purposes. The ratio is called the "r coefficient," which is the ratio of maintenance and operating expenditures to initial investment of capital expenditures annualized.

Depending on the type of infrastructure, there is a huge change in the importance of capital versus recurrent expenditures. So when we talk about financing, it is important to distinguish between financing of the initial, major works and annually recurring expenditures. Some categories of expenditures have a higher ratio of recurrence to capital investments. These include buildings in education and health and, within the category of roads, feeder roads, which are more maintenance intensive than higher technology roads like paved roads and state roads in general.

The second issue is that foreign financing is an important component of the infrastructure investment problem. At present, about 12 percent, $24 billion a year, is foreign financing of the infrastructure investment. As I mentioned earlier, most of that goes to transportation and energy projects. Another issue is public guarantees. The share of commercial financing of infrastructure over time has declined, even when it is publicly guaranteed.

Figure 1 shows the stock of dispersed lending to infrastructure in billions of U.S. dollars over time. The upper block shows the total disbursement, and the lower block is publicly guaranteed private investment, which has declined. Even though people are talking more about private participation, real private flows are not coming in yet. In fact, they seem to have been declining in comparison to the total need. This raises an important problem of financing. If it is true that the private sector is not very interested in financing infrastructure, what can be done to increase it?

The last characteristic of this problem is demand, which is projected at $200 billion a year and is going to grow. It is already growing in three types of countries: countries that have just come out of macroeconomic adjustment, newly industrialized countries that are going through periods of rapid growth and have, at the moment, very congested infrastructure systems, and countries that are rapidly urbanizing. When you think about these three characteristics, you find they include almost the entire world, with very few exceptions. So the demand is certainly going to grow.

Why are we talking now about infrastructure financing? I want to go quickly through the advantages and disadvantages of the way infrastructure is financed at the moment, which is basically through public borrowing. Among the advantages, especially in developing countries, is that the government is sometimes the only credible entity in the country. For this kind of investment,

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

FIGURE 1

Publicly guaranteed private loans have fallen. Note: The loans are for electricity, gas, water, telecommunications, and transportation. Source: Adapted from World Development Report 1994 (The World Bank, 1994).

the government must play a role to establish credit worthiness. The second advantage is that governments can usually borrow at low rates, partly because of the certainty of repayment.

A disadvantage of government financing is that governments are usually more lax than the private sector in terms of financial discipline because they can always raise taxes or transfer funds to meet financial constraints.

Another disadvantage is that the government is not as efficient, partly because of the lack of financial discipline, but for other reasons as well, like overextension or the fact that civil servants of the infrastructure do not own the facilities for which they are responsible. Thus, there are inefficiencies, and these inefficiencies make government financing costly, even though borrowing may be at a lower rate than for the private sector. This puts a strain on government budgets, which is a real disadvantage.

A third disadvantage is that maintenance is usually neglected when the government is responsible for provision, at least in developing countries. I am not certain about the domestic experience, but I think it can be said that maintenance usually suffers. That is because the infrastructure is provided up front, paid for indirectly, generally by taxation, so users do not have a true sense of the cost. Maintenance is neglected because users do not have a sense of ownership of the infrastructure.

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

The overriding issue is that government financing is usually the best way to balance equity and efficiency issues. So the challenge becomes how to take advantage of the government but use the private sector to offset some of the elements that at the moment are disadvantages, the first one being financial discipline.

I am going to go over nine alternatives for financing infrastructure in order of increasing risk-sharing by the private sector. Bringing in the private sector is a question of keeping the advantages of government provision while allowing the private sector to take risks it normally would not take in order to make financing infrastructure feasible. Among the options are:

  1. specially negotiated contributions

  2. joint public/private companies

  3. formal joint ventures

  4. service delegation

  5. leasing

  6. concessioning

  7. transferring responsibilities to the private sector

  8. participation by users

  9. privatization

The first alternative, specially negotiated contributions, are contributions negotiated once. The private sector brings in certain types of financing to put an infrastructure project together. Some countries have created mixed companies of joint public and private investment. There are formal joint ventures where the public and private sectors enter into formal contracts for one-time projects. Service delegation (the fourth alternative) is the transfer by government of planning and management responsibilities to private agents. The service is contracted out to the private sector, but the government keeps public ownership. There are various forms of transferring responsibilities to the private sector—participation, when users are given responsibility for financing and managing the infrastructure, and privatization, when there is a total transfer of ownership to the private sector.

These options differ in a number of ways, who owns the infrastructure at the end of the day, for example, which varies from the public sector to mixed ownership to completely private ownership. Another difference is who is responsible for planning. As you can see in figure 2, this varies depending on the option.

In the area of financing, the government could transfer responsibility but keep financing in the public sector for the efficiency of operations and to maintain the advantages of government borrowing and flexibility. The same arrangements can be made for operation and maintenance. I will describe these

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

TABLE 1 Responsibilities for Infrastructure Provision Under Alternative Financing Arrangements

Option

Ownership

Planning

Financing

Operation and Maintenance

Specially Negotiated Contribution

public

public

private

public

Joint Public/Private Organizations

mixed

public

mixed

private

Formal Joint Ventures

mixed

public

private

private

Service Delegation

public

delegated agent

public

private

Contracting Out

public

public

public

private

Leasing

public

lessee

public

lessee

Concessioning

public

concessionaire

private

concessionaire

Participation by Users

users

users

users

users

Privatization

private

private

private

private

 

Source: Constructed from the 1994 World Development Report (The World Bank, 1994); Urban Infrastructure: Finance and Management (OECD, 1991).

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

features, using examples from countries that have used one or another of these alternatives.

The first one is specially negotiated contributions which, I think, has also been used in the United States. The developer gives some contributions to infrastructure to finance things that would otherwise not have been financed. Usually that particular developer is interested in meeting some other, private goal.

In this case there are two examples, one from the United Kingdom and one from France. In the extension of the London Underground Railway in the United Kingdom, a developer provided the financing for developing the dock areas and make them more attractive. This was a very nice opportunity for expanding and improving the London underground. The key feature of the project was that it was a one-time, negotiated special contribution, not something to be repeated. The deal was arranged for that particular situation.

In France there is a more long-term arrangement, which has to do with urban density. Developers are given rights to provide higher density housing in certain areas of a city in return for some types of public infrastructure. The responsibility for managing the infrastructure remains in the hands of the cities. This arrangement has been in place since the 1970s. Interestingly, some cities have rejected this option as no longer feasible and have made it illegal, although it is still being used in other cities.

An example of joint public/private organizations, the second alternative method of financing, is the Trans-Tokyo Bay Highway in Japan. This is a very important 15-kilometer link into the existing network of highways in the metropolitan area. This project is a very interesting example of network infrastructure provided through private arrangements. The project was divided into two phases, the construction phase and the maintenance and operation phase. In the construction phase, the owner of the project remained the public sector, the Japan Highway Corporation, which also coordinated the project. The corporation also had responsibility for planning, administering and collecting tolls, financing the survey work, and purchasing the land. The private company was responsible for raising the capital for construction and managing the construction, at the end of which they handed over the completed project to the Japan Highway Corporation.

The most interesting aspect is in the maintenance and operation phase, when a new contract was negotiated and the Japan Highway Corporation paid the private entity through dedicated tolls collected by law. This is one way of financing the maintenance and operations. After this, the private and public companies have joint responsibility for maintaining and operating the highway.

The other example of a joint venture, called a ''formal joint venture," although I have not come across an example of an informal joint venture because they are not reported, although they may exist. This case study is from

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

Australia, and the joint venture is between a state government and a private developer. The agreement is for urban infrastructure services.

The state government gives land and guarantees covering some elements of infrastructure, i.e., pipe connections and certain highway links. The private developer finances the construction and guarantees to provide infrastructure the state government does not provide, including low-income housing or housing for public allocation. What is interesting about this case is that the private and public sectors are sharing risks. That was a very good arrangement in terms of putting together this provision.

An example of service delegation, the fourth alternative, comes from Africa. In this case, agencies have been created in a number of countries. Recently this has also been done in Russia. A number of other non-African countries are adopting this approach, which involves governments transferring responsibility for planning and managing the procurement of public works to private agents. Agents have two responsibilities: to provide the infrastructure and to manage the implementation. So it is a dual agency.

The typical responsibilities of these agents include reviewing and selecting projects. Municipal governments and communities send project requests to the agent, and the agency reviews the projects and applies criteria agreed upon by the central government and the private agent on how to select projects. The selection of which projects are going to be financed is done by the private agent, which is very interesting. The second component of the service delegation arrangement is that the private agent finances the selected projects with funds from the central government. In other words, the agent manages the financing of this portfolio.

