|The Promise and Problem of the Infrastructure Bank
The National Infrastructure Bank could generate a lot of pop. As described in the White House fact sheet:
The President is calling for Congress to pass a National Infrastructure Bank capitalized with $10 billion, in order to leverage private and public capital and to invest in a broad range of infrastructure projects of nationaland regional significance, without earmarks or traditional political influence. The Bank would be based on the model Senators Kerry and Hutchison have championed while building on legislation by Senators Rockefeller and Lautenberg and the work of long-time infrastructure bank champions like Rosa DeLauro and the input of the President's Jobs Council.
Since the $25b figures closely follows the funding in the House version of the Infrastructure Bank, H.R.402, I presume that the total amount of finance it might provide could exceed $600b, as per the Mainstreet Insider analsis of H.R.402:
H.R. 402 would establish an independent, wholly-owned government corporation called the National Infrastructure Development Bank. Following a $25 billion initial capitalization over five years, it would be a self-sustaining entity capable of leveraging as much as $625 billion in private investment by issuing direct loans and subsidies, loan guarantees, bonds and debt securities, borrowing on the global capital market at low interest rates and pooling infrastructure-related loans and securities on the market to spread risk. The Bank would help capitalize the following:
1) Transportation Infrastructure Projects (e.g. public transit, highway and bridge repairs, port development)
2) Environmental Infrastructure Projects (e.g. drinking water treatment, waste disposal facilities, dams and levees)
3) Energy Infrastructure Projects (e.g. retrofitting buildings, smart grid, development of renewable capacity)
4) Telecommunications Infrastructure Projects (e.g. broadband expansion)
The legislation lays out a set of criteria for each project type by which each applicant must be evaluated to determine potential impact and eligibility. These generally involve environmental, health and income distribution considerations as well as more traditional cost-effectiveness criteria and other sector-specific factors.
There is, however, a fly in the ointment: the reason that $25b leverages into possibly $600b+ in finance is that its finance, not funding. For projects to be funded by the National Infrastructure Bank, there has to be funds available to repay the loans.
Now, there are a selection of projects that can be funded in this way with little problem. That number would increase if the Congress would enact a Connie Mae system, allowing repayment of energy saving investments to be repaid out of utility bills, and/or a national feed-in tariff legislation for sales of electrical power across state lines.
But still, there are many more possible projects that can be partially but not completely self-funded given the finance. This is even more the case if we are thinking about projects that can get underway sometime in the next 14 months.
And bringing those projects into the frame for National Investment Bank funding requires some source of new funding.
Which is where the Energy Freedom Fund system comes in.
The Energy Freedom Fund
The Energy Freedom Fund asks our Oil Imports helping to pay for our Freedom From Imported Oil. 1 cent a gallon on imported crude oil provides funds that every city, town, village and county can use to invest in their own Energy Freedom.
Well, OK, so that's the stump speech version.
What the EFF does is collect $0.01 per gallon tariff on oil imports, and distributes that into accounts for each municipality, county, and reservation for spending on a range of Energy Freedom Fund projects:
- Up to 50% each on:
- capital works on "Complete Streets" usable by motor vehicles, neighborhood electric vehicles, bicycles, and pedestrians, including streets not eligible for Highway Funding
- operating subsidies for oil-independent public transport
- capital works for dedicated oil-independent transport corridors
- oil-independent vehicles for public transport
- Up to 10% each on:
- Electric vehicle charging infrastructure
- Electric vehicle finance subsidies
- Capital works for pedestrian crosswalks and safety investments
- Capital works for dedicated neighborhood electric vehicle, bicycle, or pedestrian transport corridors
- Current funding for Planning and Environmental Clearances for possible future energy freedom transport corridors.
For "partial" independence investments, the share that may be funded is determined by reduction in oil consumption: investment in upgrading the engines of school buses to pluggable hybrid diesel-electric operation with 50% of the diesel consumption could receive 50% funding. Note that this is capital funding, so that the county, town or city could apply to the National Infrastructure Bank to apply the fuel savings themselves to funding a National Infrastructure Bank loan for the balance of the cost.
Each account holder would submit projects to be cleared as qualifying projects, and would then direct funds from its portfolio of qualified projects as they become available. Each account holder would also be free to enter into joint projects with neighboring local governments, so that some projects in account holder project portfolios would be joint projects.
And the funds would be "use it or lose it": each account holder with funds in its account and no projects to fund in its portfolio would have six months to submit projects for approval as qualifying projects, or else the funds would revert to an account held by their state department of transportation for use on qualifying projects.
Leverage and the "Pop" in the Energy Freedom Fund
So, where's the pop? Collecting tax revenues and directing them into accounts. Looks like a transfer rather than a boost, as far as that goes.
