Last month, Chicago Mayor Rahm Emanuel inaugurated an innovative approach to paying for public works: the , which will help arrange private-investor financing of city projects, seeded with small amounts of government capital.
The concept is not new -- several states, many foreign nations and the European Union have infrastructure banks, and a National Infrastructure Bank has been under discussion in Washington for years. But Chicago’s would be the first to operate on a municipal level, and it indicates the scale of Emanuel’s ambitions for his city.
Among other things, it’s a gutsy thumb of the nose at Washington and state capitals that haven’t figured out how to pay for the improved roads, buildings, sewage systems and such that America desperately needs. Congress is tied up in unending partisan bickering over how to allocate the dwindling Highway Trust Fund. State and local governments are broke because existing taxes won’t cover expenses and citizens are unwilling to pay more. Earmarks and their equivalents at the federal, state and local levels mean that projects often get prioritized according to politics.
An infrastructure bank offers a way around these problems. 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.
All in all, it looks like a great free lunch. Then again, as we all know, there’s no such thing.
Problem of Timing
A bank, any bank, is a solution to only one piece of the challenge facing public works. 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.
Chicago’s approach will probably bear some fruit because local governments face many problems of timing. A city government doesn’t have the cash to make building retrofits that will lower its energy bills, but future savings can pay back the loan and then some. A water utility whose rates are set to break even has expensive leaks, but no general-revenue bonding authority to fix them. A highway department wants to extend a toll road, but its capital budget is constrained. These are all problems that finance can solve because investment can unlock future revenue that can be shared with a lender.
Unfortunately, America’s most dire infrastructure problems are not like this. Most of them 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.
At the root of this difficulty are two fantasies about infrastructure that the U.S. can’t seem to shake.
The first is that once a bridge or a road or a water main is built, it’s there forever. As any accountant knows, the day you start using a capital asset is the day you start using up its value. A community with a crumbling bridge isn’t as rich as it thinks it is. As a nation, we need to start taking seriously the annual depreciation of our infrastructure, and budget future capital expenses to offset it.
The second fantasy is that we can find a way other than taxes (on gasoline and property) or user fees (tolls and the like) to pay for infrastructure. If Americans are unwilling to raise taxes to pay for crumbling roads and bridges, then we need to be more open to making them pay for themselves.
If we embrace user fees, opportunities abound. If we turn the Interstate Highway System into a toll network, we can eliminate the federal gas tax. If we accept congestion pricing in city centers, we can subsidize mass transit without resorting to raising local sales taxes. Alternatively, if we force transit agencies to charge customers more so that they operate at break-even levels, they will carry fewer riders, but those riders will get better service.
User fees allow us to convert funding problems into financing ones. All the kinds of projects an infrastructure bank can finance -- water systems, energy efficiency, airports -- are funded by strict user fees. We accept that if you don’t pay your electricity bill, your lights go off. We accept that planes should pay to land at an airport. If we accepted that driving across a bridge means paying a charge, too, we could use an infrastructure bank to fix those bridges in Pennsylvania. (It’s no coincidence that tolled bridges -- from the George Washington to the Golden Gate -- are almost always in good condition.)
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.
(Rohit T. Aggarwala leads the environmental program at Bloomberg Philanthropies and is a visiting scholar at Stanford University. The opinions expressed are his own.)
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