The North American Development Bank: After 20 Years, Time to Expand
Having been created alongside the North American Free Trade Agreement (NAFTA) to mitigate concerns that increased commerce would destroy the border region environment, the organizations fully deserve the kudos. Nonetheless, looking ahead to the challenges on the horizon for the next twenty years of NAFTA, we need to empower the NADBank and BECC to do much more. I was invited to attend the meetings to speak on a panel focused on border infrastructure, and I came away with a few important reflections on the past and future of the NADBank and BECC.
First, both organizations have been forced to evolve rapidly in recent years, both as a result of their own success and the changing nature of the challenges facing the border region. In the early days, their bread and butter projects were in wastewater treatment, an issue of major concern in the 1990s. Since then, largely due to NADBank funding and BECC technical assistance, towns and cities in northern Mexico have increased the percentage of sewage that is treated, from 21% in 1995 to 87% in 2012. The BECC and NADBank are currently focused on supporting the development of renewable energy and some transportation infrastructure projects designed to improve air quality.
Both of these new areas of focus fall within the basic mandate to focus on environmental infrastructure, but they also represent the stretching of its boundaries, moving the North American Development Bank somewhat more toward traditional economic development. After all, transportation and energy infrastructure provide at least as much in the way of an economic boost as they do environmental benefits. These new projects have pushed the NADBank to the edge of its lending capacity.
If we want the Bank to do more, it will need more capital. And after twenty years of success, why wouldn’t we want the Bank to do more? Why limit it to environmental infrastructure and such a small geographic band in the border region in the first place? Why not let the Bank and BECC promote sustainable economic development and transportation infrastructure in North America?
The reason is quite simple. It costs money, and though there is much support for the twin organizations in the U.S. and Mexican governments, there is also a reluctance to support a recapitalization of the bank and expansion of its mandate while other government banks, like the Export-Import Bank, and indeed much of the U.S. federal budget, are under fire. The politics may be tough, but economically it is a huge mistake.
A quick look at the numbers explains why. Mexico is the United States’ second largest export market and the U.S. is Mexico’s top market. We trade more than a half trillion dollars of merchandise each year. Six million U.S. jobs and at least as many Mexican jobs depend on this trade, over 70% of which traverses the U.S.-Mexico border, most of it on trucks. Unfortunately, inadequate infrastructure investments for border crossings, along with staffing needs and inefficient security and customs procedures, cost the U.S. economy $7.8 billion dollars in lost output each year according to a recent analysis by Bloomberg Government. Mexico loses out on a similar amount of economic growth each year. Inadequate feeder roads and an overall lack of north-south highway infrastructure only compound the problem.
NAFTA did not just boost U.S.-Mexico trade; it transformed it. The two countries no longer simply buy and sell products from each other, but rather through the creation of an integrated continental manufacturing platform, they actually build them together. Cars made in North America, for example, often make their way across the northern and southern borders eight times as they are being produced. But for each border crossing, long lines and unpredictable wait-times raise costs and cut into the competitiveness of regional industry.
All of this means that the return on investment in border crossings and transportation infrastructure to facilitate trade throughout North America is extremely high. Of course this infrastructure costs money, but it is money well spent, especially since most border crossings have not been significantly upgraded since being built many decades ago, long before NAFTA increased the trade that passes through them.
In a time of tight budgets, the governments of the United States and Mexico must choose the most efficient vehicles available to deliver needed infrastructure investments. The NADBank cannot fully replace the traditional appropriation process for border infrastructure, but it has several distinct advantages to bring to the table.
First, by using its own capital it can help lower the cost of financing for local and state governments, allowing them to play a larger role in meeting the infrastructure needs of the region. The Bank and BECC can also provide technical assistance to help subnational governments structure and pool projects in ways that improve their access to financial markets.
Second, if authorized to do so, the Bank could coordinate the development of binational infrastructure projects to avoid a problem that is all too common, the construction of a border crossing on one side of the border without the corresponding component on the other side. The United States has recently built a bridge outside of El Paso EP NaN% at Guadalupe-Tornillo, but the Mexican government is still getting organized to finish construction of its part. The opposite is true in San Ysidro, the most trafficked port of entry along the border, connecting San Diego to Tijuana. Mexico has built a beautiful new facility, but the U.S. is still several years away from completing its construction.
Finally, analysts, policymakers and businesses all agree that an increased use of public-private partnerships will be needed to finance the full range of border infrastructure needs. These projects generally depend on toll collection as the mechanism for a private entity to recoup its investment, making the viability of the business model quite dependent on accurate modeling of future traffic flows. The NADBank and BECC are well positioned to coordinate and lead the type of binational analysis of supply chain and vehicle traffic flows that could provide the framework for individual project analyses. This same type of capacity makes the NADBank and BECC important players in efforts to make sure infrastructure planning in the region is strategic, sustainable, and meets the needs of the regional economy. The current system of cross-border infrastructure planning is extremely decentralized, and changes to the process are needed to incorporate data-driven studies of future infrastructure needs.
None of this is to say that the NADBank should discard its environmental mandate. In fact, only a small change is needed to the mandate at all: the NADBank and BECC should seek to foment the building of sustainable infrastructure for the border region. This would allow the organizations to promote the economic development of the border region and ensure that growth occurs in an environmentally sustainable manner. The NADBank would, however, need to be recapitalized at a higher level. Further, the United States and Mexico need to make fairly significant changes to the way they plan and fund regional transportation infrastructure. The politics would surely be tough, but the payoff in terms of export expansion, job creation, and regional competitiveness would more than make up for it.