November 18, 2013
Column | outbound

"The most original, creative idea on infrastructure financing in the last 30 years"

Wondering how the country can finance needed improvements to its infrastructure? Here's an idea worth a look.

By Mitch Mac Donald

You may not know Rep. John K. Delaney (D-Md.). He's a freshman U.S. congressman, and backbenchers are generally seen and not heard. But if you are rightly concerned about how the country will pay to improve its infrastructure, his is a name to know.

Last May, Delaney introduced "The Partnership to Build America Act" to finance infrastructure programs through the tax-free repatriation of overseas earnings of U.S. corporations. The legislation so far has 24 cosponsors from each side of the aisle, an early sign that its merits trump partisanship. It fits with the Obama administration's call for job-creating infrastructure programs and its desire to see offshore earnings return to the U.S. (though not tax-free). James H. Burnley IV, a former transportation secretary, a staunch Republican, and someone who knows good and bad policy when he sees it, has called it the "most original, creative idea on infrastructure financing in the last 30 years."

Here's how it works: An infrastructure fund would provide loans or loan guarantees to states and localities to finance qualified infrastructure projects. The fund would be seeded by the sale of $50 billion in bonds with a 50-year maturity, paying a fixed interest rate of 1 percent, and not guaranteed by the government. U.S. corporations would be encouraged to buy the bonds by being able to repatriate, tax-free, part of their overseas earnings for each dollar they invest; the current tax rate for repatriation is the prevailing corporate rate of 35 percent, a key reason U.S. firms keep their money over there rather than bringing it back here.

A process called a "reverse Dutch auction" would allow the market to set the ratio between each dollar invested and each repatriated, up to $50 billion in bonds purchased. Under this formula, companies bid on the face value of the bonds they would like to buy relative to the funds they can repatriate, with the lowest bids winning. Using a ratio of 1:4, which Delaney believes is realistic, a bidder repatriates $4 tax-free for every $1 it invests. A company can use the repatriated funds for anything it wants; the infrastructure fund, meanwhile, leverages the $50 billion at a 15:1 ratio to provide $750 billion in loans or guarantees. Delaney says that ratio is standard for most conservatively managed insurance companies, and even those with short memories can recall that Fannie Mae was levered at 99:1 before it imploded in 2008.

Delaney offers an example: On Monday, Company A buys $2.5 billion of infrastructure bonds at a 1:4 ratio of investment to repatriation. It sells the bonds on Tuesday at, say, 25 cents on the dollar, which Delaney estimated to be the price the resold bonds would fetch. The seller has a loss of $1.75 billion, which after a tax write-off, becomes a net loss of $1.13 billion. At the 1:4 ratio, the company has repatriated $10 billion and thus pays an "effective tax" of $1.13 billion. The effective tax rate becomes 11.3 percent, arrived at by dividing $1.13 billion by $10 billion.

Delaney's background is in the private sector, and his proposal brings with it an astute businessman's pragmatism. It requires no federal appropriations and no taxpayer exposure. Delaney knows the scheme is untenable as a pure investment and works only with the repatriation component attached.

Delaney said he's talked to the White House but wants to marshal broader congressional support before further engaging the administration. U.S. corporations he's spoken with that have big money overseas support the bill, he said.

Political realities could still get in the way of this. Delaney is a freshman in the minority party of a polarized Congress. Yet his bill represents sorely needed out-of-the-box thinking, and it deserves a serious look.

About the Author

Mitch Mac Donald
Group Editorial Director
Mitch Mac Donald has more than 30 years of experience in both the newspaper and magazine businesses. He has covered the logistics and supply chain fields since 1988. Twice named one of the Top 10 Business Journalists in the U.S., he has served in a multitude of editorial and publishing roles. The leading force behind the launch of Supply Chain Management Review, he was that brand's founding publisher and editorial director from 1997 to 2000. Additionally, he has served as news editor, chief editor, publisher and editorial director of Logistics Management, as well as publisher of Modern Materials Handling. Mitch is also the president and CEO of Agile Business Media, LLC, the parent company of DC VELOCITY and CSCMP's Supply Chain Quarterly.

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