Infrastructure

See CFR Senior Fellow and Renewing America Director Edward Alden's accompanying blog post here. Despite the pressing infrastructure investment needs of the United States, federal infrastructure policy is paralyzed by partisan wrangling over massive infrastructure bills that fail to move through Congress. Federal policymakers should think beyond these bills alone and focus on two politically viable approaches. First, Congress should give states flexibility to pursue alternative financing sources—public-private partnerships (PPPs), tolling and user fees, and low-cost borrowing through innovative credit and bond programs. Second, Congress and President Barack Obama should improve federal financing programs and streamline regulatory approvals to move billions of dollars for planned investments into construction. Both recommendations can be accomplished, either with modest legislation that can bypass the partisan gridlock slowing bigger bills or through presidential action, without the need for congressional approval. The Problem The United States has huge unpaid bills coming due for its infrastructure. A generation of investments in world-class infrastructure in the mid-twentieth century is now reaching the end of its useful life. Cost estimates for modernizing run as high as $2.3 trillion or more over the next decade for transportation, energy, and water infrastructure. Yet public infrastructure investment, at 2.4 percent of GDP, is half what it was fifty years ago. Congress has done little to address this growing crisis. Ideally, it would pass comprehensive bills to guide strategic, long-term investments. The surface transportation bill, known as the highway bill, is a notable example of such comprehensive legislation. It is the largest source of federal infrastructure spending, allocating hundreds of billions of dollars over several years for highways, rapid transit, and rail. But the most recent six-year highway bill expired in 2009, and Congress has been unable to agree on a new multiyear bill since then. The Senate passed a new bill in March 2012 that provides only two years of funding and efforts in the House to pass a longer-term bill have nearly collapsed. The continuing impasse forced Congress to pass its ninth temporary extension of the old law at the end of March 2012, this time for ninety days. Transportation Secretary Ray LaHood announced in February that he does not expect a bill to pass before the 2012 election, a view many experts share. Even if Congress passes a new highway bill, the country's infrastructure debacle is hardly resolved. Transportation is only one part of the problem, and the pending bills do not even raise investment in this sector from previous, insufficient levels. Nor do they address the biggest long-term problem for transportation—inadequate funding from the Highway Trust Fund. Since the mid-1950s, federal gas tax revenues have been deposited into the Highway Trust Fund and then allocated to states for transportation improvements. But the gas tax is not tied to inflation and has not been raised since 1993. At current spending and revenue levels, the trust fund will be insolvent within two years. Raising the gas tax would alleviate the funding problem, but both parties consider that and other new taxes to be political nonstarters. Unlocking Progress There is no shortage of good proposals to encourage infrastructure investment. For example, President Obama has endorsed the idea of creating a national infrastructure bank to leverage federal funds and encourage PPPs. Bipartisan negotiations in the Senate produced a bill for a scaled-down version of the bank, focused on low-cost federal loans to supplement state financing and private capital. The bill is not supported by House Republican leaders, however, and is unlikely to pass this year. There are also important transportation reforms in both pending highway bills where Republicans and Democrats are on common ground: expanding the popular Transportation Infrastructure Finance and Innovation Act (TIFIA) loan program, streamlining the Department of Transportation bureaucracy to speed approval of new projects, and eliminating congressional earmarks—a huge step toward smarter project selection based on merit rather than political interests. But if the highway bill does not pass, none of these reforms will happen. States are already looking at new ways to finance infrastructure as federal funding becomes uncertain and their own budgets are strained. More states rely on PPPs to share the costs and risks of new projects, and they are finding new sources of nontax revenues to fund investments, like tolling and higher utility rates. But at the same time, federal regulations and tax laws often prevent states from taking advantage of creative methods to finance projects. Federal programs designed to facilitate innovative state financing are underfunded, backlogged, or saddled with dysfunctional application processes. Many of these obstacles can be removed by adjusting regulations and tax rules to empower states to use the tools already available to them, and by better managing federal credit programs that have become so popular with states and private investors. In cases where modest reforms can make more financing solutions