Financing the Productive Economy: The Heartland Development Bank

Infrastructure
and Economic Opportunity

Throughout American history, infrastructure investment has played
a critical role in economic development. As the nation moved west, the building
of canals and turnpikes, followed by construction of railroads, expanded the
field of economic opportunity. Later, investment in electricity and telephone networks
facilitated the development of vast expanses of the American landscape that had
previously been left behind. More recently, the national interstate highway
system and now the continuing build-out of broadband telecommunications
networks have enabled the de-clustering of many business endeavors that were
once confined to large central cities.

Infrastructure is one of
the basic building blocks of economic opportunity, as illustrated in Figure 1.
The standard infrastructure package of the economy includes highways, airports,
harbors, utility distribution systems, railways, water and sewer systems, and
communications networks.

In today’s network-centric, innovation driven economy
infrastructure also includes university and lab facilities, technology and
training centers, export processing facilities, and research parks.
These infrasystems – integrations of facilities, technology and advanced
socio-technical capabilities – have emerged as key drivers of innovation and
the locus of future higher-value industries and higher-paying jobs.

The
Heartland Opportunity

Long written off by much of the national media the American
Heartland of America has been displaying new signs of life. Made up of
thousands of rural small towns and hundreds of second and third tier cities
scattered across America,
the Heartland represents the vast regions outside the metropolitan areas. Many
retain strong ties to agriculture, forestry, mining or fishing but many also
have made a steady and successful diversification to globally competitive
manufacturing, energy information and other service industries.

Heartland communities outside the major metropolitan areas possess
many underutilized assets. These include, in many places, relatively low
housing costs and a good business climate, quality schools, a reasonably
educated and productive workforce, and available land and other resources for
expansion. Recently the resurgence of the Heartland has also been bolstered
by strengths in both energy and agriculture.

Infrastructure bottlenecks, however, are putting a damper on the
Heartland’s forward economic motion. Surging agricultural exports are exposing
inadequacies in the country’s railways, highways and waterways that carry grain
to feed the world. Those bottlenecks are costing farmers, shippers and consumers
millions of dollars.

This dire situation is
mirrored in the energy sector. Much ballyhooed plans to harness wind and solar
power face severe limitations due to a power grid that cannot bring renewable
energy from its sources to potential customers. Many transmission lines are
simply inadequate for the amount of power companies would like to push through them. As a result many of the windiest places, particularly in the Great Plains,
cannot move their energy to the more populated cities where the demand lies.

Rural regions and second and third tier cities in the Heartland
cannot bear the financial weight of these investments themselves because they
are often financially stressed due to a limited tax base, the high costs
associated with size and scale, and difficulties of a population that is in
many areas is aging and in others being rapidly increased due to in-migration.

America, the world’s most advanced continental nation, could be on the
verge of a great resurgence, much of it based in regions largely unacknowledged
by many pundits, academics and the media. What is needed now is an
infrastructure strategy to make it happen.

Infrastructure
Investment Key to the Heartland’s Growth

Of course, the Heartland’s infrastructure problems are not unique.
According to the American Society of Civil Engineers, the United States
needs to invest $1.6 trillion in infrastructure improvements in the next few
years. There is a need for a greater national commitment to meet these needs.
Yet often in the debates about infrastructure, the needs of the heartland —
so out of sight and mind to policy makers and pundits alike — are often
ignored.

Spurred in part by the
increase in calls for action on infrastructure investment, Congress has begun
to propose new funding structures and agencies to deal with the perceived
shortfalls in funding. Senators Dodd and Hagel have introduced bipartisan
legislation (S. 1926) calling for the creation of a National Infrastructure Bank (NIB). The NIB would be an independent
government agency modeled after the FDIC, with an initial endorsement to issue
bonds totaling up to 60 billion dollars. Focusing on transportation
infrastructure, Sen. Wyden or Oregon
has introduced legislation (S. 2021) that calls for 50 billion dollars in
infrastructure bonding through the issue of “Build America Bonds.” In the
House, there have also been moves towards proposing new solutions, including
the introduction of the National Infrastructure Development Act of 2007 (H.R.
3896) that calls for creating an infrastructure development corporation capable
of using leverage to make loans and to issue and sell debt securities.

