U.S. hegemony, as generally perceived, focuses upon American military might. However, since the end of the Cold War economic power has become the greater “instrument of policy.” The economy has staggered since the 2008 financial crisis and, despite an encouraging recovery, is not yet fully robust or stabilized in terms of sustainable growth and wealth distribution. Unsettling is the U.S. dilemma of massive twin deficits of sovereign and current account debt. Data indicates improvement. However, in the long run, the figures could be warning signals of potential loss of global industrial competitiveness.1 In order to reverse these potential trends, a revival of the economy and continued American authority in world affairs will depend upon a reinvestment in the industrial base and our communities. This article attempts to explain how a national infrastructure bank might not only be a mechanism for stable long-term investment for domestic and global markets, but also provide a boost to the U.S. economy, which might eventually be of epochal proportions. 

In many places our national infrastructure is aging, obsolete, and/or on the point of collapse. Neglect, over-use, and an over-reliance on market mechanisms have driven transportation networks, energy grids, residential complexes, communication and utility systems to their limits. Because the lion’s share of these assets are in private hands, it will not just take political will from Washington to overcome these problems, but also business and fiscal incentives, which can only occur by means of a true partnership between the public and the private sectors.  

Marshalling these assets may require a similar spirit and vision evident in the immediate years following World War II. The primary institution resulting from such collaboration and effort was the European Recovery Act, or what was better known as the Marshall Plan. It was not only a success story, but also a continuing testament to American innovation and foresight that helped cast this country’s fortunes and lifted others out of various periods of ruin.

At the end of the Second World War, the Marshall Plan sought to rebuild a ravaged Western Europe and its devastated commercial infrastructure into a bulwark against Soviet expansion. With the benefit of thirteen billion dollars of U.S. economic aid, between 1948 and 1951 Western Europe experienced the fastest period of growth in its history. Despite representing less than 3 percent of the combined GDP, the Marshal Plan boosted industrial output of the recipient countries by thirty five percent. Agriculture also rebounded above prewar levels.2 The program not only restored the European economy, but also undercut the ideological appeal of Communism.

This collaborative spirit and pragmatism has its roots in the very building of America. In the early decades of the twentieth century it took 62 days to travel from Washington to San Francisco by car. The quality of roads was inconsistent and dangerous.3 By the 1950s America was poised for an economic burst, much the way but on a lesser scale, of the trajectory of the global economy.  However, Dwight D. Eisenhower regarded the prospect of extended trips through parts of the United States as “impracticable.”4 He was inspired to build a U.S. system of high-quality highways by his experience as supreme commander of the Allied Expeditionary Force in Europe during World War II. The contrast of the German autobahns against the chaos of the American network of un-uniform standards of construction, maintenance, safety, and coordination revealed to him national defense vulnerability and a barrier to economic growth. Economic and defense imperatives meld into a single cause. Not only was there a need to facilitate trade and commerce, but also the U.S. felt it had to have the ability to move military convoys, evacuate cities, and to have emergency landing strips in the event of an attack.5,6 For these latter reasons the program was originally called the National Highway Defense System. Yet, by the time of its fiftieth anniversary the Eisenhower Interstate Highway System was hailed for “accelerating everything in America.”7 However, the issue that propelled the program through Congress was linkage with national security.

In addition to the apparatus it offered to national defense, the Interstate Highway System “drove” the nation’s prosperity. Despite it only comprising 1 percent of the miles of public road, by 1996, it carried 45 percent of motor freight transport. It can also claim credit for an increase of more than a quarter of the nation’s prosperity. It made “just-in-time” delivery more feasible and economical.8 As a comparison, the contribution the Internet has made to commerce and the quality of our daily life is incalculable. Add to these infrastructure investments the building of the Transcontinental Railroad and the creation of the inter-coastal waterway, and the story that emerges is not only the building of America but also the making of the greatest power in history.  

