The Infrastructure Privatization Bank
The first time many heard about the United States creating a infrastructure bank was in President Obama’s Thursday speech, but the idea has actually been floating around Congress for a number of years. Former U.S. Senator Chris Dodd of Connecticut proposed the idea in 2007 with inauspicious timing. From the American Water Works Association:
In an eerie coincidence, legislation to create a National Infrastructure Bank to address the need for financing of infrastructure projects was introduced with bipartisan support in the US Senate the same day a bridge collapsed in Minneapolis.
The horrific 2007 bridge collapse in Minneapolis is often used as the poster child to promote a national infrastructure bank. In 2007 there were 75,000 other bridges in America that had the same rating of “structurally deficient” as the Minneapolis bridge; the problem continues today. The need for massive spending on our roads and bridges is well understood by everyone.
I think there is some misunderstanding though about the purpose of the proposed infrastructure bank. On the surface it appears to be an alternative source of funding for common transportation, water and energy projects. But its real purpose seems to be a means of spurring a large infrastructure privatization movement in the United States.
Senate Resolution 652, sponsored by Senator Kerry of Massachusetts, would create the American Infrastructure Financing Authority. The AIFA would require that funded projects generate revenues to repay the loan to the infrastructure bank. For the Minneapolis bridge project to be funded it would have needed to be a toll bridge rather than a free bridge (or have a government entity repay the loan). It’s a PayGo Infrastructure Bank.
Currently almost all American infrastructure is funded either through municipal bonds or federal funding. Even as federal funding has been constrained, municipal bond issuance has been very low this year, running at about half of last year’s rate. There is plenty of capacity to fund infrastructure with municipal bonds. From a funding standpoint it’s not clear why we need an infrastructure bank, especially a paygo infrastructure bank.
The AIFA legislation is very specific about the type of projects that can be funded:
- Highway or road
- Mass transit
- Inland waterways
- Commercial ports
- Air traffic control systems
- Passenger rail, including high-speed rail
- Freight rail systems
The legislation seems to require public-private partnerships for funding. In the bill’s criteria for loan approval, there’s a preference for those projects which maximize private investment (page 41):
“the extent to which the provision of assistance by AIFA maximizes the level of private investment in the infrastructure project or supports a public-private partnership, while providing a significant public benefit”
Conceivably Warren Buffett’s Burlington Northern Santa Fe railroad could team up with a small municipality and receive below-market loans to fund improvement of their rail systems. There is a lot of gray area defining “public good” in the legislation and this makes way for many projects that might have a larger private component.
The legislation also requires that projects have dedicated repayment sources (page 43):
(3) DEDICATED REVENUE SOURCES.—The Federal credit instrument shall be repayable, in whole or in part, from tolls, user fees, or other dedicated revenue sources that also secure the infrastructure project obligations.
The essence of the American Infrastructure Financing Authority is to use the full faith and credit of the U.S. government to loan funds at below-market rates to public-private partnerships — in other words, to privatize the cash flows from public assets.
When you read the congressional testimony and materials about the proposed bank you always hear about the vast sums of private money waiting in the wings to be invested. When Robert Wolf, Chairman and CEO of UBS Americas and close confidant of President Obama, testified to the Senate Banking Committee last year he said:
Preqin, a private equity industry consultant, estimates that there is over $180 billion dollars of private equity and pension fund capital focused on infrastructure equity investments. This capital can play an important role in bridging state and local budget gaps.
There is no question that private money is interested in being used for loans to infrastructure projects and guaranteed by the federal government and taxpayers. It’s almost identical to senior bondholders who loaned money to too-big-to-fail banks. It’s the best setup for private money because there is no loss.
Although McClatchy is reporting that Rep. John Mica, R-Fla., chairman of the House Transportation and Infrastructure Committee is unenthusiastic about plans for an infrastructure bank, it’s likely that the Senator Kerry’s legislation will be adopted since it has support from the administration, the AFL-CIO and the U.S. Chamber of Commerce.
But it’s a pity that a project dressed as job creator will really be a vehicle to create privatized public assets. Our nation was founded and grew strong on the basis of our shared public infrastructure. It’s a shame that the American Infrastructure Financing Authority will be the agency in which ownership of public assets becomes private.