On the implementation side, the agent selects projects based on benefit-cost ratios and other criteria of social desirability. The agent manages the procurement or selects the winning bidder and manages the payments to the contractor, hires a firm to supervise the work, and manages other aspects of the government project. For example, governments in the following countries—Benin, Burkina Faso, Mali, Mauritania, Niger, Senegal, Chad, Gambia, and Madagascar—wanted to generate employment. So they put a private agent in charge of monitoring how many jobs are being created by various projects and documenting improvements in local construction industries. One of the objectives of these projects is that small-scale enterprises benefit from the investments.

The other example of service delegation is called contracting out. Although this practice is widespread in the United States, in developing countries it is usually limited to contracting out maintenance and operations. Here are a number of examples. In Pakistan, the railway company contracted out ticketing, cleaning, and catering for the railways, although everything else remained in the public sector. In Kenya, repair and maintenance of locomotives

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

was contracted out. In the Philippines, in the port sector, the operation of an entire container terminal was contracted out.

In Chile, companies contract out reading meters and collecting fees for municipal water. This is interesting because in most developing countries municipal water companies are hampered by labor unions and are unable to restructure. Consequently, it is difficult for them to become more efficient. In some countries, municipal companies do not even know who their customers are because they do not have computerized systems, and people who have been working for the company for many years go from house to house to collect fees. If workers, civil servants, are the only ones who know who the customers are, it is very hard to improve efficiency. These are extreme problems, but metering and bill collection are difficult to improve through the public sector.

Another example of contracting out is in France, which has been so successful in contracting out public services that this model is called the "French model." Seventy percent of municipal water in France is contracted out, including management and operation of municipal systems and the treatment of waste. The municipalities maintain ownership of the assets, determine strategic policy in terms of investment, and regulate prices where there is no competition. (I think the exception is Paris, where there are two firms that have a yardstick competition.) The municipalities are also in charge of awarding contracts for management of these services and regulating the performance of the company.

The fifth alternative for financing infrastructure is leasing. An example is financing the water supply in Guinea, where the public sector plans and sets policy for the private sector, and is in charge of capital investments. The service company is a mixed public and private company, 49 percent of which is owned by the government. A foreign consortium owns the other 51 percent. The service company has a 10-year lease to provide services, mostly operation and maintenance. The company assumes the commercial risk—a very important feature of this arrangement—and is paid through user fees.

It is interesting to note that these arrangements can also involve foreign financing. For example, in the project for the water supply in Guinea, the negotiated agreement is between the government, a public/private company, and the external financier, the World Bank. The World Bank assumes declining shares of the foreign component of investment over time, and the central government assumes declining shares of debt. By the end of the lease period, which is 10 years, the public/private company would be responsible for the full capital investment. This was a key feature of the lease.

The sixth alternative is concessions, an example of which comes from CôTe d'Ivoire. Here again, a French company, Saur, is involved. You can see why the French model is referred to in many situations where the public enterprise retains ownership of the infrastructure, but responsibilities are

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

transferred to the private company (the seventh alternative). In this case, the ownership of capital is as follows: the local interest is 52 percent; the foreign interest is 46 percent, through the French private firm; and the government interest is 2 percent.

The Côte d'Ivoire project is a concession contract, (the seventh alternative) under which the investment and operational responsibility for supplying water for the whole country, not just the city, is given to the private company. The contract has a provision for investments in low-income areas, and specifies what the company should do in terms of providing services to low-income housing—waiving the connection charge. The company assumes the social responsibility for this provision.

Tariffs, which are set by the company, must meet a number of objectives—operating costs, money for expanding and rehabilitating the networks, paying the shareholders, and paying the government a rental fee (because the government had accumulated a lot of debt in the past and wanted to repay it). On top of paying taxes, the company was responsible for debt payment.

Despite the tall order of what the tariffs have to cover, the company has been realizing a 5 to 6 percent growth rate in connections, including low-income housing connections. The performance has improved, and unaccounted-for-water is less than 15 percent, which, I believe, is less than in the metropolitan Washington area. Collection from private consumers has never gone below 98 percent, which is dramatic. Only public service users are not paying at the moment, which is a very interesting difference. The company is now down to four staff people per thousand connections, which is a very good level of performance. The tariffs are the same as in neighboring countries. Because they improved efficiency, tariffs have not gone up. This is an example of a successful leasing out arrangement.

Another leasing arrangement is a little bit different because it involves participation by users, the eighth alternative. This is an example of an important way of including private investments. This case is from Peru, where there are a number of water user associations to whom the government has given—without charge—the responsibility for managing all of the irrigation infrastructure. The government provides technical assistance on how to carry out the operation and maintenance, and poor communities receive grants for expanding irrigation systems. The government also manages the auctioning of rights, which are tradable. The government manages the auction so user associations can sell their rights.

User associations can borrow money, but at commercial rates, and they can only borrow for new investments or rehabilitation. They are not allowed to borrow for maintenance. The associations design the projects and execute them,

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

repay the loans (sometimes in kind by providing labor). They also provide labor and operate and maintain the infrastructure.

For the last option, privatization, I am not going to use specific examples. You can see in table 1 the scale of privatization that has already taken place. About 25 countries have now undertaken huge transfers of ownership of infrastructure. For more detail, you can consult ''Infrastructure for Development," in the World Development Report published by the World Bank in 1994.

I want to list a number of concerns about privatization. These have to do with who should own the assets in the case of private financing, how to do investment planning and coordinate activities, who sets policies, whether or not there is regulation, who manages capital financing, who manages current financing, how to deal with operations and maintenance, who has managerial authority over the system, who bears what risk and how to make sure risks are properly borne, and how to compensate private parties that undertake the investments. Also how long should the contract be?

On the resource side there are, as I mentioned earlier, various infrastructure development funds; infrastructure funds, if they exist; and domestic capital markets. The macroeconomic implications of these vary according to country. How good is the existing managerial and technical

TABLE 2 Value of Infrastructure Privatizations in Developing Countries (in millions of U.S. dollars)

 

1988

1989

1990

1991

1992

Total 1988-92

Number of Countries

Telecommunications

325

212

4036

5743

1504

11820

14

Power generation

106

2100

20

248

1689

4163

9

Power distribution

0

0

0

98

1037

1135

2

Gas distribution

0

0

0

0

1906

1906

2

Railroads

0

0

0

110

217

327

1

Road infrastructure

0

0

250

0

0

250

1

Ports

0

0

0

0

7

7

2

Water

0

0

0

0

175

175

2

Airlines

367

42

775

168

1461

2813

14

Shipping

0

0

0

135

1

136

2

Road transport

0

0

0

1

12

13

3

Total

798

2354

5081

6503

8009

22745

15

Total developing country privatizations

2587

5188

8618

2204

23187

61629

25

 

Source: Compiled from the World Development Report 1994 (The World Bank, 1994)

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

capacity? Can the private sector be involved efficiently? Does the private sector have an interest and, if not, how can they be made more interested?

Not all public sectors guarantee competition among private providers, in which case we face the monopoly issues Dr. Brennan talked about. There are also questions about characteristics of the service and how the service is being used. For the private good? For the public good? There are a number of concerns there. Then there is the issue of equity, which is difficult to deal with, and also environmental concerns. All of these factors affect the potential success and selection of various financing options.

Note: The World Bank does not accept responsibility for the views expressed herein, which are those of the author and should not be attributed to The World Bank or to its affiliated organizations. The findings, interpretations, and conclusions are results of research supported by the Bank; they do not necessarily represent official policy of the Bank. The designation employed, the presentation of material, and any maps used in the document are purely for the convenience of the reader and do not imply the expression of any opinion whatsoever on the part of the World Bank or its affiliates concerning the legal status of any country, territory, city, area, or of its authorities, or concerning the delimitations of its boundaries or national affiliation.

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

Current Issues in Infrastructure Finance

Natalie R. Cohen

Fiscal Stress Monitor

I owe my presence here today to the gnatcatcher, a small bird that likes to dance around wildly as it catches insects. Its endangerment had slowed down construction of the $1.1 billion San Joaquin Hills Toll Road in Orange County, California. Anticipation of protests of this construction project by environmental groups led managers to put a large contingency into the financing consisting of about $100 million and two years of extra capitalized interest beyond the expected completion date of March 1997 to account for environmentally caused delay. Little did they know that those contingency funds would come in handy to cover an $81 million loss on their invested construction funds as well as loss of projected interest earnings as a result of the Orange County debacle.

I wrote about this in an issue of Infrastructure Finance, which ultimately led me here. I am going to speak a little bit more about the Orange County consequences for infrastructure finance later, but I would like first to share a few general views about infrastructure finance today.