possible, good ideas should not be held hostage to "grand bargains" on big legislation like the highway bill or the failed 2010 energy bill. Congress should take up smaller proposals that stand a chance of passing both houses this year—incremental steps that can unlock billions of dollars in additional investments without large federal costs. Any proposals hoping to win Republican support in the House need to have a limited impact on the federal deficit and focus on reducing, rather than expanding, federal regulations and bureaucracy. Some progress can also be achieved by circumventing Congress entirely with executive branch action. Viable Near-Term Action Items Congress can unlock state and private investment by reducing state borrowing costs and allowing flexibility for alternative revenue sources and private capital for financing solutions. Specifically, federal policymakers should: Give states the flexibility to use alternative capital and revenue sources. Billions of dollars to finance new infrastructure could be raised every year from private-sector capital and untapped revenue sources like tolls and user fees. Neither is a free lunch, but they are potential alternatives to a federal tax increase or deficit spending. New tolls are banned on interstates, except for a federal pilot program that allows only three states to use tolling to replace worn-out roads. Congress should eliminate this cap and make tolling options available for any interstate improvement project. In addition, Congress should promote PPPs by loosening rules on government contracting and concessions and provide grants and other assistance to develop state PPP programs. Congress should also help states attract private capital by allowing broader use of tax-favored structures preferred by many investors for other types of investments, like master limited partnerships (MLPs) and real estate investment trusts (REITs). Help reduce states' borrowing costs. Municipal bonds are exempted from federal taxation, lowering interest rates on state debt by making them more attractive investments. But federal tax exemptions are more restricted for state private activity bonds (PABs), which pass along low state borrowing rates to private companies and independent authorities investing in projects with public benefits, such as water treatment facilities and airports. Congress should provide long-term certainty by eliminating limits on the amount of PABs states can issue and permanently exempting PABs from the federal Alternative Minimum Tax (AMT) to increase buyer demand. The federal cost of the AMT exemption is around $20 million per year in lost revenues—a modest amount that will result in tens of billions of dollars in low-cost financing for urgently needed projects. Streamlining regulatory reviews and financing approval processes and improving program management can speed project delivery and reduce regulatory uncertainty for project sponsors. Specifically, federal policymakers should: Coordinate and enhance existing finance programs. A modest but viable alternative to an infrastructure bank is coordinating the many loan programs for infrastructure that are already spread across various federal agencies and departments. There is bipartisan agreement that these programs need improvement—for example, TIFIA needs more credit experts to keep up with its growing workload, and the Department of Energy's loan program needs better oversight and transparency. Congress should modernize the outdated Federal Financing Bank (FFB), a nearly dormant government corporation now controlled by the Treasury Department, and convert it into an independent credit review and oversight office. The new, more active FFB could perform technical, "back office" functions like risk assessments and loan tracking for agency credit programs. Using a central team of experts would avoid duplicative staff across programs, speed approvals, and minimize taxpayer exposure to unforeseen loan risks. Cut red tape for new projects. On March 22, 2012, President Obama issued a new executive order to "improve performance of federal permitting and review of infrastructure projects." But the order is short on substance and long on studies and steering committees. A bolder step would be eliminating duplicative reviews by merging them into single-track proceedings wherever possible. The approval process for natural gas pipelines is a model; an interagency agreement established a "one-stop" review conducted by the Federal Energy Regulatory Commission (FERC) with input from other government agencies. President Obama could order similar streamlining without congressional approval and without waiting months for a steering committee plan. Conclusion None of these steps is a silver bullet for fulfilling the United States' infrastructure needs. But big successes may be hard to come by before the 2012 election. In the meantime, small victories are better than none. The modest steps offered here could unlock hundreds of billions of dollars in new investment over the next decade. With pragmatic solutions that do not carry big federal price tags, Congress and President Obama can offer some relief to the states and local governments who know firsthand that the country cannot afford to wait any longer to make these investments.

