Financing Tomorrow's Infrastructure: Challenges and Issues Proceedings of a Colloquium (1996) / Chapter Skim
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II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL
II. INFRASTRUCTURE CHALLENGES AND ISSUES: A PANEL
Pages 21-66
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Our three panelists will provide insights on the challenges and issues in infrastructure finance that lie ahead. Although domestic and international inf~ructure requirements differ in both type and degree, the relationship between a healthy infrastructure and economic vitality .
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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.
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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 in* =ructure.
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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 Budget.
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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.
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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
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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.
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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.
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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.
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Source: Adapted from World Development Report 1994 (The World Bank, 19941. the government must play a role to establish credit worthiness.
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Service delegation (the fourth alternative) is the transfer by government of planning and management responsibilities to private agents.
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32 FINANCING TOMO~OW'SIN~STRUCTU~ TABLE 1 Responsibilities for Infrastructure Provision Under Alternative Financing Arrangements Option Ownership Planning Financing Operation and Maintenance Specially Negotiated Contribution Joint Public/Private Organizations public public private public mixed public mixed private FormalJoint mixed public private private Ventures Service public Delegation Contracting public Out delegated public private agent 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, 19911.
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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.
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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 Finds from the central government.
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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 hill capital investment.
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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.
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Also how long should the contract be? On the resource side there are, as I mentioned earlier, various infrastructure development fiends; infrastructure funds, if they exist; and domestic capital markets.
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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.
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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.
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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
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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.
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Pufflng these together, it is easy to understand why there is a movement to shrink local government. Another key characteristic of the over~5-year-old homeowner is that he or she is significantly mobile.
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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.
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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.
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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 inf~ructure 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.
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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.
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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.
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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.
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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?
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That is one of the main reasons I think trust funds as such have not been very useful for financing in~ructure. 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.
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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.
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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.
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The confidence was there. The people are going to pay for it even though Orange County is bankrupt.
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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.
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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.
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NATIONAL TECHNOLOGY INNOVATION SYSTEM What are the elements of the national technology innovation system? The first element is the human resource base.
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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.
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companies have not been able to participate because our oust 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.
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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.
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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.
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FINANCING INNOVATION What should we do about the financing environment for innovation? Banks and venture capital firms no longer play a role.
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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.
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It will cost a little bit of money, but the benefits for productivity will be huge. We should also get rid of GlassSteagall.
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You see in the announced mergers and acquisitions of companies a reorganization that unroll alter the current industrial structure, but it will not take you to this national information infrastructure. AT&T is divesting.
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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.
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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.
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