In my opinion, infrastructure finance is lagging today. At the state and local level, I do not believe that in the near future there is going to be a tremendous amount of attention given to financing the infrastructure in the current political and economic environment. I am going to outline a few of the reasons. Certainly, with efforts in Congress to balance the budget, new infrastructure initiatives are not likely to come from the federal government either right now. However, infrastructure financing is receiving some attention in pockets of the country where economic growth is quite healthy. I think it is important not just to paint a broad brush picture of infrastructure problems, but to look also at some pockets that are experiencing a natural evolution of infrastructure growth through the private sector creation of capital, jobs, and wealth. I am going to end with some of those bright spots.

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

I would like to present some of the reasons I do not think there is going to be a rush to finance infrastructure projects at the local level in the next few years. First, as more social services are downloaded or devolved from the federal government to the state and local level, the grab for local dollars is going to intensify. The last devolution took place early in the Reagan years, and it is instructive to look at that time to help explain state and local behavior today. Second, with more competition for local dollars, pressure on local tax rates obviously has also intensified. In reaction, taxpayers are protesting. Our federal system is set up so taxpayers have much more opportunity to vote their wishes directly for government at the state and local level than at the federal level. As a result, tax limitations, caps, incentives, and referenda are alive and well today. Finally, the key revenue source at the local level, the property tax, is under fire. Some of the reasons for this, and I will get into this, are immutable demographic and economic trends that are likely to continue.

Let's take the first point. In the early 1980s, Congress passed President Reagan's program for economic recovery, which transformed many federal categorical programs into block grants, cut funding levels, and handed them over to state and local governments, much like what is happening today. At that time, the devolution coincided with the end of the 1982–1983 recession. The nation's economy had taken off sharply just about the time when the effect of the federal cuts was being felt. With surplus funds accumulating in many state coffers, state and local governments were only too happy to take over some of the social programs the federal government was unloading.

For seven straight years state governments increased their budgets 8 percent for each year or, after inflation, 3.2 percent annually. Swollen budgets and expanded social programs left the states poorly positioned to handle the recession that hit us in the early 1990s. The early 1990s on the state and local government level was marked by mid-year crises, spending reductions, cuts at the state level of aid to local governments, and tax increases. A number of states saw their credit ratings chopped. Record tax rate increases led to voter unrest, and ultimately, a number of stringent tax limitations were voted in.

One of the first items to go during a fiscal crisis is the capital budget, in some measure through deferred maintenance, postponed borrowing, and pushing capital products out into the later years of a capital plan. The relationship between fiscal stress and reduced capital spending has been well documented. I also know it directly from experience, having worked for New York City's Office of Management and Budget in the late 1970s.

Looking at this a little bit differently, from the perspective of the national income and product accounts, you can see that there was a shift during the expansionary 1980s away from capital spending towards social service spending at the state and local government levels. The national income and product accounts accounting includes expenditures and revenues of the current

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

fiscal year, excludes bond proceeds but includes interest on state and local debt, and also includes capital outlays. It is an interesting snapshot.

Measured this way, accounts show that the deficits of state and local governments grew from $3 billion at the end of 1986 to about $30 billion in the first half of 1990. Deficits of this magnitude had not been seen since the 1974 recession. They were common during the 1950s and 1960s when capital spending for roads, schools, and other infrastructure made up about 25 percent of outlays. However, the deficits of the 1980s did not reflect a surge in capital spending. Rather, outlays for construction remained consistently at about 10 percent through the latter part of the 1980s, down from about 25 percent during the last surge in capital spending.

These findings are consistent with the assumption that state and local governments did pick up and expand social service programs during this time period. Ironically, the deficits appeared during a time of general economic expansion and continued to get worse although there was no general economic downturn, which I believe is why the recession in the early 1990s hurt local governments so drastically.

Today similar measures by the federal government for block grants for welfare and to hand other social programs over to the states have made it through Congress. Some states again have seen their first surpluses since the recession in the early 1990s. Whether or not those states choose to pick up where the federal government leaves off remains to be seen. Today's statehouses are vastly different from what they were in the 1980s. There is more concern today with keeping taxes low and managing and controlling spending than with expanding services.

At best, however, state legislatures will be tremendously preoccupied with how to manage their new responsibilities. Whether it is Medicaid, welfare, or criminal justice, considerable discussion will focus on getting programs set up, managed, and monitored. At worst, the impulse to download further, from the state level to the local level, will also become stronger, which, no matter how you slice it, leaves a lot less air time for infrastructure projects.

This brings me to my second point about why infrastructure will have a tough time in today's political environment. One outlet, as I have touched on before, for some of the local fiscal pressure has been citizen taxpayer protest. The record for the most citizen-initiated petitions since 1934 was broken in 1990. Taxpayer unrest is alive and well at the local level. Local government is one of the few arenas, as I mentioned earlier, where taxpayers can directly vent their frustrations with government. Many states have authorized direct citizen-initiated referenda, and it is typical for taxpayers to vote local bond issues and budgets. Unfortunately, we do not get to vote the annual federal budget or vote directly for the level of federal taxes or federal borrowing.

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

Another reason taxpayer frustrations are expressed at the local level has to do with some of the changes in property ownership, which brings me to my third point. Property taxes are a key source of revenue for local governments. The demographic profile of property owners is changing, and this trend, I believe, is likely to continue. In the last decade, we have witnessed one of the worst declines of all time in property wealth. Property wealth expanded greatly during the 1970s, but during the 1980s growth and values ground to a halt, ending the decade at virtually the same level where it began.

Commercial property fared a little bit better in the 1980s than owner-occupied housing with values just shy of 2 percent higher at the end of the 1980s than at the beginning. In contrast, the value of owner-occupied housing—and again this is a macro figure—fell 6 percent. These numbers are all after inflation.

In the first three years of the 1990s, owner-occupied housing fell about 2.2 percent in value while commercial property lost 26 percent in value. Add to this a very important shift in the makeup of residential homeowners. Today's residential property homeowner is more likely to be over 65 and less likely to have children at home than 10 years ago. No wonder the property tax is under fire, particularly for schools and spending for education. The only age group with a greater share of home ownership than 10 years ago is the over 65 set.

The percentage of homeowners between 25 and 64 declined from 77 percent in 1981 to 74 percent in 1991. The proportion of homeowners who were over 65 grew, in contrast, from about 22 percent to 26 percent. If you are over 65, you are more likely to live in your own home than you were 10 years ago. If you are between 25 and 64, you are less likely to own your own home than you were 10 years ago.

The proportion of owner-occupied households with children under 18 was about 40 percent in 1981. By 1991 this number had fallen to about 36 percent. The proportion of school-aged children living in rental housing has grown from about 25 percent in 1981 to about 30 percent today. I believe this explains why some bond issues for education and school district spending are being voted down.

Although the baby boomlet is with us, children today are less represented by property-tax-paying homeowners than they were a decade ago. Aging homeowners today are (a) facing losses in property values, (b) living on fixed retirement incomes, and (c) paying higher property taxes to meet growing social needs. Putting these together, it is easy to understand why there is a movement to shrink local government.

Another key characteristic of the over-65-year-old homeowner is that he or she is significantly mobile. Unlike some other social spending programs, Social Security is portable, and it is a commonly accepted cultural practice to make a geographical move for retirement. The mobility of retirees is a very

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

important national trend. Retirees feel that they have postponed certain joys until this time in their lives, and they very strongly want things their way.

Migrating retirees are contributing to some of the growth today in rural counties as they move there looking for greater safety, a lower cost of living, and a slower pace than in the denser population centers where they earned their money for retirement. The new immigrant to some of these communities is less likely to be loyal or feel a connection to the local government and its particular needs. In this context, prospects for revenue and user-fee-supported projects look a little bit brighter than for traditional property-tax-supported projects.

The Orange County toll road financing is an interesting example of this trend. With the dearth of new California debt but significantly eager investor demand, the Foothill Eastern Transportation Corridor Agency was able to market successfully a $1.3 billion toll road revenue bond at the end of May 1995. The issue sold very well, and it was rated investment grade by Standard and Poors and Fitch Investor Service. An investment grade rating is unusual for a toll road with no operating history, especially in the context of the Orange County, California, bankruptcy. Apparently Orange County residents are unwilling to pay a half a cent increase in their sales tax for general government, but they are willing to pay tolls to make commuting faster and smoother.

Other capital projects in Orange County are not likely to do as well. Like New York City's fiscal crisis in the 1970s, the disinvestment by local government in the infrastructure will only begin to unfold in Orange County in the next two years. Since the bankruptcy filing, real estate values are down by about 20 percent. New housing construction has nearly ground to a halt, and resales are difficult. Certain capital projects were canceled completely. It is difficult to imagine that there is room at all in the budget for any capital improvement projects at the county level. The recovery plan that they put together also diverts money from the transportation authority and from other local governments in the county, which, needless to say, means governments must tighten their spending belts considerably.