Federal resources alone are
not going to meet the nation’s infrastructure needs. For that reason, here and
elsewhere around the world, cash-strapped governments are viewing private
investment as an increasingly important piece of the infrastructure investment
puzzle. Concurrently, banks, pension funds and other private investors are
considering infrastructure as a new, long-term asset class that offers a
combination of hard assets and visible long-term earning streams.

This confluence of circumstances has given rise to a new set of
private infrastructure funds that have attracted billions of dollars and Euros
from individual and institutional investors alike. In an 18-month period
leading up to 2007, nearly 160 billion dollars was directed for infrastructure
investment funds, including 120 billion dollars in newly created funds. This
trend has continued into 2008, with investment banks and institutional mangers
now able to leverage somewhere between $400 and $500 billion in buying power.

A key question is whether
the new private infrastructure investment vehicles or the assets of a federally
sponsored bank will find their way to the Heartland. There is a danger that
these funds will remain concentrated in the large metropolitan areas like their
private venture capital and federal urban development program counterparts.

The
Heartland Development Bank

In order to capitalize on emerging economic opportunities and to
rebuild America’s
productive capacity in energy, agriculture and manufacturing enterprises we
propose the creation of the Heartland Development Bank. The Bank is envisioned
as a $10 to $25 billion source of financing for infrastructure development
projects. The Bank would serve as a lead lender on projects of economic
significance in the Heartland and leverage considerable co-investment from the
private and public sectors.

Comparable models include the Inter-American Development Bank
(IDB) and California’s
Infrastructure and Economic Development Bank (I-Bank). The IDB is the oldest
and largest regional development bank which now serves as the main source of
multilateral financing for economic, social and institutional development
projects as well as trade and regional integration programs in Latin America
and the Caribbean. California’s
Infrastructure and Economic Development Bank (I-Bank) finances public
infrastructure and private investments that promote economic growth,
revitalization of communities and the enhancement of the quality of life
throughout California.

Following the IDB model, the Heartland Development Bank’s capital
would be subscribed by investors including states and the federal government,
banks, private investment funds, local and regional development organizations,
corporations, and other development-interested groups. Non-Heartland members outside the region could subscribe to the fund
and benefit by having preferred status as suppliers of goods and services for
HDB-financed projects.

The Bank’s resources would
include callable capital, and paid-in capital from HDB members, as well as
reserves and funds borrowed in international markets. The Bank could be
structured so that only 5% percent of the $10 billion is paid-in. The remaining
95% is callable capital to be based on the implementation of approved projects
in need of financing.

Unlike earlier periods of infrastructure expansion, which were
often uniformly national or regional in scope, today’s infrastructure — and
more particularly infrasystems — needs related to economic development are
often closely tied to the specific circumstances pertaining to a particular
local or regional economy. Since federal resources alone will most certainly be
unable to meet the entire need, local and private resources must be mobilized
to the greatest extent possible. For these reasons, the investment strategy of
the Heartland Development Bank may be most successful if it focuses on the many
thriving regional growth centers in manufacturing, agriculture, energy and
advanced services that have emerged across the country.

Public
Private Investment in the Heartland Development Bank

Infrastructure provision and development in America is
poised to jump to the front of the policy agenda over the next several years.
With the election of a new President, new priorities and objectives are sure to
be set regarding infrastructure investment. In addition, a major new
transportation funding bill will be introduced in the coming year, to be accompanied by a
major push for all kinds of infrastructure, at the congressional level.

While the rest of the world has been expanding the use of private
finance through public private partnerships (PPP) for decades, the United States
has remained somewhat behind the curve. Limited use of such PPPs has a long
history in the United States,
going back to the canals and railroads, but new and useful models need to be
developed. Faced with numerous challenges, including a soft economic outlook,
and a downturn in property values, governments require innovative new options
for the provision of infrastructure vital for economic growth. In many cases,
the most viable option for such communities will be to draw upon public-private
financing partnerships for new projects.

Infrastructure has been aptly characterized as the new competitive
imperative. The full competitive potential of the Heartland cannot be fully
realized, unless there is intelligent public policy and public and private
investment to catalyze it and make it happen. By investing in a vital
heartland, America
will help develop the kind of productive economy necessary to improve the lives and
prospects of a rapidly expanding population.

Joel Kotkin is Senior Fellow at the New America Foundation. Delore Zimmerman is President of Praxis Strategy Group.

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