The United States needs to develop a comprehensive strategy for the Arctic. Melting sea ice is generating an emerging Arctic economy. Nations bordering the Arctic are drilling for oil and gas, and mining, shipping, and cruising in the region. Russia, Canada, and Norway are growing their icebreaker fleets and shore-based infrastructure to support these enterprises. For the United States, the economic potential from the energy and mineral resources is in the trillions of dollars—based upon estimates that the Alaskan Arctic is the home to 30 billion barrels of oil, more than 220 trillion cubic feet of natural gas, rare earth minerals, and massive renewable wind, tidal, and geothermal energy. However, the U.S. government is unprepared to harness the potential that the Arctic offers. The United States lacks the capacity to deal with potential regional conflicts and seaborne disasters, and it has been on the sidelines when it comes to developing new governance mechanisms for the Arctic. To advance U.S. economic and security interests and avert potential environmental and human disasters, the United States should ratify the UN Law of the Sea Convention (LOSC), take the lead in developing mandatory international standards for operating in Arctic waters, and acquire icebreakers, aircraft, and infrastructure for Arctic operations. Regional Flashpoints Threaten Security Like the United States, the Arctic nations of Russia, Canada, Norway, and Denmark have geographical claims to the Arctic. Unlike the United States, however, they have each sought to exploit economic and strategic opportunities in the region by developing businesses, infrastructure, and cities in the Arctic. They have also renewed military exercises of years past, and as each nation learns of the others' activities, suspicion and competition increase. When the Russians sailed a submarine in 2007 to plant a titanium flag on the "north pole," they were seen as provocateurs, not explorers. The continental shelf is a particular point of contention. Russia claims that deep underwater ridges on the sea floor, over two hundred miles from the Russian continent, are part of Russia and are legally Russia's to exploit. Denmark and Canada also claim those ridges. Whichever state prevails in that debate will have exclusive extraction rights to the resources, which, based on current continental shelf hydrocarbon lease sales, could be worth billions of dollars. Debates also continue regarding freedom of navigation and sovereignty over waters in the region. Russia claims sovereignty over the Northern Sea Route (NSR), which winds over the top of Russia and Alaska and will be a commercially viable route through the region within the next decade. The United States contends the NSR is an international waterway, free to any nation to transit. The United States also has laid claim to portions of the Beaufort Sea that Canada says are Canadian, and the United States rejects Canada's claim that its Northwest Passage from the Atlantic to the Pacific is its internal waters, as opposed to an international strait. Canada and Denmark also have a boundary dispute in Baffin Bay. Norway and Russia disagree about fishing rights in waters around the Spitsbergen/Svalbard Archipelago. U.S. Capacity in the Arctic Is Lacking Traffic and commercial activity are increasing in the region. The NSR was not navigable for years because of heavy ice, but it now consists of water with floating ice during the summer months. As the icebergs decrease in the coming years, it will become a commercially profitable route, because it reduces the maritime journey between East Asia and Western Europe from about thirteen thousand miles through the Suez Canal to eight thousand miles, cutting transit time by ten to fifteen days. Russian and German oil tankers are already beginning to ply those waters in the summer months. Approximately 150,000 tons of oil, 400,000 tons of gas condensate, and 600,000 tons of iron ore were shipped via the NSR in 2011. Oil, gas, and mineral drilling, as well as fisheries and tourism, are becoming more common in the high latitudes and are inherently dangerous, because icebergs and storms can shear apart even large tankers, offshore drilling units, fishing vessels, and cruise ships. As a result, human and environmental disasters are extremely likely. Despite the dangerous conditions, the Arctic has no mandatory requirements for those operating in or passing through the region. There are no designated shipping lanes, requirements for ice-strengthened hulls to withstand the extreme environment, ice navigation training for ships' masters, or even production and carriage of updated navigation and ice charts. Keeping the Arctic safe with the increased activity and lack of regulations presents a daunting task. The U.S. government is further hindered by the lack of ships, aircraft, and infrastructure to enforce sovereignty and criminal laws, and to protect people and the marine environment from catastrophic incidents. In the lower forty-eight states, response time to an oil spill or capsized vessel is measured in hours. In Alaska, it could take days or weeks to get the right people and resources on scene. The nearest major port is in the Aleutian Islands, thirteen hundred miles from Point Barrow, and response aircraft are more than one thousand miles south in Kodiak, blocked by a mountain range and hazardous flying conditions. The Arctic shores lack infrastructure to launch any type of disaster response, or to support the growing commercial