I promised that I would mention a number of bright spots to conclude. In some locations in this country where private sector development is intense, new infrastructure is being built. The recent boom in technology has a number of cities, towns, and counties growing at a rapid pace. Take North Sioux City, South Dakota, for example, the home of the Gateway 2000 Computer Company. The city had a population of 200 not long ago. They are now struggling to meet the needs of 4,000 Gateway 2000 Computer employees. I spoke with the corporate communications director there, and she said that on many days she has to walk a mile to a mile and a half from her car in the parking lot to her office. Housing there is in short supply. They are rapidly

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

building roads. They just put in a brand new sewer system. The Sioux City, Iowa, airport, which serves the region, has been expanded and can now accommodate jets, whereas they could not before.

Another example is Rio Rancho, New Mexico, which has been written up a little bit in recent history. Rio Rancho was once a bedroom community of Albuquerque. It is now attracting reverse commuters for some of the job growth there. Rio Rancho is home to one of Intel's new semiconductor chip plants, and it is also home to the technical support center for the software maker Intuit. Taco Bell houses their accounting division there.

Advances in telecommunications have enabled real-time links between remote rural locations and the rest of the world. Midwestern and plains states once suffering under the weight of the farm crisis are now experiencing a vast turnaround. They are seeing some of the lowest unemployment nationally. In some locations, unemployment is below 2 percent, and even in the 1 percent range in some communities.

Housing, roads, sewers, water systems, and airports are all experiencing dramatic growth in these regions. These changes have challenged our traditional assumptions about the viability of the growth potential of rural and small communities. If technological advances and smart economic development are inspiring solutions to some of the classic problems in remote rural locations, we ought to be able to come up with ideas to solve the infrastructure problems of older urban centers.

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

Discussion of the Morning Presentations

Participant: How does the widening income disparity in this country change the calculation of future benefits of infrastructure—when you have one group who are, indeed, enjoying the benefits of a very fast pace of American entrepreneurialism and investment and another group who seem to be sliding further and further away from that. Certainly one reflection of that is, perhaps, the decline in home ownership or the wealth of home ownership as a whole.

Dr. Brennan: There are just a couple of brief comments I would like to make on that. One is that income disparity does not change the general thrust of the question about whether opportunity cost or equal standing is the right way to evaluate long-term infrastructure investments. What disparity adds to this already complicated question is that one may have to worry about the incidence of the costs and the incidence of the benefits, in other words, who loses and who gains. Are we obligated to have wealthy people fund investments now that will benefit poorer people later, poorer people elsewhere (in deciding who gets World Bank funding), or poorer people here and now?

There is a standard economist response to disparity issues, which is not to worry about it now because, if we maximize the size of the pie, we can take care of the size of the slices at some point later on. That response may not be too realistic. Given the feasible alternatives we have in front of us, we probably ought to take income disparity into account.

The second comment, which I think other people here are more qualified to speak about than I am, concerns the effects of wealth distribution on the flexibility issues Ms. Everett brought up. There is one school of thought that says that if wealth gets concentrated in the hands of a small number of people, they are easier to soak by a poorer majority in a democracy. There is another school of thought that says that smallness is actually a political virtue because it makes it easier to organize more effectively. If I had to guess which is true, I would say that the second is more likely to hold than the first. Perhaps that is a cynical view of the state of affairs these days, but other people can

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

discuss that. The questions are probably even more pronounced in the developing countries that Dr. Humplick talked about.

Ms. Cohen: I can throw some demographic figures out. I do think this is an important issue. I think the disparity in wealth is generational, and that is what I find to be a disturbing trend between the older generation and the younger generation coming up today. I have a few statistics on that because I have done research on some of the demographic changes in the 1980s. Despite the fact that the baby boom generation is now roughly in its peak earning years, median household income is only about 3 percent higher than it was a decade ago, and this is after adjusting for inflation.

There was a 50 percent jump in the number of households within the 35-to 44-year-old range, family years, etc., but income of the baby bust generation fell 10 percent over their age counterparts of 10 years earlier. There has been, as many of us are aware, particularly in the urban centers, a dramatic increase in the number of young female heads of households with small children living at or below the poverty level. Obviously, the willingness and ability of these households as they mature in age to support state and local government programs is going to be challenged in the near future.

Dr. Brennan: I would just like to add something quickly to that about the group that was not mentioned, senior citizens. There is a myth that they are the poorest people in the country. But they are the wealthiest. They tend to own their own homes. Social Security and Medicare have been enormous successes for redistributing income toward the elderly in this country.

Dr. Bugliarello: We are talking about private wealth, if you like, but there is also public wealth that accumulates from generation to generation. Highways and airports are public wealth. So, the new generation has more public libraries, etc., than the previous one. How is that taken into account? In other words, my wealth is my personal wealth, whatever that may be, but also a share of the public wealth. I may be privately not very well off, but I enjoy the advantages of an environment that has been built over several generations. Is this a significant factor to be considered, and, if so, how?

Dr. Humplick: I may try to address the two separate questions. On the question of public wealth, what seems to be the case, according to our coefficients, is that you may inherit this very rich stock of public wealth, but it has huge maintenance costs. And so you may actually be poorer as a result because to maintain it is a responsibility. So that is one of the concerns.

In terms of income disparity, having the private sector pick up some of the financing for public works gives the public sector more resources to deal

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

with income disparity. In a sense, you transfer the responsibility for provisions to the private sector to get the efficiency gain, and that leaves the budget free for addressing social issues. So there is an opportunity to rebalance the role of the public sector in taking up social responsibilities and leaving the provision responsibilities for goods to the private sector. That may allow us to address these income disparities in the future and at present.

Ms. Everett: Yes, but there is still a move away from the activist tone that you might have seen represented in congressional reports of say 10 years ago. In the U.S. House of Representatives report there is a real sense that the federal government's role will have to be changed, that it is going to be smaller than it has been in the past, and that state and local governments and the private sector are going to have to do more. I will say, however, that there is a more optimistic tone in the congressional report than there is in the U.S. Army Corps of Engineers report.

Participant: It is rather interesting that much of the rhetoric about not investing in future infrastructure implies an unwillingness to obligate our grandchildren, when in actuality it appears much more that not wanting to spend at all is the principal reason. We have inherited a great deal of infrastructure investment, but we seem, perhaps for the first time, to have no inclination to carry on that investment. We want to stop now and consume it. I fear the concern is not so much about obligating our grandchildren as it is with not wanting to spend our own money today because that would diminish what we have available in the present. After we are gone, we are like your tulip people. We do not care what happens. That is very troubling to me because it seems what we really have is a lack of willingness to invest in the future under the guise of not wanting to obligate the future.

Ms. Connery: You know there is, if I may just interject, a dimension to this that has not been mentioned here that I think bears investigation. Infrastructure is sort of talked about as one great amorphous thing. But there is at least one major differentiation, besides the modes of transportation and all the services, and that is the infrastructure that could be called productive infrastructure. That is the infrastructure that takes goods to market, gets people to work, does very specific things on behalf of job creation, wealth creation, and so on.

There is a whole other dimension of infrastructure loosely called ''social overhead capital.'' This includes both environmental improvements and amenities, the things that we tend to lump together in America as part of one great category called infrastructure. In fact, infrastructure is differentiated very clearly in other countries, not only in the developing countries but I think even in countries like Japan.

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

I was struck by Ms. Everett's reference to the report that compared us to Japan, which I think is totally fallacious because, in fact, they historically put their investment into productive infrastructure at the cost of not investing in social overhead capital. They are now trying to catch up in a very hard way because land there is very costly. It is also very difficult to do that after development has taken place.

It would be interesting to me to find out whether or not in the United States we are beginning to differentiate and see whether the same level of investment is going in to keep business happy because there is a lot of strong lobbying on behalf of business. But the social overhead capital, the amenities, the libraries for instance, the environmental controls, which are beginning to be threatened fairly seriously by cutbacks, may in fact be diminished. That sets up a number of other equity issues and interesting dimensions that I have not really thought very much about, but I suddenly became very interested in today.

Participant: On the subject of educating the public, I think the public does not know about the condition of the infrastructure, as well as not caring. I think when they see a TV special on it, they are concerned about how many bridges have problems. I think there is a lot to infrastructure that the public really does not know about, and if they do not know they cannot make a determination whether or not they care.

Dr. Humplick: I think the historical way in which infrastructure has been financed partially contributes to this in the sense that it has been financed through general taxation, for the most part, and people do not keep account of what happens to their taxes the same way they keep account of what happens to their out-of-pocket costs. Because of that, the awareness of what you are spending and how it is being used is lower in the case of general taxation than it is in the case of direct charges.

