When a new Congress or member proposes an infrastructure bank (learn more from Wikipedia), like clockwork I will hear from a couple of State DOT CFOs who say in frustration: “But that’s financing, not funding.” It’s great to have more financing tools and great to accelerate projects, my friends say, but financing rarely adds the additional new funding that is needed to address our long range needs and growing infrastructure deficit. The funding and projects deficit grows due to rising vehicle fuel efficiency, increased construction costs, inflation, and more roads reaching old age and needing preservation and maintenance.
So my DOT friends will cheer this recent quote:
Infrastructure banks have great potential to solve financing problems. But no one should think for a moment that financial innovation can address funding problems. We still need to face the fact that there’s no free lunch.
So says Rohit T. Aggarwala in “Fiscal Games Can’t Hide True Costs of U.S. Roads” in Bloomberg. Aggarwala leads the environmental program at Bloomberg Philanthropies and is a visiting scholar at Stanford University.
Infrastructure banks are in the news again because Chicago Mayor Rahm Emanuel recently announced the Chicago Infrastructure Trust, which will “help arrange private-investor financing of city projects, seeded with small amounts of government capital.”
Chicago’s plan is worth paying attention to “because it is the first-of-its-kind established on the local level and it should profoundly inform the new thinking and ideas coming from the states,” notes Robert Puentes of Brookings in a good analysis of the proposal (“Transformative Investments, Chicago Style“)
Aggarwala correctly notes that infrastructure banks offer a way around the political challenges of convincing elected officials and the public to raise the gas tax, and the pervasive myths (my words) of earmarks:
“Private investors’ money multiplies limited public funds; those investors’ bankers help ensure that politicians don’t prioritize the wrong projects; and the projects themselves remain public — thus avoiding the downsides of true privatization.”
That solves only the challenge of timing, not the challenge of wealth. Aggarwala describes how financing and infrastructure banks can solve the timing challenge:
By definition, a financing problem is one of timing: a project built today creates value tomorrow, but the builder doesn’t have the cash today to get started. So an investor lends, the borrower builds and the two share the value created tomorrow. That’s finance. . . .Investment can unlock future revenue that can be shared with a lender.
The problem is that much if not all of the public funds come from existing revenues. That in turn reduces the amount of funds available in the future for other needed maintenance, preservation and capacity improvements.
In some cases, the public funds are new, such as tolling revenue. But tolling is an option on very few roads across the country. Further, there is strong opposition to tolling new roads and even stronger opposition to tolling an existing road for expansion and improvements. Aggarwala dissects the dilemma:
“Unfortunately, America’s most dire infrastructure problems are . . . like Pennsylvania’s 6,000 structurally deficient bridges. Replacing these won’t create new value, serve new traffic or generate new economic development, so financing has to come from existing income. And that’s a problem not of timing, but of wealth. Even if a replacement bridge can be financed through an infrastructure bank, the debt service on the loan has to be paid back with existing wealth.
Worse, most of America’s bridges are untolled, so even if their replacements were to carry more traffic, they wouldn’t yield new direct revenue. At best, through gasoline and other taxes, they would bring money into the federal Highway Trust Fund and into state and local governments. So what’s necessary to unlock financing is funding from increased future allocations from the Highway Trust Fund, or from state and local taxes.
But that is the very problem an infrastructure bank tries to avoid.”
I would quibble with his point about not generating new economic development. A new bridge or road can improve economic vitality but rarely enough to back private investment, which I think is Aggarwala’s point.
There’s one aspect Aggarwala doesn’t mention, according to Joung Lee, Deputy Director of the AASHTO Center for Excellence in Project Finance. Congress, during its debates on a national infrastructure bank (NIB), has yet to reach “a full consensus on what exactly such an entity should do. So far the debate has exhibited qualities of a Rorschach test, where interested stakeholders project what they want to see in a NIB based on their varied interests. For example, Aggarwala takes it as a given that a NIB would extend loans to recipients that are selected through careful vetting based on sponsor creditworthiness and project risk. However, some supporters of the NIB have proposed activities that would include grant funding in addition to extending credit. Direct grant-making by a NIB would essentially displace state DOT and MPO decision-making with an entity that is much further removed from the transportation plans and projects to which such funds are applied. In addition, such activities would most likely reduce the purported ability of a NIB to efficiently leverage seed capital and bring discipline to project selection with minimal political interference.”
So in the end, an infrastructure bank and financing tools are excellent additional tools which will help a few public agencies. They will help primarily with mega-projects at our ports and in our major cities – both of which are the economic engines of our country. Puentes comments that given “the absence of progress in Washington, cities like Chicago are showing the way forward. They are stepping up to devise new ways to conceive and finance a range of infrastructure projects as the physical means to an economy-shaping end, rather than end in itself.”
But infrastructure banks and financing tools will do little to help the majority of smaller ports, and rural and suburban cities and counties who face overwhelming infrastructure needs and funding shortfalls. As Aggarwala notes, it is “fantasy” to believe we can “find a way other than taxes (on gasoline and property) or user fees (tolls and the like) to pay for infrastructure.”
Learn more about the Chicago Infrastructure Trust plan from the city’s news release.
For critical perspectives see “Don’t Trust the Infrastructure Trust,” from Tom Tresser in the Huffington Post., and “Cloud Of Skepticism Surrounds Chicago Infrastructure Trust,” in Progess Illinois. Note that some of the criticisms have now been addressed – see “Emanuel revamps Infrastructure Trust plan to appease aldermen,” Chicago Sun Times, April 14, 2012
Learn more from our related stories:
The Conservative, Tea Party Case for An Infrastructure Bank, June 2011
Infrastructure Bank is DOA in House, Mica Declares, October 2011
New Infrastructure Bank Proposal from Senators March, 2011