development in the region. U.S. Leadership in Arctic Governance Is Lacking Governance in the Arctic requires leadership. The United States is uniquely positioned to provide such leadership, but it is hampered by its reliance on the eight-nation Arctic Council. However, more than 160 countries view the LSOC as the critical instrument defining conduct at sea and maritime obligations. The convention also addresses resource division, maritime traffic, and pollution regulation, and is relied upon for dispute resolution. The LOSC is particularly important in the Arctic, because it stipulates that the region beyond each country's exclusive economic zone (EEZ) be divided between bordering nations that can prove their underwater continental shelves extend directly from their land borders. Nations will have exclusive economic rights to the oil, gas, and mineral resources extracted from those outer continental shelves, making the convention's determinations substantial. According to geologists, the U.S. portion is projected to be the world's largest underwater extension of land—over 3.3 million square miles—bigger than the lower forty-eight states combined. In addition to global credibility and protection of Arctic shelf claims, the convention is important because it sets international pollution standards and requires signatories to protect the marine environment. Critics argue that the LOSC cedes American sovereignty to the United Nations. But the failure to ratify it has the opposite effect: it leaves the United States less able to protect its interests in the Arctic and elsewhere. The diminished influence is particularly evident at the International Maritime Organization (IMO), the international body that "operationalizes" the LOSC through its international port and shipping rules. By remaining a nonparty, the United States lacks the credibility to promote U.S. interests in the Arctic, such as by transforming U.S. recommendations into binding international laws. A Comprehensive U.S. Strategy for the Arctic The United States needs a comprehensive strategy for the Arctic. The current National/Homeland Security Presidential Directive (NSPD-66 / HSPD-25) is only a broad policy statement. An effective Arctic strategy would address both governance and capacity questions. To generate effective governance in the Arctic the United States should ratify LOSC and take the lead in advocating the adoption of Arctic shipping requirements. The IMO recently proposed a voluntary Polar Code, and the United States should work to make it mandatory. The code sets structural classifications and standards for ships operating in the Arctic as well as specific navigation and emergency training for those operating in or around ice-covered waters. The United States should also support Automated Identification System (AIS) carriage for all ships transiting the Arctic. Because the Arctic is a vast region with no ability for those on land to see the ships offshore, electronic identification and tracking is the only way to know what ships are operating in or transiting the region. An AIS transmitter (costing as little as $800) sends a signal that provides vessel identity and location at all times to those in command centers around the world and is currently mandated for ships over sixteen hundred gross tons. The United States and other Arctic nations track AIS ships and are able to respond to emergencies based on its signals. For this reason, mandating AIS for all vessels in the Arctic is needed. The U.S. government also needs to work with Russia to impose a traffic separation scheme in the Bering Strait, where chances for a collision are high. Finally, the United States should push for compulsory tandem sailing for all passenger vessels operating in the Arctic. Tandem sailing for cruise ships and smaller excursion boats will avert another disaster like RMS Titanic. To enhance the Arctic's economic potential, the United States should also develop its capacity to enable commercial entities to operate safely in the region. The U.S. government should invest in icebreakers, aircraft, and shore-based infrastructure. A ten-year plan should include the building of at least two heavy icebreakers, at a cost of approximately $1 billion apiece, and an air station in Point Barrow, Alaska, with at least three helicopters. Such an air station would cost less than $20 million, with operating, maintenance, and personnel costs comparable to other northern military facilities. Finally, developing a deepwater port with response presence and infrastructure is critical. A base at Dutch Harbor in the Aleutian Islands, where ships and fishing vessels resupply and refuel, would only cost a few million dollars per year to operate. Washington could finance the cost of its capacity-building efforts by using offshore lease proceeds and federal taxes on the oil and gas extracted from the Arctic region. In 2008, the United States collected $2.6 billion from offshore lease sales in the Beaufort and Chukchi Seas (off Alaska's north coast), and the offshore royalty tax rate in the region is 19 percent, which would cover operation and maintenance of these facilities down the road. The United States needs an Arctic governance and acquisition strategy to take full advantage of all the region has to offer and to protect the people operating in the region and the maritime environment. Neglecting the Arctic reduces the United States' ability to reap tremendous economic benefits and could harm U.S. national security interests.