Infrastructure financing: searching for solutions.

• Author: Spain, Cathy

A national consensus has developed regarding the need for increased investment in infrastructure and other public capital facilities. A national solution to infrastructure financing problems has been more difficult to define, however, even though the subject has been studied by numerous commissions, task forces and congressional committees.

Last year, in anticipation of a future Clinton Administration initiative in this area, the Government Finance Officers Association (GFOA) developed a policy statement outlining the organization's proposed solution to infrastructure financing needs and specific federal actions to assist state and local governments. The GFOA's recommendations highlight the need for financial assistance programs, the relationship of federal tax law changes to infrastructure financing and the importance of ensuring that existing federal resource commitments to infrastructure are fulfilled. The policy statement appears in the accompanying sidebar.

Recently, several proposals have been made at the federal level to address infrastructure financing. This article summarizes various available federal policy options for channeling more capital into infrastructure development, as well as some current proposals.

Federal Infrastructure Policy Options

The proposals to promote infrastructure development use various means to encourage greater investment in public capital facilities. Among those that are most frequently raised are

* support for privatization,

* expansion of revolving loan funds,

* provision of financial assistance,

* creation of an infrastructure bank or other financial intermediary,

* changes in federal tax law affecting tax-exempt bonds and

* proposals to attract new sources of capital.

Privatization refers to arrangements under which the private sector becomes involved in the financing, design, construction, ownership and/or operation of public facilities. Contracting out, public-private partnerships and the sale of public assets to the private sector are all forms of privatization that have been suggested. Among the options available to the federal government to encourage more privatization are the provision of investment tax credits, more beneficial depreciation schedules for privately provided infrastructure facilities and less restrictive private-activity tax-exempt bond limitations.

Revolving loan funds are programs offered by states that recycle lendable funds to finance successive generations of projects over an extended period of time. The federal government may provide capital for such funds, as is now done for the clean water program. The initial and subsequent federal contributions may be lent out or leveraged by borrowing additional funds in the municipal bond market. Among the services provided by these entities are direct loans, bond insurance, loan guarantees and grants.

Direct federal financial assistance programs traditionally have been used to...