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Obama infrastructure bank takes shape

Draft legislation in circulation on Capitol Hill envisions a 'National Infrastructure Reinvestment Corporation' that would spur $48bn of infrastructure investment by providing grants, loans and tax incentives to select projects sponsored by public, private and non-profit entities.

The Obama Administration’s plans for a national infrastructure bank would establish an independent organisation that funds public-, private- and nonprofit-sector infrastructure projects based on an objective ranking of the social benefits they provide, according to draft legislation obtained by InfrastructureInvestor.

The draft legislation for the National Infrastructure Reinvestment Corporation (NIRC), commonly referred to as an “infrastructure bank”, would authorise an experimental two-year program for an organisation wholly owned by but separate from the US government that would provide grants, loans and tax incentives to invest in US infrastructure.

The NIRC would “prioritise those qualified projects yielding the highest societal returns”, whether they are sponsored by public, private or non-profit entities. The exact scoring mechanism for such projects is yet to be determined but Peter Luchetti, a private sector advisor to the Obama administration on the draft legislation, said that the NIRC would seek “to make projects possible that might not otherwise happen”.

He cited the Tri-City Medical Center in California’s San Diego County as an example of such a project. The hospital needs money to upgrade its facilities to comply with earthquake safety legislation, but the public sector can’t afford to pay for it and the private sector doesn’t feel comfortable taking on the revenue risk due to the high degree of non-paying customers.

“It’s the only public hospital in county of 5.5 million people. It’s overwhelmed with people coming to the hospital, but no one wants to pay for it,” Luchetti said.

In this and similar situations in which the public and private sectors can’t reach agreement on risk and reward sharing, the NIRC could step in and enable the project to move forward by providing stopgap financing, Luchetti said. In that sense, the NIRC would function like a multilateral finance agency but on a domestic basis, he said.

The NIRC would be funded with $13.5 billion from the US Treasury. Of that, $10 billion would come from appropriations from the US government’s general fund. The additional $3.5 billion would come from foregone tax receipts related to the issuance of $10 billion of tax credit bonds over two years.

Tax credit bonds are debt securities that enable bondholders to receive a federal tax subsidy for the interest on the bonds. This provides the bondholder with both 0 percent financing and a simultaneous financial subsidy from the federal government.

The bonds would be issued by a new Federally-chartered non-profit corporation called the Build America Financing Authority that would be separate from the NIRC. Its bonds would be called “Build America Bonds” and would be allocated to private or public sector sponsors selected by the NIRC.

The draft legislation estimates that the $13.5 billion of funding would enable $48 billion of capital investment in infrastructure projects. Of that, $18 billion would come from discretionary grants to select infrastructure projects, $20 billion would come from federal loans for infrastructure projects and $10 billion would come from the tax credit bond issuance.

Various ideas are still under consideration and the exact shape of the infrastructure bank is yet to be determined.

“We cannot yet make any claim that this is done. What we can say is that it is under active discussion,” Luchetti said.

Luchetti is a partner at California-based Table Rock Capital: an infrastructure fund manager specialising in transportation, social infrastructure, water and waste treatment, energy, and communications assets. Table Rock is currently raising a $2 billion fund toward investment in assets across those sectors, according to data from placement agent Probitas Partners.

Luchetti was invited to sit on the Obama administration’s advisory board by Building America’s Future (BAF) – an infrastructure investment advocacy group created two years ago by Pennsylvania Governor Ed Rendell, California Governor Arnold Schwarzenegger and New York City Mayor Michael Bloomberg. BAF is sponsoring the draft legislation for the NIRC.

National Infrastructure Bank: slowly taking shape.
Source: NIRC draft legislation summary