This is, I think, one of the contributing reasons people seem to be unaware of infrastructure spending and, therefore, do not care about where it is going and what is going to happen in the future. The other thing has something to do with the category of infrastructure that we normally talk about. It has this huge initial investment, to a large extent, and then it lives for a long time. In that period it rarely needs much.

What the infrastructure needs is hardly thought about until it suddenly is not there. This makes the catastrophic view of thinking about infrastructure the current view in the sense that people are only aware of infrastructure when it fails. This is a characteristic that can rarely be changed because it is inherent in infrastructure. But when people become more aware of the infrastructure in the way that they are aware of their private assets, they start to think about it in that way.

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

Having infrastructure is like having your own house that needs a new roof every so many years. If people felt the same sense of relationship to the infrastructure, they would also be more responsive toward paying for its care and more aware of how it is being maintained. I think the challenge to policymakers and also to people who are responsible for infrastructure in general is to somehow link the financing of infrastructure to ownership of it. Ownership does not have to be in the real sense of contributing toward financing but in thinking about it as something that you actually have a stake in. The environmental lobby has been very good at making people aware of forests and owls. I think infrastructure needs a similar approach.

Participant: I was struck by what Ms. Cohen said about the rise of the Gateway 2000 Company in Sioux City and the implications of that for infrastructure. It seems that the communications we have now and the speed of commercial change allow companies like Gateway to grow extremely rapidly. But also when a company grows rapidly like that, it can quickly go bust. We have seen many large computer companies flourish for a few years then die away very quickly. In the past, when we developed infrastructure in a rural area, it might be for mining or for farming, which had an extended potential lifetime.

I am not sure what the arrangements for building the infrastructure in Sioux City are, but you have to bring a public/private arrangement that is going to build infrastructure to meet the need right now but with an uncertain future. Five years from now there may be a few bad reports on Gateway computers, and their sales may go way down; they could even go bankrupt. Then you have an infrastructure built in an area in a place where it may be very difficult to find somebody to come in and utilize it right away.

Dr. Bugliarello: Just to respond very quickly, I believe there is another point. The infrastructure being built there is at the expense of infrastructure that could have been built in another place or was already in place. We have been doing this throughout the country. Essentially, we neglect the infrastructure in certain regions, while building infrastructure from scratch in new regions. We are expanding infrastructure more than, perhaps, we should were it not for the fact that from the economic, production, and industrial viewpoint it is apparently better in certain cases to build a new infrastructure, in Sioux City, say, than to add to the infrastructure of Pittsburgh.

Participant: I was wondering if any of you had a comment about whether or not there is a credibility problem with the money coming down to Washington for obligated trust funds and Congress not spending the surplus on the very projects they were intended to fund?

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Dr. Humplick: One of the reasons I did not talk about Rinds of that sort is because, within the World Bank and also within the family of economists, there is no agreement as to whether earmarking is good or bad from a macroeconomic point of view. That is one of the main reasons I think trust funds as such have not been very useful for financing infrastructure. Although they give the user the direct view of where fees are going in terms of financing, trust funds reduce the flexibility of the government to deal with short-term problems and reallocate public funds in the short term.

I think that separation between the government's flexibility to manage allocations and the direct link to users and what is happening to their fees is the problem. Many countries that have put together highway trust Rinds or road funds are facing these problems at the moment because users like them very much. Users are very happy to see where their fees are going, but the central government loses flexibility in allocating funds across sectors.

Dr. Brennan: I suspect the American public does not have much of a problem with credibility regarding trust fund distributions, just because I doubt that a very high percentage of the public knows anything about trust funds. If there is a credibility problem, it may affect people who are in the road-building or construction industries. They expected there would be demand for these businesses, generated by the trust funds, which is not there because the government is not doing with the trust funds what they expected it to do with them. I doubt that there is a lot of clamoring by the general public to recall representatives because of the trust funds, however.

Ms. Everett: I second that. I tend to think the American public does not know what is being done with trust funds. I think a bigger or an additional problem is that it is not just the Congress that is distorting the subject, but also the Office of Management and the Budget. It is useful for the Office of Management and the Budget right now to consider these monies as part of the unified budget.

Participant: With all this depressing information—the budget figures coming out of the Republican Congress, left wing and right wing politics on the environment and income distribution—is there any way we can fund transportation infrastructure now, or should we just let it fall apart and prepare for 6 or 10 years down the road?

Ms. Connery: I think you have made an interesting point because, in fact, whether you are right or left, Democrat or Republican, liberal or conservative, you drive every day. More and more, there is an astonishing level of increase in the vehicle miles traveled, the basic measure of how much we get out there. Obviously, there are lots of concerns about that, and I share them, but I think

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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we have to look at the fact that ultimately our livelihoods and our lives depend on our mobility, particularly as we form smaller and smaller households with more complex needs. Women are out there more and more with careers as well as family, which factors into that.

Your question is can we find a way of at least establishing a common ground to go forward on this. I fear for my own state right now, which is the state of Maine. Where I live, we are funding less than half of our maintenance budget for transportation. We can see the effects of that right now in bridge deterioration to the point where my husband, who is a politician, appears at meetings with the department of transportation wearing a life preserver to let them know that this is important.

Beyond the theatrics, it is a serious problem. At some point I think we can find common ground. It has to do with staging the debate differently. Some of the efforts I would cite are the New Jersey Alliance for Action, which is attempting to cast the debate in terms understandable across the political spectrum. There are others, the Regional Planning Association of New York, which represents New York, New Jersey, and Connecticut, and the I-95 Coalition. None of them alone is going to change the nature of the debate, but I take heart from the fact that they are thinking beyond just immediate self-interest. They are framing the debate in ways that reach the middle ground and ultimately look at not only immediate needs but also longer term needs.

Participant: I think there is a place for trust funds. If you put out a six-year authorization of the trust fund, and you make some commitment that the money will be there and place it out of the reach of politics, there are a lot of people who are willing to make investments and make million-dollar decisions based on those trust funds, which is good for growth. I think it is okay to look at trust funds from a pro-business standpoint.

Dr. Humplick: I agree with you. When I made my comment, it is because the experience with trust funds has been very mixed. Most countries facing budget deficits have found trust funds to be very inflexible, and they have tried ways of moving away from having them managed by the public sector and having them belong to users. Road-user associations have been formed to take over the management of road funds, for example. That has worked very well in making the financing of the fund function more directly as a user fee because users are part of the membership that manages the fund in a more direct way than through a trust fund that is managed federally or centrally.

I think there are ways to reduce the effects of earmarking and removing flexibility from federal hands, which is what a fund does, and keeping the efficiency of using those funds directly for financing the infrastructure they were supposed to finance in the first place. It is a very

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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delicate balance, and countries with deficits have a lot of trouble dealing with that. One can argue that road infrastructure may not be the priority for that particular year. There may be other priorities, like health and education and so on. So the short-term optimization is forsaken when you have earmarked funds.

As I said, there is no agreement as to which is worse. Is it worse to let infrastructure deteriorate and then pay 20 times more to replace it than to maintain it periodically using a fund? Or is it worse to lose flexibility of period-by-period optimization across sectors? For the economy, it is hard to quantify the differences between these two options. This is why I personally cannot say, based on the experience we have, which one is better. For roads or for any infrastructure that has a fund, it is better for that infrastructure to have the fund. But for the economy as a whole it is hard to say. That is the difficult point.

Ms. Everett: Apparently this Congress and the American public cannot hold in their minds at the same time the two ideas of reducing the deficit and promoting greater economic wealth. I have to think that at a certain point there will be pressures that will lead us to undertake the greater investment. Those pressures will have to do with how we are going to take care of our sluggish, long-term economic growth problem, get to a higher production curve, and take care of the disparity of income in our country. I think these are looming problems. Also, at some point, reinvestment in our nation's cities has got to become a preoccupation. Sooner or later I think this thing will turn around, and we will look at infrastructure investment as a valuable component of dealing with all of these problems. I just see this as a temporary preoccupation with contraction.

Dr. Brennan: Carol's response gets to a question I was asked earlier about capital budgeting accounts. I think, as is true with accounting in general, capital budgeting does not necessarily tell us in a direct way how to act. But it may affect what we think, i.e., what we can or cannot hold in our heads when we make decisions. It may be okay to run deficits to pay for things when the benefits last a long time, thus spreading the payments out over time. To the extent that capital budgeting helps us think more clearly about these things and has feedback effects of the type we are describing, it can be useful.

Ms. Cohen: One comment on the transportation question. I presented a lot of depressing statistics, but maybe I am basically an optimist. I thought the $1.3 billion Foothill Eastern bond sale was a phenomenal statement of the importance of transportation to people. It is phenomenal to receive an investment grade rating for a yet-to-be-built toll road. I have worked for a rating agency and a bond insurance company, and you just never ever would

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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consider that toll road investment grade because of the construction risk, especially in the context of an environmental and political culture where there are going to be fights and delays.