The "pop" comes from allowing the account holder to commit payments out of its EFF account for qualifying capital works for up to 10 years in the future. Now, this could be in a finance agreement with the National Infrastructure Bank. It could also be in a finance agreement with an Investment Bank.
In either event, its the forward commitment that provides the "pop" to the program. Our crude oil imports in 2010 was 3,362 million barrels, or about 141 billion gallons. So each 1 penny in tariff yields about $1.4b in funding (perhaps a little more if there are some processed oil products that are either not listed on WTO tariff schedules or have tariffs below their WTO tariff rate).
Of course, with forward commitment, local governments could make capital spending now, if there was increased tariff revenue expected over the coming ten year. So that is exactly how the system would be designed: starting with 1 cent per gallon, rising by 1 cent every year to a dime a gallon in ten years. The sunset on the EFF is set for 15 years in the future.
If about half of the funding is commitment ten years ahead, and half is current spending, that would mean the immediate "pop" depends on the average credit terms that local governments can get for the forward commitment. Given the current desperation in finding safe places to put funds, as reflected in the 2% Treasury Bill rate, I'll use 5% as a rate:
- 5% funding over 10 years provides 7.72x leverage
- Doing the same for 9 years on the next penny, discounted a years into the futures, and so on, yields a 40x total leverage
- On $0.7b out of each penny tariff, 40x leverage is $28b
This is not, however, a one-off one-year boost. First, over each of the following four years, additional funding becomes available. Second, over the medium term, as local governments learn how to combine funding of energy freedom funds and National Infrastructure Bank finance, funded by sources including savings in in fuel costs, the leverage available from the funds will increase.
And of course, the investments themselves will yield substantial benefits as we hit each of the coming series of oil price shocks.
This isn't all of the "pop" we need, by any means, but every bit helps. And many of the projects that are quickest and easiest for local governments to add to their portfolio are projects with better than average job creation ~ whether fixing up broken down pedestrian crossing infrastructure, converting a street into a "complete street" to qualify the street repair for funding, or finishing a bike trail postponed due to the recession.
Given that the $200b in spending in the jobs bill includes $50b to keep the unemployment insurance we presently have and $35b to keep teachers and first responders employed that are presently or were recently employed, the "new spending" is on the order of $115b. If the $115b. Adding an extra $38b on top of that ~ and $38b that Take Everything Away Party Governors could not easily divert or subvert ~ is boosting the "new spending" in the Jobs Bill by about 1/3.
And then, to the extent that local governments realize and take advantage of the opportunities to provide partial funding from the Energy Freedom Fund and partial funding from some other source, converted into capital finance by the National Infrastructure Bank, the "pop" from the Energy Freedom Fund goes up from there.
Politics Makes Strange Bedfellows
Maybe you've heard that Big Pharma and Big Medicine is fighting against the danger of cuts to Medicare and Medicaid from the "Super Congress":
"A lot of provider groups and healthcare groups would take a 2 percent cut to providers, no cuts to Medicaid and would find that much easier to live with."
Politics makes strange bedfellows indeed. And this system relies on some very strange bedfellows in support of a national energy independence policy: US-based oil producers.
After all, given that the pricing power for crude oil passed overseas in the early 1970's and our locally produced share of oil consumption has fallen substantially since that point ... a 1 cent per gallon tariff means $0.42 cents per barrel extra revenue to domestic oil production ~ rising to $4.20 per barrel extra revenue to domestic oil production as the tariff hits a dime a gallon.
And whereas the impact on oil consumption will be incremental and down the track ... the impact on domestic oil production revenues from the import tariff is immediate, starting from the quarter in which the tariff is introduced.
The ideological radicals like the Koch brothers will, of course, oppose the program on ideological grounds.
But what about the normal run of oil company corporate executives, where the size of their pay packets depends heavily on the stock price of their company, a free boost in revenue right now is likely to look like a good deal. Indeed, where executives receives stock options, that means that the increase in executive compensation is likely to be far greater than the percentage increase in revenue ... due to the same option leverage effect which made incorporated investment banks so much more foolhardy risk takers than they had been as partnerships.
All that has to happen is a handful of oilpatch Republican Congressmen to move the system out of committee or a handful of Oil Patch Senators declining to filibuster that amendment, plus working behind the scenes to see to it that its included in whatever the Jobs Bill ends up looking like after going through the Lawmaking Sausage Grinding Machine.
Meanwhile, for progressives, we know that even if the tariff is extended past the sunset date ... the subsidy to domestic oil producers is certain to fade over the next two decades, for the simple fact that domestic oil production is certain to decline over the next two decades. With the US producing 1/10 of the world's crude oil, but having only 1/100 of world oil reserves, the fading of domestic oil production is an inexorable physical fact, which no amount of "drill, baby drill" sloganeering can reverse.
Midnight Oil ~ Truganini