Vital Interests: Michael, thank you for joining us today on the Vital Interests Forum. You've spent a number of years examining and structuring infrastructure projects in the United States and around the world. This is a key policy initiative we hear about each time a new administration comes in.

Can you give us a recap of just what we are talking about when discussing infrastructure policy. What can an administration do to implement an infrastructure plan that will quickly start significant transportation, reliable and sustainable energy, and national enhanced digital access projects with realistic completion timelines?

Michael Likosky: Thanks for having me. For starters, it is essential to get a handle on how decisions over what projects to choose and how to pay for them are taken.  Most experts, commentators and practitioners have not well thought through this issue on a practical level.  So, we will see battling stories between the federal government must lead the way, on the one hand, to all decisions are taken at the local level.  We can be forgiven for not knowing really what is being talked about on a practical level.  

Very generally, infrastructure procurement is done by state, county, city, and governmental authorities. However, the exceptions whereby the private sector drives projects are immense including slices of energy, water and communications infrastructure which can be largely private, albeit still involving governmental support through the tax code and regulatory advantages. The federal government does on its own procure projects through various agencies and certain statutory entities.  

That said, frequently and regardless of the procuring entity or private driver, the federal government plays a catalytic role through policy decisions, tax code usages, and financial support. In infrastructure, it is not all about the money on the federal front.  Moreover, it is frequently, at the project level, a team effort involving federal, state, local, private, not-for-profit entities.

President-elect Biden’s infrastructure tool kit has a number of mechanisms within it. Importantly, the federal government does not often pay one hundred cents on the dollar for projects. Instead, in an environment where need for money far outstrips federal budgets, it’s all about leverage.  

The federal mechanisms are in practice far different than how the situation is typically presented.  First, of course, is the policy directives. Then, a number of grant outlays exist including formula grant money and also competitive grant programs within agencies. Otherwise, Biden has a number of leveraging mechanisms including tax credits, bond vehicles and enhancements, loans and loan guarantees, zoning determinations, investment platforms, P3s, and insurance. That is pretty much the universe of federal mechanisms. Of course, these mechanisms each take on many permutations and emanate from the many federal agencies. And, the federal government itself does do stuff through the Department of Defense, General Services Administration, Army Corps of Engineers, and others. Frequently, their work though is contracted out.

VI: You mentioned states and local municipalities coming up with ideas for infrastructure projects. What about projects that require a national vision? For example, the modernization of American railroads which are antiquated and dysfunctional when compared to other nations.

To create a national vision and raise the amount of money that other countries have been able to raise to build high-speed rail lines, what can the Biden administration do to get state cooperation? 

The federal government has been trying to upgrade the vital East Coast rail corridor but there is a weak link in a hundred year old rail tunnel under the Hudson River in New York city called the Gateway tunnel. There was federal planning and a budget to replace this tunnel but it was shot down by the New Jersey governor at the time, Chris Christie, who said, "No, this isn't worth it. We're not going to do this.” The project was essentially killed.

Michael Likosky: Yes, it's a great question. As a general matter, it's very difficult to do something that's interstate, be it a passenger rail system, an electrical grid, or a bridge.  There are many federal, state, local and private interests which must converge long enough to get things signed and sealed.  

Still, America has been built in many ways on these interstate projects including President Lincoln’s Transcontinental railway, Eisenhower’s road system, rural electrification, Roosevelt’s industrial defense system during the Second World War, massive water projects, the Internet, among many others.  

So, all this is achievable, although all sizable federally-driven projects have faced large obstacles.  Right now, in fact, we have been undergoing seismic transformations with a subsea cable system, an emerging renewable energy economy including production and batteries, a network of data centers, satellite constellations, among other areas.

Biden’s administration will grow and further catalyze these emerging areas so that they become foundational to our economy.  

Additional areas such as interstate passenger rail will happen inclusive of subway and buses, as well as rural and underserved municipal broadband. All this is in the works.  Biden will play a transformative role, an essential catalytic role. The key will be baking a diverse set of interests into the transactional structures. This will involve innovation, because infrastructure projects are tradition-bound enterprises and mostly stumble or fall because tradition has become frequently synonymous with a lot of hand ringing and finger pointing and frustrations associated with things not happening as much as is needed. 

These are areas that the federal government can and will play a role. It's just a matter of what's the government versus what's the private mix on a lot of these projects.

VI: If the federal government decides that something like broadband is a national priority and in fact is an absolute necessity for national security to have the country at the forefront of new technology, would that make a substantial difference? Could an executive decree get such initiatives funded and underway?

