Wednesday, October 14, 2009
Innovation by the DOT?
It has always intrigued me to consider the ways in which locations are connected by an unbroken series of roads. Since 1994, the Federal Department of Transportation has made a commitment to innovation related to roads. This innovation does not have to do with the materials, design, or construction processes of engineering public roads, but with their financing.
The Department has traditionally funded the construction of highways by offering grants of up to 80% of project costs. These days, the nation's demand for new road construction is too great for the traditional grant program and as a result, the Department has turned to "innovative financing" - new and creative ways to finance the production of public roads. Two examples of these innovations are Grant Anticipation Revenue Vehicles, also known as GARVEE bonds, "whereby future Federal funds provide the revenue stream needed to pay debt service and other bond-related costs for debt-financed projects" and “Credit Assistance Strategies,” through which the government aids in providing credit enhancements to improve the financial feasibility of such projects.
The Department's approach to project finance by means of debt instruments is by no means new. Obviously the Department of Transportation was not the first organization to make use of credit enhancements or to take on debt in order to lever a project off the ground. The DOT's approach is nonetheless innovative on the grounds that it has taken existing infrastructure and applied it in a new way to provide financing solutions.
Some would say that it was creative financing that got our economy into trouble. Particularly blamed are credit default swaps, which created a giant web of liability among our nation’s investment banks. Do you think innovative finance has a place in our economy anymore? What effect do you think increased regulation would have on such innovation? Do intellectual property rights play any role in this discussion?