Banking on it
Senators John Kerry, Kay Bailey Hutchison, Lindsey Graham and Mark Warner have proposed an American Infrastructure Financing Authority (AIFA) that will bring private capital to bear on public infrastructure.
The AIFA has emerged as the front-runner among a number of serious national infrastructure bank proposals now on the table. It has core bipartisan support, and will turn the way infrastructure is financed in America on its head.
Rather than sell public debt to private investors for projects, the AIFA will demand that private investors stand-up projects on their own. It will simply give a push here and there, with targeted loans and loan guarantees that will be repaid.
If the AIFA comes online, it could fast become a gold standard for infrastructure banks. Its drafters have taken care to learn lessons from over 75 years of experience with international infrastructure banks around the world. Senator Kerry’s role as the pre-eminent foreign affairs statesman in the US Congress gives confidence not only that the bank has learned from on-the-ground experience, but also that UK and European investors will find a partner that appreciates how to synchronise national interests in a mutually advantageous way.
So how will it work with UK and overseas firms? One of the main purposes of the AIFA is to bring capital now sitting on the sidelines – within pension, private equity, hedge, sovereign, and petrodollar funds – into the US market. While US Treasuries have long benefited from robust purchases by this group, the AIFA will shepherd this capital into putting Americans back to work building infrastructure. In this respect, the bipartisan Senate bill is very much in sync with President Barack Obama’s recent statement reaffirming the US commitment to open investment policy.
How will the AIFA impact upon the PPP market? It is a multi-sector infrastructure bank, covering transportation, clean energy, and water. It will partner on projects over $100m with a $25m threshold for rural projects. The AIFA will take $10bn in seed money and over the next 10 years bring around $650bn into the US market.
It would work this way: a state or local government, or even a private firm, would put a project together and demonstrate its regional or national benefit as well as its ability to produce a revenue. If a state government partnered with a private firm, nothing prohibits the state from throwing in a grant so that the project produces a healthy revenue. The project is then brought to the infrastructure bank, which evaluates it, and makes a decision about whether to provide a loan or loan guarantee.
The involvement of the AIFA will lend confidence to the project sponsors that it will actually move forward. The reason is this: the AIFA will be an independent entity with a professional management. It will be insulated from the political process but also aware enough of the politics surrounding projects to get things going.
Moreover, the AIFA will not only catalyse the projects that it directly finances. States and local governments will take a cue and start pursuing a healthy group of partnerships on their own. For instance, right now I co-head a taskforce to modernise California’s Infrastructure and Economic Development Bank with Stanton Hazelroth, executive director of the I-Bank, at the direction of Governor Jerry Brown. The idea is to aggressively ramp up infrastructure and clean energy partnerships so as to meet the governor’s ambitious goals to return the state to where he left it when he was last governor: the world’s leader in clean energy.
In California, the enthusiasm for the I-Bank modernisation is in part tied to an eagerness to help the AIFA lead the way into new territory. The success of the AIFA adds fuel to the supporters of a broader portfolio for the I-Bank of partnership projects. If the AIFA comes online, some of these California partnerships will be co-financed with it, many others will do just fine on their own. It’s called market-making, with a long enough lever, the AIFA can move the market.
The AIFA represents a partner, a co-investor, for UK banks, pension funds, and construction firms eager to benefit from not only a jurisdiction with minimal political risk, but also an undervalued and long-suppressed market.
The lesson of the East Asian Miracle was that a country that lays an infrastructure foundation through PPP as countries in that region did in the 1980s will have a platform for a sustained manufacturing surge. Those countries built the water and power infrastructure necessary for chip fabrication and other intensive production before wooing Intel and others away from Silicon Valley. Without the infrastructure build out, the chip fabrication was not possible. It was infrastructure not low wages that was the platform for the East Asian Miracle.
The AIFA can make the US the UK’s own miracle partner across the Atlantic. It is why a growing group of pro-market, pro-growth Republicans and Democrats are moving forward with a new way of doing things in the midst of a divisive deficit debate.