Michael Likosky: There are different ways of doing it operationally. We certainly saw government action with the need for PPE and the different COVID vaccines production.  A large amount of this was accomplished by executive order in terms of financing. Interestingly, it was the Department of Defense that has played a large role in this process. That's your easiest route legally - to go through the Defense Department in some way or another to get a national program immediately underway. Ah, but the politics, the Constitutional issues, the mechanisms, the justifications, they are all so complex, but certainly not unsurmountable if done in a sophisticated, targeted way.

One of the challenges that the incoming administration is going to confront is we now have several decades of underinvestment and disinvestments in large parts of the United States.

Biden has been crystal clear that national global security is fundamentally driven in part by domestic economic security. In fact, infrastructure investing by the federal government overseas has frequently been a key element of global security. Of course, post-conflict and post financial crisis overseas nation-building exercises are many.  These efforts are poorly understood because it is easier to claim to have knowledge on these highly political areas than to understand them.

A relevant area which will increasingly structure our economic decision-making on this front is how the U.S. used infrastructure investments overseas as a component of national security to build out the industrial base of countries in order to peacefully evolve them into strong non-authoritarian allies in regions like Southeast Asia and Eastern Europe. This has been a mixed success for the U.S. for a number of reasons including the fact that our allies and competitors are fighting for those same intergovernmental relationships.

With regards to domestic infrastructure-related national security, unfortunately, global efforts have largely commanded the bulk of U.S. infrastructure money. There was a tremendous mobilization of American capital that went abroad, much of it in public-private partnerships.This resulted in disincentives to investment in American infrastructure in a large number of areas of the country. All this, on a forward going basis will not be a zero sum game.

Biden’s infrastructure plan will have a national security component, because what we are learning is that America’s economic engine must be fueled in many parts of the country at sizably higher levels. Chronic disinvestment means that the U.S. is not as strong of a player on the global scene as it must be, thus the national security issues. This is the reality the Biden administration will inherit as it tries to negotiate or renegotiate a lot of trade and investment regimes. 

VI: Let's talk about the money needed for meaningful infrastructure policy. The Biden transition team is outlining an infrastructure plan that will mandate an immediate $300 billion stimulus program to be followed by a $3 trillion 10-year infrastructure initiative. This plan will soon run up against the fact that the response to the COVID pandemic will leave states, cities, and small municipalities with huge budget shortfalls and debt burdens in the $300 billion range. How can the country deal with this level of debt and still fund large-scale infrastructure projects? Can foreign investment be counted on as a source for infrastructure funding? 

Michael Likosky: This is a complex issue. It comes down in part to finding a way of sizably increasing the overall pie of available capital be it federal, state, local, or private.  From a federal vantage, when demand for federal money far outstrips any dollar figure on the table, it is all about leverage.  The Biden dollar figures make sense and are politically viable. The key is how the financing mechanisms discussed above which are at Biden’s disposal will be structured and deployed.

VI: So who actually does that? Is this done through government agencies? Is it done by an executive initiative? Who makes the decisions to create the landscape that is conducive to attracting investments to fund large-scale infrastructure projects?

Michael Likosky:  All of the above and additional. That is the short direct answer. You have to look around globally at who has sizable amounts to invest in infrastructure and then what vehicles are put in place to put that capital to work.  In broad strokes, it’s global sovereigns, global pensions, insurance, and high net worth individual family offices.  

These institutional investors can make it into the U.S. market through third party private equity funds, global asset managers, U.S. Treasuries, government bonds, transnational commercial enterprises, direct lending instruments, banks, the stock market, among other vehicles. 

The federal government and its many other entities, including the Treasury Department, play a large role in creating the enabling environment and catalyzing the investing in deals.  

Notably, much can be done through Executive Order and intra-agency action to shore up money already in the federal government. The baseline also certainly includes appropriations and direct expenditures as well as the leveraging devices. 

VI: What would be an example of an agency that could directly raise money to fund a specific project?

Michael Likosky: Well, look at the New York Metropolitan Transportation Authority (MTA), which runs the New York city subway system and the train system in the New York region which includes service into Connecticut and New Jersey.  It really fits the profile of what a Biden infrastructure plan is seeking out:  interstate, critical national infrastructure, key asset, vital to national security, foundation for economic development and opportunity, transit, large bang for the federal buck, essential services system for frontline workers, source of middle class jobs with mobility, union participation, capital planned ability to prudently expend, mixed financing profile, prime federal vehicle for moving large critical amounts of money to market efficiently and quickly, catalyzer of transit-oriented real estate development, Climate Change impacting, multiplying effects producer, among other elements.