People want transportation, and they are willing to pay for it. The confidence was there. The people are going to pay for it even though Orange County is bankrupt. They had just voted down a sales tax increase for general government to bail out some of their problems. Real estate is falling through the floor, etc., etc.

Commuting times are essentially the same today in the Washington, D.C., metropolitan area as they were 20 years ago despite the incredible differences in distances people travel. People are out there building, jobs are being created, and so on. Anyhow, I leave you with that statistic.

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Technology, Infrastructure, and Competitiveness in a National Innovation System

Deborah L. Wince-Smith

Council on Competitiveness

Although this colloquium deals with the financing of and the challenges to physical infrastructures, i.e., constructed buildings and transportation, etc., I want to give you a little broader perspective on national innovation and where this particular issue of the infrastructure falls. Also, I want to talk about how other matters that affect the ability of the United States to create national wealth and train highly skilled workers affect the infrastructure. I am going to speak rather broadly and hope that I will engender some discussion before the afternoon session.

I think we all recognize that innovation in the private sector is a requisite to national productivity and economic growth. Individual investment decisions of private enterprises ultimately affect our national economic strength. The government, as we know, has a strong interest in ensuring that business capital flows into areas that promote long-term growth, productivity, and the creation of wealth. But at the end of the day, the private sector has to translate whatever national assets we have into wealth-generating activities.

Currently, there is much discussion in the science and technology community, on the issue of government and private sector roles and responsibilities in the support of research and development (R&D) and overall competitiveness. There has been some discussion of direct fiscal incentives, such as the research and experimentation (R&E) tax credit, and much discussion of the federal investment in civilian, commercially oriented technology, or cost-shared R&D partnering. But there has not been a lot of discussion of the network of impediments, disincentives, and special interests, which, I believe, collectively stifle the ability of American firms to reap the

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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benefits of our national leadership in science and technology and our dynamic, entrepreneurial culture.

I want to give you a framework for a national innovation system and then look at both the disincentives and potential incentives for us to capitalize on as we move into the next century. The United States, in spite of what you may hear from those who are worried about the level of government investments in R&D, spends more on R&D than France, Germany, the United Kingdom, and Japan combined. We spend a tremendous amount in the government environment on R&D, and we also spend a tremendous amount in the private sector, cumulatively between $160 billion and $170 billion. Because a robust R&D technology base is important to the economic issues I have mentioned, the federal government, at least since World War II, has been providing direct support for what we classically refer to as basic research.

Economists Michael Boskin and Lawrence Lau have estimated in a recent paper, "The Contribution of R&D to Economic Growth," that the introduction of new technology has accounted for 30 to 50 percent of economic growth. So government investment in the seed corn—the basic research and underlying infrastructure, if you will, of knowledge creation—has been very important.

In the last 15 years, we have seen a change in government policies, inching toward much closer interaction between private sector users of technology and government supporters of technology for mission purposes through, among other things, public/private cost-shared partnerships.

The Clinton administration made the concept of public/private partnerships a cornerstone of its technology policy, building on many of the initiatives from the last two years of the Reagan/Bush era. In a simplistic sense, the philosophy came down to this. If we would just restructure the priorities of the federal R&D system, cut back expenditures for national security and defense and mission work in general, have more civilian-oriented technology development, and do this through cost-shared partnerships or direct grant programs such as the Advanced Technology Program to create more commercially oriented technology, we would become world class competitors. I want to argue that this philosophy does not ensure global competitiveness for the United States. So, let me go through the elements of a technology innovation system and how to create a system that is relevant for the next century.

Successful technology innovation depends upon one very simple thing. It depends upon a private sector entity—either in a small, medium, or large firm or a collaboration—taking a knowledge or technology asset developed indigenously, in partnership with the government or with other firms, and quickly and cost efficiently translating it into a competitive new or improved

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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product or service. What do private sector entities do with the knowledge or technology asset? They obtain market share.

Market share is really the final determinant of whether or not you have been successful. And in today's global economy, the market share is not just domestic but global—capturing the product and service end-user markets on a world wide basis. Clearly, in the construction industry, every major U.S. firm operates globally. The growth markets are not just in the United States. They are all over the world. Think of the tremendous physical infrastructure challenges in the former Soviet Union. There are similar challenges and opportunities in China.

I will mention one that I have become a little familiar with, the Three Gorges Project. I do not know if any of you are familiar with this major initiative now under way in China. U.S. construction firms are very interested in the initiative and eager to participate in it. At the moment, however, I think we are the only advanced industrial democracy that is not moving forward with any government support for such participation. Even the Canadians, who like to think of themselves as far more environmentally oriented than we are, have strongly endorsed the Three Gorges Project and are providing direct financing subsidies to their major construction firms. Right now the Export-Import Bank is not able to do that for American firms because of guidelines from the White House. I mention this as an example of a global market and the importance of the market share beyond our own backyard.

NATIONAL TECHNOLOGY INNOVATION SYSTEM

What are the elements of the national technology innovation system? The first element is the human resource base. A nation needs skilled, educated people. That is obvious, but it is of great concern to the United States. Even though we spend more money on education per pupil, per capita, than any other country in the world, many of us feel that the quality and the delivery of our national public education system are sorely wanting.

I will share a few very sad statistics. There are more school administrators in New York City than in all of France. There are more school administrators in New York State than in the entire European community. Anyone who has small children knows that, even if you live in purportedly affluent parts of the country, first grade classes are now held in trailers. There are just not enough resources to do the things we all took for granted growing up in a time when all these national financial resources did not go into education. That is not clearly an infrastructure issue in the sense that you have been talking about, but I put the human resource base as the primary element for an innovation system.

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Second, there is the technology asset. Fundamental new knowledge, technology know-how, and other R&D assets are necessary but insufficient for commercial technology utilization. Technology owners who hold a proprietary position today through a limited monopoly granted by the patent system or trade secret protection are not guaranteed to reap the economic benefits of the commercial uses of their technology. The technology asset, as I envision it, really is the starting point in the race to attain early market entry and market dominance.

Physical infrastructure is the third building block in a national innovation system. This includes everything from the quality, sophistication, and ease of transportation systems to the constructed environment in the broadest sense.

Since leaving the government, I have had the opportunity in the last few years to do some technology work in the former Soviet Union. I think we all remember the days when you could visit Moscow and not see any cars. It is now virtually impossible to get to a meeting on time in Moscow unless you budget an hour-and-a-half to get to your appointment. This is true in places like Bangkok as well. Therefore, if you are trying to conduct any sort of business, the physical transportation infrastructure is absolutely critical to efficiency. Transportation systems are going to be profoundly driven by the use and deployment of advanced technology, like the intelligent vehicle highway system (IVHS). The smart systems that are being demonstrated right now in test beds in various parts of the country will not only afford the United States leadership in terms of new products and services we can deploy and new markets we can tap, but also in terms of tremendously enhancing our own environment for conducting business.

A nation's capital formation and allocation system are absolutely critical for innovation. This is the most important building block we have to deal with right now. In order to remain competitive, firms must acquire capital to pay for innovation, production, capacity, and global marketing. Businesses and government share certain concerns, but they do not agree on the ways and means of achieving the optimal system for capital formation and allocation. Indeed, some economists now say the United States has an innovation-hostile capital formation and allocation system. It is not that we do not have lots of capital. We have billions of dollars in capital. The problems are where the capital goes, for what purposes, and what results it gives to the society at large and business in particular. I will explain this in more detail.

The next building block is the regulatory framework. I would rank the existing framework with the current capital formation and allocation system as a profound disincentive to our ability to have a world-class national innovation system. The regulatory environment in which firms operate at home and abroad heavily influences their decision-making. This covers everything from the types

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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of business protection, or lack of it, to intellectual property rights and product liability. Competition policy, better known as antitrust policy, and directives often regulate what a firm may develop at home and abroad. The set of laws and complex regulations embedded in the government procurement and acquisition system currently regulate private sector suppliers to the government. I am sure many of you are familiar with that morass.

Indeed, there are many major U.S. firms that will not even participate with government customers because of the problems associated with the acquisition system. For example, Motorola chose not to supply the government with mobile radios during Desert Storm because they had to guarantee, as one of the regulations in the acquisition system, that nowhere else in the world were mobile radios being sold for a penny less than the Department of Defense was paying. Motorola obviously could not guarantee that. So where did we procure our mobile radios? Japan.

The international trading system is a critical enabling factor for national innovation. A firm's early entry into and penetration of key global markets is determined by its ability to participate fully and equitably in the global trading system and, in parallel, to obtain relief from trading systems that subsidize or protect infant or targeted industries, that force mandatory cross-licensing or technology transfers, or that commit a host of other anti-trade sins.