The commercial infrastructure combines the skeletal and circulatory systems of the national economy and is at the core of the body politic. Nonetheless, and despite our history, experts estimate that the U.S. government needs to appropriate $48 billion annually for infrastructure.9 The total under-investment, however, equals 129 billion per year.10 These U.S. rates of investment are not only substandard in proportion to the scale of the nation’s economy, but also insufficient to maintain the current dismal ranking of 24th in the world in the quality of infrastructure.11 The U.S. infrastructure is not only aging, in many areas it is near the point of collapse.

As the U.S. neglects its infrastructure, emerging economies move forward. China has been spending 8.5 percent of its GDP on its infrastructure. In addition to its own future, the PRC invests in Africa through the construction of roads, bridges, and rail projects. In contrast, our current assets are too insufficient to support the present demand even while we expand the Panama Canal and “Panamamax” cargo vessels are being deployed.

While the United States devotes only 2.6%, India investment in infrastructure has been nearly 5% of GDP. The India power industry is an illuminating case study. The power reforms in the 1990s, which were in direct response to the power shortages that plagued India at that time, redeveloped the industrial and political landscape.  These efforts culminated in the Electricity Act in 2003. The traditional ways of funding power allocation throughout the country were lacking and financially restricted by local state control. The new reforms unbundled local restrictions and enabled new effective forms of development based on competition and commercial merit from the private sector.12  The aim and result was the formation of key relationships between public and private entities. This coupling, which combined different market capabilities, made possible the optimal domestic resolution of one of the nation’s foremost social and economic problems - power shortages.

One of the key elements to the new market paradigm was the establishment by the Indian government of the Power Finance Corporation (PFC). As a financing agency, the PFC fills the gap in the financial markets for large power projects. The size of these projects, degree of risk, and the time lag between construction and revenue generation require substantial financing packages and long term loan conditions. As a government agency, the Indian PFC provided the necessary loan mechanisms in the early stages so that these projects could eventually become commercially viable and self-standing.

In addition to sizeable loan packages, these large projects, called Ultra Mega Power Projects (UMPPs), need cross sector and inter-jurisdictional cooperation to succeed. Therefore, UMPPs rely upon the PFC not only for financing, but also for administration and expertise. Once the terms of financing have been agreed upon, the PFC oversees the competitive bidding process, authorizes the appointment of power distribution companies, and arranges for the acquisition of land and state clearances. The PFC evaluates all project requirements and private involvement, along with more specific alternatives. It centralizes the need and allows for thorough project demand provisioning.  More critically, the PFC opens doors to the secondary markets - leveraging private funds and the critical mass of public-private partnership. Having been founded in 1986 as a wholly owned government entity, the PFC eventually issued an IPO in 2007. Today it is listed on the Bombay Stock Exchange and National Stock Exchange of India and is an example of what might be possible in public and private sector collaborations. 

The PFC corresponds in concept to the proposed creation of an infrastructure investment bank in the U.S. With public budgets exhausted, and corporate cash reserves robust but relatively dormant, a national or regional infrastructure bank can fill the similar role. Additionally, at the federal level, a centralized or national infrastructure bank will not only help integrate project financing from private funds, but also facilitate investment through the underwriting process. A national infrastructure bank will also help coordinate the array of scattered and redundant federal grant and lending programs now in place. Non-standardized procedures and protocols of federal and state jurisdictions have created complexity in the planning and public-private financing process, which has inhibited communication and progress.13 

It is important to note that in the case of India, China, and other emerging economies, there is a different economic and political structure than that in the West. Infrastructure build out in these emerging markets has obstacles and circumstances apart from the preexisting infrastructure conditions of their Western counterparts. The benefits of a large and inexpensive labor pool cannot be met in the West. These more “closed economies” also have the advantage of enforced innovative financing vehicles, political reforms, and the freedom from layers of entrenched interests at “sub-federal” jurisdictions. The strong central authority wielded at the national level allows these governments to avoid the free-for-all that has been the standard of political processes in the U.S., Western Europe, and Japan. As well, the ability to set national policy and initiate domestic programs without the same fear of political opposition or public resistance, although basic to Western societies, has usefulness in these policy-setting instances.  