The MTA has a very large budgetary hole right now as emergency infrastructure services governmental entities tend to have. This has an obvious impact on its operations. However, the MTA also has an essential sizable capital program. The two areas share in the fact that each is critically under-capitalized. Each is though entirely dependent on the other’s health both in achieving the authority’s public benefit mandate and in ensuring fiscal health. An authority that does not grow cannot readily pay debt service over time.  Likewise, an authority that does not have healthy operations cannot attract growth capital.

A number of traditional and innovative entrepreneurial financing and value producing solutions are possible. Ideally, the authority finds ways of increasing the available pie of capital by looking to an integrative approach. 

It is about leverage for entities such as the MTA including a large scale inflow of federal direct payment into the authority for meeting vital needs.  

The diverse types of capital which are likely to come from the Biden Administration including through cash assistance must be leveraged. Here, the MTA is leveraging to lead the way though. So, projects, programs of projects and such can be funded on or off balance sheet strategically, in ways that produce revenue streams that the authority can capture as makes sense. Off balance sheet financing is a very poorly understood area of infrastructure investment because it not only encompasses the introduction of private equity, but also is an essence of federal grant financing as well as a quotient of revenue generated by myriad sources, federal leveraging vehicles both traditional and innovative, direct investing by institutional investors into projects as well as injections into the authority’s balance sheet.  

The capability of the MTA to do programs of projects is immense, diverse, and essential.  Again, viewed in this way, new pots of capital, including from the federal government, through an integrated financing approach in which the MTA strategically wields the various instruments we’ve discussed here and attuned to the end institutional investors is key.

VI: As these agencies go into the global market to get financing, I imagine the federal government has an oversight function, certainly for national security concerns? There has been controversy when Saudi sovereign funds were involved in the operations of a harbor facility and certainly the Chinese entity Huawei was suspect in any involvement with American communications infrastructure. There must be government review functions that say, "Well, you can go after this money, but you can't go after that."

Michael Likosky: It's a good question.  A number of federal agencies are deeply immersed in this area.  Most high profile has certainly been CFIUS (Committee on Foreign Investment in the United States) which oversees all large foreign direct investment into the US. It very rarely raises significant concerns tied to infrastructure transactions. It certainly gets involved in other sectors. We're going to see the CFIUS process continue to undergo evolution and change as it has in the past. Other departments, including procurement for the Defense Department are active areas for infrastructure.

On the infrastructure front, governmental and private entities can structure these things so there's not any influence or interference.

Importantly, we are seeing another type of influence happening driven by a mandate among global institutional investors to see their investments produce benefits to economies, social concerns, climate areas, labor, governance, and economic opportunity areas. This movement has origins which are not often understood and which continue to shape how the federal government approaches regulatory issues among other intervention areas.  

It is a broad deep movement. Nonetheless, it is a nascent one when it comes to measuring actual impact. Moreover, areas with high levels of quantifiable measurement capabilities which align with Biden’s mandate such as labor involvement in projects are under-utilized in the measuring arena as is economic opportunity.  

VI: The Biden transition team has announced the appointment of John Kerry to a cabinet-level position to oversee the United States' involvement in tackling climate change challenges. Kerry will facilitate the U.S. rejoining the Paris Climate Accords and setting a national environmental agenda. Is there a need for an infrastructure czar? Someone who is knowledgeable about all the complexities connected with implementing national infrastructure projects?

Michael Likosky: Senator Kerry's position is essential for building domestic adaptation and resilience to climate change.  His role can also catalyze federal legislative action.  Although infrastructure is multifaceted and includes such a range of sectors and also governmental and private participants, many states have identified needs in only a few.  The thing about Climate infrastructure is that most states in the country have an exiting, emerging and growing Climate infrastructure economy. This means that members of Congress can fulfill their duties of supporting projects which advance the interests of their respective constituencies and also the national interest. It’s a way of getting those voting cards.

VI: The other key aspect about infrastructure projects is they are significant job creators. One of the groups behind infrastructure projects, you would expect to be the labor unions. What role does labor play in national infrastructure visions?

Michael Likosky: Labor unions are going to play a sizably larger role than we've seen to date in infrastructure. But there are considerations that need to be understood. First, the labor movement is not monolithic. The AFL-CIO is quite varied in its membership. The SEIU has both government and non-governmental workers. AFSCE is a large government worker union. Overall the unions have traditionally been primarily supportive of government-financed projects where the private sector plays a service contract role.  