When I was in the White House Office of Science and Technology Policy during the Reagan administration, I was on the periphery of the famous Kansai Airport negotiation with Japan because I was working on a lot of Japanese-related technology trade issues. The Japanese fought against doing anything to provide transparency in the bidding process for our construction companies. I have not followed the issue since, but somebody told me that the United States is not a player in that process, in spite of a trade agreement, because of a whole set of non-transparent cultural issues that have worked collectively to keep us out of that market. I would add that the Three Gorges Project is another example of a project in which U.S. companies have not been able to participate because our own government has not being willing to put our firms on an equal footing with foreign competitors by giving them access to the Export-Import Bank and supporting them in other ways.

Reciprocal access to international investment opportunities is another building block in a national innovation system. The international economy and the globalization of R&D, finance, and manufacturing currently offer firms investment opportunities abroad. Nations that do not adopt reciprocity in international investment flows are really creating an entry barrier to their home markets. For example, if you compare the direct foreign investment figures of both the United States and Europe vis-à-vis Japan, you would be shocked. Per capita, there is almost no American direct foreign investment in Japan.

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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American firms do not really have the opportunity to invest in and acquire Japanese assets. Even in the more sensational cases where investors and companies have acquired majority ownership of shares in Japanese firms, they have not been able to exercise any corporate governance because of informal barriers. On the other hand, the United States and Europe have a fairly open reciprocal international investment flow and can participate in each other's economies.

The industrial structure for innovation is another key factor. This is a very important point. The industrial structure in which a firm conducts its primary innovation activities has a profound effect on time to market and market penetration. Today in the United States we have a very interesting situation. Many of our most advanced technology assets are developed or incubated in fragile, capital-starved entrepreneurial firms that are vulnerable to premature failure—particularly if a company is in a small or scattered industry or in a new industry, in which the ability to share information, costs, and risks are limited.

On the other hand, if you look at technology that is incubated in or through partnerships with larger, more vertically integrated industries, you often see some very innovative things occurring where producers and end users across multiple applications pool their resources and risks to develop and commercialize technology.

Let me give an example from the construction industry. The construction industry obviously has a tremendous need for the most advanced flexible materials. These types of materials are being developed in the aerospace industry, in the auto industry, in our national laboratories for defense purposes, and by sporting goods manufacturers. You could envision a case of a number of vertically integrated teams with players from all of those industrial sectors who have a common interest in, say, developing or using advanced ceramics. They would not have any antitrust problems. They would not be concerned about pooling their crown jewels because they are in different business lines. But they could have a way to get to the market faster and more quickly with cost-effective products through those synergies and links, than if they tried to team up with their direct competitors in a traditional horizontal consortium.

In a horizontal consortium, competitors rarely share critical information. They help each other get to a common point, and then they go off and compete. In a vertical teaming relationship, they can share their proprietary crown jewels. If you look at the strategies used by some of our foreign competitors who get to the market in many industries on a cycle time much faster than U.S. firms, you find that they are pooling and sharing risks and costs across industrial sectors and multiple product lines.

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Business management and manufacturing practices also profoundly affect innovation. As you know, in this country we pioneered what is known as the Tailoris Mass-Production System. We also pioneered many of the current management practices that are increasingly viewed as hindrances and disincentives to early market entry and penetration. Horizontal, cross-functional teaming relationships are increasingly replacing rigid, hierarchical, or inflexible organizational structures. The Malcolm Baldridge Quality Awards have played a big role in helping change cultures of firms that need relationships among their supplier networks. In the traditional, hostile relationship, firms go out every year and rebid their supplier network rather than working with them to upgrade their capability, and vice versa. And the whole new world of virtual manufacturing, or integrated computer manufacturing, is having a profound effect on U.S. firms. I had the pleasure last year of visiting Motorola's new manufacturing facility in Phoenix, which produces satellites for the Iridium communications network. Experts consider this manufacturing facility one of the most advanced. Rather than building each satellite from the ground up, they have a system in which the satellites are all built concurrently.

The Japanese deserve tremendous credit for pioneering and utilizing many of the most advanced manufacturing techniques. This also relates to how they treat their workers and labor. They do not have the hostile management/labor relations we have in the United States. To many of us working in the competitiveness arena, the greatest obstacles to the involvement of workers in management decisions are the traditional labor unions because participation takes away from their power structure. The National Labor Relations Board has had suits brought by labor unions. For instance, a big labor union brought a suit against DuPont for having self-managed work teams in the factory because they eliminated labor shop stewards.

All of these factors comprise a holistic national innovation system. Evidently, nations provide the primary staging platforms for commercial innovation. Collectively, we need to look at the system of incentives and impediments for each of these factors and decide what we can do as a country to create incentives and break down disincentives. We need to optimize our system for the next century, which requires us to create wealth and skilled jobs here in the United States based on our leadership in science and technology and our skilled human resource base.

I believe that the United States is at a turning point. If we do not begin to develop both a national innovation system and a systemic approach, our leadership in science and technology is going to create more accessible raw material for our foreign competitors to use. I will share with you an anecdote on that.

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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I was involved very intensely in the late 1980s and early 1990s with the Japanese on technology issues. They used to refer to our universities as their raw material suppliers. They saw our universities as creating the knowledge and technology assets that they converted into products and sold back to us. We were negotiating a very difficult intelligent manufacturing systems initiative. One of the Japanese negotiators from MITI said the following to me, and he really sort of let the cat out of the bag, which we already knew. However you structure this, he said, as long as this is an R&D project, we are going to clean your clocks because you do not have the capacity to take this and get it to market ahead of us. So we want all these programs to be R&D oriented. We want access to your knowledge, creativity, people, and institutions. We will take that back and deploy it through our system, which has a better capital formation process that does not impede our businesses through regulatory problems. Every single trade regulation or trade policy is geared to support and help Japanese manufacturing entities at home and abroad. With our management business structures, we do not waste time on management labor problems. We do things collectively. So, go ahead, focus all our projects on R&D. We will contribute a little money, but we are going to be the ones who produce the product and services that come out of it.

I will throw in a political comment here regarding the government not supporting grants to companies to create more commercial industrial technology. I would say that unless the federal government and Congress begin to deal with capital formation and allocation and clean up the regulatory mess, we will just be creating more raw material for our competitors.

FINANCING INNOVATION

What should we do about the financing environment for innovation? Banks and venture capital firms no longer play a role. The reason for that, again, is regulatory, compounded by culture.

At one time in our country, banks played a major role. Then in 1933, we passed the Glass-Steagall law in the aftermath of the Depression and the stock market crash. This law makes it illegal for banks to own shares of industrial enterprises or to be involved in security underwriting. Therefore, banks play no role in what many believe to be the most critical phase of technology incubation and financing through equity participation. They are only involved in debt financing of major corporations.

Venture capital firms played a very important role back in the 1970s and 1980s in the creation of Silicon Valley, the semiconductor and biotech industries. Their role is increasingly changed now. They no longer invest in seed or early stage financing because the growth potential of their investment is

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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very uncertain. It is too hard to predict the outcome to justify the risks. They really want a very clearly defined exit strategy, and they are really only looking at a three-year to five-year window. Start-up companies do not want to go to the venture capital list unless they are absolutely desperate. Venture capital firms will take all your equity, put in a management team, and keep you on starvation rations because they have to manage for the fact that out of their investment portfolio only 30 percent of their ventures have any chance of success. So they take huge returns from that 30 percent to balance the 70 percent that fail.

What should we do? We clearly need to redirect capital allocation through tax reform. You have read about flat taxes. Moving from a consumption-oriented tax system to a savings-oriented tax system is something most policy groups that have been looking at tax reform advocate. It is a question of what the transition is. Let me just mention a couple of things that, collectively, could make a profound difference. The R&E tax credit has been a primary incentive for increasing corporate investment in R&D. However, it has never been made permanent, and the credit base structure has made it applicable only to a few firms. So one important recommendation is to make that tax credit permanent, so every year you know that you will be able to take advantage of it. Then change the base so everybody, as opposed to only a few companies, is eligible for the R&E credit.

Another interesting idea is to provide a 20 percent credit to encourage collaborative R&D ventures in the United States. I talked earlier about the need for pooling and teaming. The tax system could be a neutral way to encourage that, as opposed to giving direct grant subsidies to individual firms. What is nice about doing a lot of these incentives through the tax system is that everyone would be eligible. With direct subsidies of specific firms, even if you pour $10 billion into grant programs for commercial technology development, there would still be a lot of companies that would not get them. And where do you draw the line on the governments role in terms of picking up the risks and rewards of private sector innovation? It is much cleaner, neater, fairer, and more comprehensive to do these things through the tax system and concentrate our tax resources on creating a broad infrastructure and base of knowledge through basic and strategic research that is mission-driven.