Nevertheless, the example of the PFC and the Indian power sector is a potential working model for infrastructure investment in the U.S. An infrastructure investment bank might be the institution for resolving funding decisions and focusing on demand for critical infrastructure points in the U.S.  It might also be the appropriate authority needed to plan, finance, and coordinate infrastructure investment while creating jobs and helping to assure the future expansion of the U.S. economy.  The current approach to infrastructure development costs the U.S. approximately $1 trillion per year in forgone economic growth, according the U.S. Chamber of Commerce.14 A frail commercial infrastructure inhibits the ability of U.S. business to compete economically in the global system – currently and in succeeding years. Meanwhile, as investors fret over the future of a volatile equity market, this need for infrastructure investment also comes at a time when nearly as much as $30 trillion is held by central banks, sovereign funds, and global pension accounts.15  A dollar denominated, long term U.S. debt instrument that is risk/return sensitive could attract funds and financing, ratchet up economic growth, and restore stability to the financial markets.  

Legislation calling for the establishment of infrastructure investment banks has already been proposed. The Obama Administration has acknowledged three major bills that would replace the traditional way of financing; all with an appropriated funding cost of 10 bn in the first 2 years. As presently proposed, the president would choose the upper management of the fund or entity while the board members would be selected by Congress. Having appointment from a bipartisan level of federal government would buffer out the influences of infrastructure project allocation at local levels. Generally, the projects would be financed through loan guarantees, which would have “callable capital” that would cover the liabilities in the event of a default. The fund or corporation would also be allowed to issue bonds, which could be sold on the secondary market. Infrastructure projects would offer guaranteed returns, create cash flow and employment opportunity.

A central banking entity to coordinate critical infrastructure build out would not only be more efficient, but would also integrate analytical data to more comprehensively evaluate assets or projects. One of the problems in our traditional way of financing is that more infrastructure projects are considered by mode; as a result they are siloed and are not considered in a macro level. The same analytical approach applies to the financing of these projects. Therefore, the most cost-efficient way of project financing is not realized because of the inability to take into consideration spillover effects, regional and national economic potential and impact. On the other hand, a national infrastructure investment bank would avoid these inefficiencies by establishing and following a system of protocols and metrics for selecting commercially feasible projects for development. The “bank” would also identify private dollars sources and act as an intermediary in the public-private partnership arrangement and thus, close the funding gap that is currently a GDP opportunity cost. At the same time, a national infrastructure bank can eliminate the prevailing problem of jurisdictional barriers and the complex of confusing regulatory strictures, conflicting legislation, and parochial politics that accompanies the prevailing system. 

The financial instruments created by a national infrastructure bank would replace the traditional way of financing through municipal bond market. It has been harder for the municipal bond market to satisfy either the needs of the project or the demands of the investors. As personal tax rates have declined over the years, tax-exempt bonds have gradually become less attractive than in earlier periods. Furthermore, these debt instruments favor wealthy individual investors with high tax liabilities and, therefore, mostly exclude consideration by pension funds and foreign sources. A U.S. National Infrastructure Bank security would reverse this trend. A higher taxable interest rate, the guarantee of a tied revenue stream, and the unique safety feature of the bonds would cast a wider net to lure investors. As with the Indian example, the “bank” could provide for a delayed payment feature funded by direct subsidies that would allow the project time to generate adequate tariffs or users fees once it matured past the earlier construction and development stages. The amount of subsidies would be revenue neutral to the federal government after factoring lost income receipts from the tax- exempt bonds. Under these conditions, maturity could extend past the usual ten-year period that is the current term of municipal bonds. 

Large-scale, complex enterprises such as transportation, water treatment, and utility projects require years of planning, construction, expansion, and continuous upgrade. A maturity of twenty to thirty years makes the financing of these types of infrastructure projects less complicated.6 The longer maturity term also provides the market with stability, and for the project it would diminish the level of commercial and business risk. Such a national financial institution may require oversight from “bank” authorities and additional federal regulation in order to cobble together financing, construction, and operational processes that span state boundaries. As Mark Gerencser, former Managing Partner at Booz Allen Hamilton, notes:

Deregulation, which began in earnest in the mid-1970s and accelerated into the 1980s and 1990s, may well have bequeathed short-term economic benefits, but it has also made long-range management, planning and investment decisions for infrastructure systems far more difficult. The infrastructure-related industries of the United States used to be part of a relatively stable public utilities market, but deregulation, corporate mergers and acquisitions, and outsourcing trends have put an end to that stability.17 

Under these conditions, the new environment for infrastructure build out will be a more integrated system. It will include multiple sectors in the development process, which include comprehensive analysis and financing. Eliminating the old complex ways of traditional financing will also allow the private sector to invest confidently in reliable revenue sources with acceptable rates of return. The impact will mean a more liquid secondary market and a return to a stable environment for long-term planning, management, and investment decision making that the U.S. economy now so very much needs. 

Finally, the need for infrastructure investment is not only an economic imperative, but also a matter of national security. In much the same way the planners and policy makers of a generation ago justified the need for a Marshall Plan and the construction of the Interstate Highway System, the new national agenda must consider the corroding state of the nation’s infrastructure and the need for re-investment as a matter of national defense. Economic and national security concerns are interlinked. However, rather than defending remote areas of the world to protect markets and sources of raw material to supply our economic engine, today our priority security assets are the parts, organs, and elements that make up the critical infrastructure.  

These structures, such as ports, utility grids, transportation networks, and information/communication systems, are under assault every day by electronic vandals, natural catastrophic events, and our own over-use and neglect. Approximately 87% of these facilities and networks are privately owned.  Therefore, a public – private partnership is the only working arrangement that can address the challenge of re-building the economic framework. A national infrastructure investment bank might be a key linchpin. The moment and opportunity could not be more appropriate. Money center banks, global pension accounts and strategic sovereign funds hold trillions of dollars. The discount window remains open as long as historically low inflation rates prevail. The financial markets, and business in general, long for stability. This is also an opportunity to insinuate best practices standards for security, which heretofore has been lacking in commerce. Voluntary security regimes, patchwork solutions, and ad hoc programs and measures have become accepted methods of dealing with the security threat.  The result has been a network of breaches and the loss of trillions in productivity, business disruption, and intellectual property theft. A revitalization of the economic structure is a chance to “bake-in” a security ingredient that would create a reliable and resilient commercial system, which would lessen the vulnerability of attack and help assure the nation’s economic dominance.

The current U.S. defense budget accounts for 45.7 percent of total spending by the world’s 171 governments and territories.18  These sums support the U.S. military and the protection it provides for international shipping lanes and the energy supply routes. The Pacific Rim countries, including the Peoples Republic of China, and other nations, such as Saudi Arabia, buy U.S. federal debt instruments as indirect payment for a security force.

These and other governments can justify the investment as being more favorable than the alternative of developing their own capabilities and militarizing their domestic economies. It also allows these governments to devote and direct financial resources toward domestic programs. However, world events have never been more fluid.  The United States is at an inflection point where, despite the rise of violence in the Middle East and around the world, public opinion may force Washington to turn resources inward and concentrate efforts on strengthening its global competitiveness through markets rather than by military presence. Even if national policy determines it must maintain its military hegemony, the United States may have no alternative than to rely upon open market sales of government securities for further financing. As Jonas Grätz of the Swiss Center for Strategic Studies remarks:

Military power will not be sustainable without independent economic might – even more so as key allies like Japan or the UK are being weakened economically as well. The prime challenge to U.S. power is thus economic, not military.19

With the same foresight, energy, and intellectual spirit that helped re-build post-war Europe, and create what became known as the “American Century,” the U.S. can revitalize its anxious economy and re-imagine its own future. In order for the U.S. to remain competitive and dominant, it would not entail a massive mobilization. It merely would mean a return to a previous history of prudence, innovation, collaboration, and political determination. 

Kyle Jarmon is a business data analyst for Rakuten Marketing, a global e-commerce company based in Tokyo.  Prior to joining Rakuten, he worked at Fidelity Investments in Philadelphia and has consulted on various infrastructure projects, which involved the assessment of commercial real estate and seaport facilities. He is a graduate of Fordham University’s Gabelli School of Business.  Previous publication and interests concern the structure and impact of transnational organized crime.