However, not infrequently, the private sector investment model has been at odds with the interests of members of labor unions. Often it has been puzzling how private investors have pitted themselves stubbornly against labor groups in varying ways. This has driven significant concerns, as can be expected, among labor groups. All this can be worked through; however, certainly many of the private investor groups are fix-me-ups. The opportunity though is immense to coalesce private investors and labor unions in common cause.  It is simply how to get things done and to scale. Importantly though, greater sophistication and a more empathetic approach are preconditions.  

VI: Michael, let's look at this scenario. The United States is having a difficult time battling the COVID pandemic. There is a vaccine program underway but there's still going to be an enormous financial impact - high unemployment leading to economic hardship with evictions and families dependent on food banks. The U.S. economy may well slip into recession. Infrastructure projects are a means for the federal government to get an economic stimulus going. When you think about the Roosevelt era with New Deal programs like the Works Progress Administration  - massive dams were constructed, modern highways were built, and many towns got public buildings like libraries - is that a way of looking at what Biden can do if the economy really starts to tank in the second, third quarter of 2021?

Michael Likosky: Yes, it is. I think it's a good question. Importantly though, we need to understand fully the Roosevelt approach. While it involved large scale deployment of financial resources through the WPA and other vehicles, FDR also pursued public-private partnerships such as quasi-public entities and federal incentives  Every major federal crisis infrastructure program has done these two approaches together.  

The key is to coordinate the two approaches.  

Given the prolonged nature that this crisis is likely to have, this approach requires some innovation. Traditionally, the WPA direct payment programs have been short term, albeit massive. Where they have stopped, the other programs have kicked in especially under the FDR approach when the country faced a double dip Great Depression without enough grant money to sustain a recovery. Today, the grant money will need to maintain its size for longer as the economy recovers. At the same time, the targeted additional vehicles are equally essential to grow the pie of capital.

The impact of Dodd-Frank cannot be underestimated in all this. It is a key way of integrating grant and leveraging approaches. Understood and implemented, the evolution opportunities created by Dodd-Frank can be a game changer for governmental entities and private sector ones. This includes the intermixing of equity of financing on an organizational, programmatic and project basis involving integrated operating and capital project mechanisms and structures.

VI We're coming to the end of our time. Thank you for an interesting and in-depth discussion on the complex aspects of infrastructure. We like to end our discussions on a positive note. Looking, two, three, four years down the line during the coming Biden administration, do you have a positive outlook that in fact infrastructure will be a top priority and the administration will have means to get projects organized, funded, and going with some real dates for completion that will impact the nation?

Michael Likosky: Absolutely, and we’ve talked mostly about that immense positive transformation underway and on the way. 

Fundamental to the impact the Biden administration will have on the U.S. economy through infrastructure is by rebuilding and repurposing our industrial base. I got a factory to build or expand - a large, couple billion-dollar facility to build, I got a cluster of those to construct in a tight time frame, what do I need? I need a rail spur to bring in freight and ship out products. I need an airport to integrate economies through the movement of people and goods, I need to have a decent sized wastewater processing center. I certainly can't invest in a rural area without having reliable broadband and power grids. 

We're going to see a lot of ourselves and our allies and others investing in a whole range of new generation facilities, in renewable production, and those all have to be powered and connected up and moved by infrastructure. That's going to be the imperative and realized opportunity in the near, medium, and long term. That's what we're going to see during the Biden administration.

VI: I hope so. The country certainly needs to see that kind of progress.

Michael Likosky: I am confident we will. For more on Joe Biden’s infrastructure vision see my recent article President-elect Joe Biden's infrastructure vision

Michael Likosky is a partner at Advantage Infrastructure Advisors.  He holds a doctorate in Law from Oxford University. Michael has worked on infrastructure, inclusive of energy, high technology, advanced manufacturing, life sciences and economic growth for twenty years from a number of perches including as an expert and advisor, both domestically and transnationally. He has published five books on the topic including three with Cambridge University Press. Michael has advised multiple and successive governors.  He has served as chair of Governor Brown’s committee to modernize the California Infrastructure and Economic Development Bank. Michael has advised U.S. Treasury Department, U.S. Senators, Members of the U.S. House of Representatives members, United Nations, OECD, IDLO, Ford Foundation, Pension Funds, Mayors, Clinton Global Initiative, Global Investors, Multinational Enterprises including Google, Facebook, ABC/CBS/NBC/NewsCorporation, labor union pension funds, civic groups, rural financing entities, and start- ups.