It is also incredible that at this stage of our history we are still dealing with a capital gains tax. We are the only advanced industrial country in the world with a punitive capital gains tax structure. Everybody else—the Europeans, the Japanese—has gotten rid of this structure. We have allowed ourselves to treat this as a rich/poor issue. All the facts and statistics show that this is not the case. The idea that a reduction in the capital gains tax would reward the rich is a political canard. Every business study says the one thing they would like is to reduce the capital gains tax. What we have now is double taxation. You pay at both the individual and the corporate level, and this is a

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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huge disincentive for investment. It favors debt bias over equity in our tax code. You can deduct debt from your taxes, but you cannot take advantage of equity. Equity investments drive growth. Thus, we need to eliminate the double taxation of individual and corporate investment income in order to increase the availability of investment capital and reduce costs.

We also have a treasury regulation that provides a complete incentive for our companies to do their R&D overseas. We could change this with an Executive Order (the Bush and Clinton administrations have tried). I think Wall Street is protecting itself and not looking at the good of the country. The regulation is fairly detailed and complex but is in the tax code. If you want to get tax benefits from R&D, you must do it overseas. Now, do we want to have our R&D done overseas, away from our platform of innovation? No. So we should get rid of that treasury regulation. It will cost a little bit of money, but the benefits for productivity will be huge. We should also get rid of Glass-Steagall. It is obsolete, and we need all of our financing sources participating in innovation.

REGULATORY OBSTACLES

In regard to regulatory structures, I want to mention a few quick items. The regulatory framework is really a case of huge national resources going into something that has nothing to do with productivity. Let me give you some statistics collected by the National Association of Manufacturers in a wonderful little booklet describing what manufacturing means to the American economy. U.S. firms spend about $65 billion responding to government environmental regulations. They spend another $55 billion responding to health-related regulations and $55 billion on legal services. The statistic mentioned earlier, that we spend approximately $170 billion collectively on R&D, represents money that goes into productivity. The rest does nothing to add to our wealth or create jobs.

Clearly, we want regulations to protect our families, ourselves, and society at large. The issue is balance. Most experts on the regulatory regime think we have gone too far and allowed regulation to become a disincentive. I will share with you just one area where regulation is now very negative—product liability. The product liability system varies from state to state. It has neither rhyme nor reason and is driven by the Trial Lawyers Association. Awards given to plaintiffs have no caps, and this is a nightmare. In terms of its impact on innovation, I will refer you to the literature. In fact, the National Research Council (NRC) did one of the best studies on product liability reform and its relationship to innovation.

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

DuPont used to be a major material supplier of medical devices. When you want to have access at some point in your life to certain types of medical devices, the United States may no longer manufacture medical devices (within the next 10 to 20 years). As a result of the product liability system, even if a manufacturer's materials had nothing to do with the cause of an injury, and even if the materials they sold to an end-use manufacturer were totally modified by that end-use manufacturer, the manufacturer can still be held totally liable. Because awards have no caps, a company could be wiped out. DuPont said, ''Why should we do that?''

So here we have the quandary of our government spending lots of money on R&D in advanced materials for, among other reasons, medical application. And yet we do not have any companies that are going to commercialize the applications because of product liability laws. So who is going to benefit from that taxpayer investment in the new materials that lead to a whole new generation of products? We will not. I am giving you that as an example of how these issues are linked. You cannot look at one in isolation from the others.

Antitrust is also a very important issue, but when the laws and regulations were originally set up, antitrust legislation had a different purpose than it has now. We still have an antitrust system with a philosophical basis from the 1920s, when we were concerned about competition between Ohio and Indiana, not competition between the United States and a global environment.

The Justice Department, as we speak, has issued "Antitrust Guidelines and Innovation Policy." In a nutshell, first they look at the type of R&D a firm does. If a firm conducts R&D that could lead to something that could keep another company out of a market, the Department of Justice will initiate antitrust action. That is anti-competitive behavior. I always thought that doing R&D was to give a firm an advantage over competitors—that was one of the reasons you invested in it. So we have moved antitrust way upstream.

Look at the implications of this for new industries, such as those emerging around the national information infrastructure. You see in the announced mergers and acquisitions of companies a reorganization that will alter the current industrial structure, but it will not take you to this national information infrastructure. AT&T is divesting. Cable computer telecommunication companies are reorganizing in order to get the bits and pieces they need to participate in whatever this new industry is going to be, both in manufactured products and in the software and service end. Yet the Justice Department is looking at all of those potential acquisitions and mergers from a traditional 1920s antitrust perspective.

Similarly, whatever you think about Microsoft, whether they are the thousand-pound gorilla or not, as an American citizen I was very upset that our government went, on its own, to the European Community Commission, to the

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

gentleman in charge of antitrust policy, to initiate talks about how Microsoft should be busted up in Europe. Why do we want to bust up one of our leading companies in Europe? I do not know. Microsoft is one of the few companies, an exception to all the losses we accrue from intellectual property, from which we are getting a lot of money back.

Antitrust is a critical issue relating to innovation. Our foreign competitors have totally different policies. The Japanese have never brought an antitrust suit against a Japanese company, ever.

ROLE OF THE NATIONAL LABORATORIES

The construction industry is a user of technologies developed by others. That is not necessarily bad as long as they are involved up front with the producers of their innovation stream. I think one of the ways to move quickly but still avoid antitrust concerns is to catalyze some vertically integrated teaming relationships on both the producer and the user side. You are not going to be threatened by people who make certain types of sporting equipment, and you are going to have a lot of needs in information technologies, too, managing inventory and all of that.

One thing that I would recommend to this industry is that they go to the national laboratories and take the time and effort to see what they have. There is no question that the laboratories are developing a lot of things of tremendous value to this industry. The construction industries could get in on the ground floor—maybe in some of the consortia that are formed—and participate in a way that gives them some proprietary capabilities to move forward. I am sure there are trade associations in this industry that I am not knowledgeable about, but they could put together a lot of structures to get together with the federal laboratories and also the universities. Cutting across the industrial sector is an innovative way to do this.

When I was in the Commerce Department, we found out about the intelligent vehicle highway system initiative (IVHS). This was a classic example of government operation. The Department of Transportation was acting in isolation. I reached out to Transportation and the R&D people, and we did some interagency work on it. But in that project there was going to be a tremendous need for advanced displays, and the flat panel display industry is so important as an enabling technology in the chain. Since the IVHS was a government mission, we suggested building in a procurement need to stimulate our fragile entrepreneurial advance display manufacturers, but Transportation turned their backs on that. So all the displays that are being used are from Japan, which to me was upsetting, unnecessary, and counterproductive.

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×

If you look at things as part of a system as opposed to looking at each piece in isolation, you begin to see where you can fit things in and how they are related. I give the Japanese real credit for doing that in almost everything they do.

The Council on Competitiveness has not looked at the movement of goods from city to city in a coherent way. Some companies, as I recall, Frito-Lay, Inc., won the Malcolm Baldridge Award for an incredibly sophisticated transportation movement and inventory system that uses technologies in a service sense. I think that this board in the NRC (BICE) could make a tremendous contribution by looking at that kind of issue and getting a study out on it.

I could tell you that Los Alamos National Laboratory, where I am on the board, has a very innovative initiative in the transportation arena with the Department of Transportation. They are looking at the whole traffic control system in Albuquerque as a test bed. Detractors question why a weapons laboratory is interested in transportation. Los Alamos makes, designs, and manages the nuclear weapons process, but they also bring to the table advanced computational simulation capability, which is unique and can help our economy. They are working with a number of major construction firms. The board might want to take a team out to look at that because they are doing a lot in transportation.

CONCLUSION

In conclusion, these are the points I have tried to make this morning. You can have a tremendous human resource base, and we need to work on that. You can be the leader in science and technology. You can be at the forefront of developing every new innovative technology that is going to drive new product services and create whole new industries. But if you do not embed those assets in an innovation environment that provides incentives for getting products and services to the market quickly in terms of quality, price, and market penetration, all of this will be for naught. What we need to do, what we can do, is be the staging platform for world leadership in science and technology and its utilization.

Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×
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×
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
×
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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Suggested Citation:"II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL." National Research Council. 1996. Financing Tomorrow's Infrastructure: Challenges and Issues: Proceedings of a Colloquium. Washington, DC: The National Academies Press. doi: 10.17226/5304.
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With the current emphasis on a balanced federal budget and correspondingly decreased federal participation in financing local infrastructure systems, infrastructure providers are faced with the challenge of developing new sources of capital to fund their projects. This book discusses critical infrastructure issues and brings together recognized experts in domestic and international infrastructure and finance. It provides perspectives on the issues and discusses less conventional financing techniques used in recently completed projects. This volume also discusses likely conventional financing mechanisms of the future.

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