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?


  1. This post left me a little confused. I think it could be because I don't have a great background in finance or perhaps I'm just simplifying the concept too much. My understanding is that the DOT is now borrowing money to pay for road construction. If this is correct then I think that perhaps a better innovation from the DOT would be to find a way to not have to borrow money. For example, when the Indiana Toll Road became too expense for the state to maintain they leased it to a Swedish company. While this is a huge oversimplification, in general, I believe you shouldn't "buy" something you can't pay for.

  2. I too, am confused. Maybe in class you can clarify a little, Mike?

  3. Toll-based approaches are most certainly one of the leading ways to pay for roads. Not only do they tax only the users of the roads, they are considered one of the leading methods of reducing traffic congestion. So yes - tolls are certainly an innovation!

    What the DOT did by creating a specific department for innovation was open the doors to new ways of paying for roads other than grants. The innovation relates to our discussion that most innovation takes the shape of applying old approaches to new problems. Part of the innovative approaches put forth by the office have included tolling, but the main reason the office exists is to find creative ways of financing these large projects.

    I agree with your point that in general we should not buy things cannot afford, but I would stress that this holds true for personal expenditures more than anything else. Credit card rates are much higher than the rates that these projects are financed at. Also, debt is a critical factor in the world's economy. From very short-term loans called commercial paper to million and billion dollar construction projects, companies operate with debt all the time.

    I found what the DOT has done to be an interesting innovation because 1) it represents an approach to solving a relatively recent problem - up until now, roads have been pretty affordable. 2) The innovation rests in its application - how can the department apply financial instruments to fund this unique type of project? And 3) I can't imagine anything that could seem as government-y/bureaucratic-sounding as the department of transportation. Who would have thought they'd have an office focused on innovation?