Financial PPP and the Age of Deleveraging: A Pragmatic Approach to Loan Guarantees for U.S. Infrastructure Projects

Abstract

Since the financial crisis of 2008, the U.S. private sector has been deleveraging rapidly. During such a major macroeconomic trend, government programs to support large-scale infrastructure development are often considered an effective economic policy response with respect to employment, economic growth, and achieving low project costs. But since the U.S. government entered the financial crisis with relatively large deficits and outstanding debt, the extreme fear of indebtedness that characterizes an “age of deleveraging” in the private sector is now constraining public-sector policymakers as well. This article outlines a limited and pragmatic approach to U.S. government support for the capitalization of infrastructure projects. The approach, based on utilizing project finance loan guarantees, seeks to provide a practical framework to address the issues that any new spending proposals face in the U.S. as a result of due to the highly contentious debate about the level of U.S. deficits and national debt.

The first part of the article briefly summarizes the relevant features of the fierce current debate in the U.S. about government debt, deficits, and overall economic policy. The next and most fundamental part outlines why partial loan guarantees of infrastructure project finance debt (a type of financial public–private partnership (PPP) between government and private-sector lenders) might be especially effective as a “middle ground” to defuse, or avoid, some of the budget debate issues. This part includes subsections that briefly discuss how the partial guarantee mechanism can help ensure long-term debt management, control risk, assess cost, and add to transactional efficiency, as well as how a guarantee program can be managed with respect to overall debt capacity utilization and political issues. The final part of the article contains some brief observations about intrinsic elements of the potential usefulness of a U.S. loan guarantee program for infrastructure, even when it is subject to multiple constraints.

TOPICS: Legal and regulatory issues for structured finance, legal/regulatory/public policy