COMMENTARY: For quite some time now, Americans have been hearing about the dire state of infrastructure in the US. It’s clear that traditional sources of funding new projects and repairs are struggling to keep the nation’s infrastructure from falling apart, let alone thrive. What isn’t as clear is how to fix it.

Formula grants distributed through the Highway Trust Fund have long been the preferred way to fund infrastructure. But the inefficiency of earmarks and the decrease in revenues from the gas tax are posing significant challenges for this funding model.

At the same time, cities and states have assumed a growing role in infrastructure funding but are now getting squeezed with the financial crisis. Bond issuances, once a boon for raising plentiful funding infrastructure have seen a sharp decline recently due to three main factors: restrictions on new debt for hard-pressed municipalities, credit rating downgrades which have increased the cost of borrowing, and the collapse in 2009 of the monoline bond insurers which have made bonds both riskier for investors and more expensive for issuers. Further funding pressure will come from a growing population, changes in technology and the need to remain competitive in the global economy.

We need to reimagine infrastructure funding, moving away from earmarks and specific formula grants and towards an approach that looks at long-term infrastructure needs across sectors and maximizes the sources of funding that can be used to finance qualified projects.
Here are two clear steps to get us there.

Break Free from the Siloed Infrastructure Funding Maze and Red Tape

Currently, public funding for infrastructure comes from a maze of programs, each with specific objectives and policies. As a result, it’s difficult to finance intermodal projects where transit funding needs to come from the Federal Transit Administration (FTA), airport funding needs to come from the Federal Aviation Administration (FAA), and other funding needs to come from other sources. This maze of rules and policies makes it challenging to combine sources of funding for complex projects. As a consequence, there are currently no public financing mechanisms that look at infrastructure at the regional level or across sectors.

A more unified strategic approach to modernizing the nation’s infrastructure would allow a public vision of the country’s infrastructure and its competitiveness as a whole, taking advantage of potential economies of scale.

Other deep-seated issues that need to be addressed to fully reform the U.S. infrastructure sector include the fact that project development is hampered by a long permitting process and the regulatory uncertainty it creates, which can discourage private investment. In addition, the current funding system is underpinned by red tape in the form of unnecessary tax regulations to fund trust funds and state and federal programs that give preferential treatment to some investment vehicles.

Create a National Infrastructure Bank to Leverage New Forms of Ownership and Operation

Private funding is becoming increasingly important for U.S infrastructure, particularly transportation, as 31 states and one territory have now passed legislation enabling public-private partnerships (P3) for infrastructure projects.

P3 is attractive because the private sector can more easily access large amounts of capital upfront than public entities, which have to go through annual budget processes. As a result, it can help get projects completed faster than traditional public processes. On the other hand, the public sector can help ensure that infrastructure projects have a source of long term debt and better financing terms.

One way to help solve these challenges is to create a National Infrastructure Bank (NIB) designed to leverage but not crowd out private capital. This is similar to what the Transportation Infrastructure Finance and Innovation Act (TIFIA) and the U.S. Export-Import Bank are doing for their more limited mandates.

The role of the NIB should be to close the funding gap and enable creditworthy projects to receive private funding. Key features of the NIB should therefore include long repayment schedules and large lending limits, which are more difficult for private lenders to provide. A good example of where the NIB could complement private funding is the water sector – projects tend to have lower returns on investment than other sectors, so low interest rate financing for part of the capital costs can help improve the attractiveness of projects for private investors.

In order to avoid the perception of excessive public spending and waste, the NIB should be structured and behave as an independently governed, self-sustaining financial institution, which bases its lending decisions on pure economic and financial criteria. This implies providing loans and guarantees but no grants and using a thorough financial due diligence process that focuses on risk. Transparent processes such as Value for Money (used by the UK Treasury and Australian states) can be used to justify investment and communicate the benefits of infrastructure investment to the general public.

A portfolio approach can be used to ensure that the bank invests across all sectors and prioritizes projects accordingly. In addition, the NIB should carry over some of the principles from TIFIA that force discipline (e.g. cannot fund more than 33% of project cost, must have other senior debt, senior debt must be investment grade) to ensure it’s not taking excessive financial risks and that its funding is complemented by the private sector.

Creating a NIB will not be easy. But much of the challenge can be mitigated by increasing funding for an existing program with a long-term vision of reforming the system, rather than setting up a new government agency which would be much more costly and less effective.

Both the U.S. Export-Import Bank and the Overseas Private Investment Corporation (OPIC) have experience in infrastructure lending, internal project screening and approval processes and staff of investment professionals experienced in project finance and related due diligence. Both have a proven track record of being successful in leveraging private investment for large projects, albeit in emerging markets. Housing the NIB under one of those institutions could help jumpstart the U.S-focused infrastructure credit program in a shorter period of time and potentially with a better public reception than setting up a brand new agency.

Getting the Job Done

As our nation’s infrastructure continues to deteriorate, one look at the massive intermodal infrastructure projects being completed around the globe makes it clear the US can and should do better. We know the challenges we face. It’s well understood that infrastructure is vital to our country’s future. Now it’s about putting the underlying structures in place that can effectively marshal and direct the necessary resources to fun infrastructure projects.

By breaking free from the siloed funding maze and red tape and by leveraging new forms of ownership and operation through the creation of an efficient National Infrastructure Bank we can get the job done right.

Ed Crooks is vice president and Michelle Quadt in principal at Booz Allen Hamilton.