Saturday, July 12, 2008

Infrastructure sector testimony of the CBO Director

US Congressional Budget Office (CBO) Director, Peter Orzag's testimony before the Senate Finance Committee on infrastructure investment has many interesting observations about the infrastructure sector. Among other things, the testimony also underlines the critical fact, suggested in an earlier post, that Governments can borrow at much cheaper rates than private or public-private infrastructure entities.

1. Need to make asset management a priority. Asset management relies on monitoring the condition of equipment and the performance of systems and analyzing the discounted costs of different investment and maintenance strategies. For existing infrastructure, the key issue is making efficient choices about maintenance and replacement. In constructing new infrastructure, asset management involves evaluating
total life-cycle costs—both the initial capital costs and the subsequent costs for operation, maintenance, and disposal—to ensure not only that projects are prioritized appropriately, but also that they are built cost-effectively. In the case of highways, asset management can involve making a larger initial investment in thicker pavement, which could provide a morethan-proportional increase in pavement life.

2. Options for meeting infrastructure demand includes
a) Increase federal spending
b) Improve cost effectiveness of tax expenditures - by delivering the tax benefits more effectively using Tax Credit Bonds (which gives tax credit on federal income tax liability, thereby freeing up State and Local Bodies from the burden of paying interest on their bonds/Munis)
c) Reduce the cost of providing infrastructure through proper asset management practices.
d) Promote eduction in demand by trying to recover atleast the Marginal Cost and by imposing user charges, congestion pricing etc.

3. The cost of capital experienced by private or public-private entities in funding infrastructure investments is much higher than that for Government. Therefore the US Government is considering three proposals - setting up a National Infrastructure Bank (NIB), a National Infrastructure Development Corporation (NIDC) and a subsidiary National Infrastructure Investment Corporation (NIIC) and a Build America Bonds Act - to raise money, mainly from the market through sovereign guarantee, and then fund public and private investments in infrastructure.

4. Most of the US federal government’s programs for surface transportation are financed through the Highway Trust Fund, about 90 percent of whose revenues come from two taxes on motor fuels. The tax of 18.4 cents per gallon on gasoline and gasoline–ethanol blends currently accounts for about two-thirds of the trust fund’s total revenues. The levy of 24.3 cents per gallon on diesel fuel accounts for about one-quarter more. Both tax rates have been unchanged since 1993. In 2007, receipts to the Highway Trust Fund from those taxes totaled about $38.8 billion. The states provide matching funds — generally about 20% of a project’s costs — on most highway projects that they undertake using federal money.

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