Democratic presidential front-runner Hillary Clinton laid out the broad outlines of her plan for a National Infrastructure Bank, which would make low interest loans to help fund all kinds of public and private infrastructure. In an explainer for Vox, Matt Yglesias lays out the case for an infrastructure bank, and sets out some of the key assumptions behind the idea.
The infrastructure bank is not exactly a new idea: It’s been suggested in several forms by the Obama Administration, and has been repeatedly advanced by think tanks including the Brookings Institution, the Hamilton Project and the Center for American Progress. While it mostly gets support from the political left, some Republicans have supported the idea, too. As Governor, Jeb Bush authorized a modest $50 million contribution to Florida’s infrastructure bank in 1999, but the Florida Legislature raided the bank to pay for other projects in 2003.
The basic outlines are these: The federal government would endow the bank with funds and empower it to borrow from the Treasury. It would make loans on generous terms—low-interest, long-term, fixed-rate—to states and local governments, and in some cases to private firms, to build major infrastructure projects. In some cases, repayment of the loans might even be deferred for a number of years. The bank would be directed to favor projects that had important national benefits, including job growth and environmental improvement.
In theory, if a national infrastructure bank wisely chose projects, and if it dispensed money efficiently, it might avoid some of the problems that plague our current system of infrastructure finance. But those are big “ifs.”
In practice, there are real reasons to believe that a national infrastructure bank won’t miraculously overcome the problems that plague American infrastructure.
A bank has to be capitalized. As the debates over the effectively bankrupt Federal Highway Fund have shown, there’s simply no stomach in Congress for raising revenues to pay for new infrastructure spending. Unwilling to ask users or taxpayers to pay more for roads and other infrastructure projects, Congress has resorted to increasingly desperate and gimmicky proposals, including a proposal to capture a portion of repatriated corporate profits, and transferring funds from the Federal Reserve’s balance sheet. Both measures end up costing the federal government more money in the end.
Banks want to be paid back. The finance problem with infrastructure projects is not the availability of capital for projects that generate a positive cash flow, it’s the lack of cash flow: states and localities have pretty much tapped out their own revenues (like the gas tax), and are generally unwilling or unable to take on toll-financed projects. The key problem is that most infrastructure projects simply don’t generate cash flows that can be used to retire debt.
Absent some new revenue source or some pricing mechanism—higher state gas taxes, or road and bridge tolls, or a vehicle miles traveled fee—it will be difficult to do more or different projects than we’re doing right now.
A Bank may mostly substitute for existing financing rather than prompting additional investment. The nature of bank financing is that they want the borrowers to take on the project management and revenue risks. This is especially the case for low interest rate financing—you only get low interest rates if you lower the bank’s risks to nearly nothing. That means that the projects that would be most appealing to a national infrastructure bank would also be the one’s that are the financially strongest—and the most capable of getting financing now (see below).
Making more money available on concessionary terms from a national infrastructure bank might simply lead to substitution of cheaper Infrastructure Bank money for slightly more expensive municipal bond financing. One of the problems with the existing infrastructure lending program TIFIA (Transportation Infrastructure Finance and Innovation Act) is, according to the US DOT, that for some projects in “TIFIA may displace, rather than induce participation by capital markets.”
Banks don’t design projects, DOTs do. While it’s tempting to assert that a national infrastructure bank will somehow only choose meritorious, sustainable efficient projects, the history with TIFIA—the closest thing we have to a federally sponsored infrastructure bank—is that it too is highly tilted to big highway projects. Case in point: a $412 million low interest TIFIA loan to widen a toll road in Southern California. Hardly a sustainable or innovative or particularly meritorious project—but thanks to a stream of toll revenue, it could plausibly commit to repay the federal loan. Clothing the lending function with the fancy new title of “infrastructure bank” may do nothing to change the actual process of project selection.
Cheap money creates its own incentive problems. Despite the good intentions of those who would set some broad policy oversight on the projects to be selected, preferential funding for some projects may have unintended consequences. Projects of national significance creates perverse incentives that encourage gamesmanship and gold-plating.
If there’s special bonus federal funding for special projects, look for states and localities to re-package their pre-existing project plans as one’s that fit the national criteria. If you can get access to some special pot of federal funding for your bridge, etc, then you can back out your own resources.
And once projects get cast as being of national or regional significance, local concern for efficiency or cost-effectiveness often gets tossed out the window. Big, nationally significant projects have the unfortunate tendency to experience the mega-project disease, and in part because of their size and importance, generate huge cost overruns as in the reconstruction of the PATH train station at the World Trade Center.
And it’s not like states haven’t figured out how to borrow money. The premise of the Infrastructure Bank idea is that our problem is too little access to financing. But when they have a cash flow, municipal governments have little problem borrowing against it—and in fact, that’s part of the problem with transportation finance. The political allure of borrowing to build big capital projects is undeniable—you get the jobs and the ribbon cutting in your term, and spread the costs over the next two or three decades, when your successors will have to deal with complaints about the taxes levied to repay the debt service.
In fact, if you have revenue, it’s fairly easily to go to the capital markets: The state of California has about $87 billion in infrastructure debt, according to its Legislative Auditor’s office. North Carolina Governor Pat McCrory has proposed borrowing $3 billion for roads and other infrastructure projects. Borrowing to pay for roads is as old as the automobile, the first road finance bonds were issued by Massachusetts in the 1890s. By 1992, states and localities had cumulative debt outstanding for road building of more than $47 billion.
For some states, arguably, the problem is not that they don’t have enough access to debt, but that they’ve relied on it far too heavily. The state of Washington for example, was on track to spend 72 percent of its gas tax revenue on debt service—effectively short-changing basic maintenance. Earlier this year it passed a new gas tax increase to fill the gap—and surprise, committed to borrowing against those funds for $8.8 billion in new projects—mostly freeway widening.