Last Tuesday, Rep. Rosa DeLauro (D-Conn.) introduced a bill to create a government-owned corporation that would finance infrastructure projects, otherwise known as a national infrastructure bank (NIB). This would be a federal entity responsible to Congress and the president. It would serve as an artery through which private savings and investment is channeled to public infrastructure projects such as roads, bridges, water and wastewater systems, and others. This is not a new concept. In 2007, Sen. Chris Dodd (D-Conn.) introduced the National Infrastructure Bank Act to establish a NIB. Then in 2011, President Obama included a NIB in the American Jobs Act but it was voted down in the Senate. Rep. DeLauro’s latest shot at this concept comes hot off the heels of a report issued by the Center for American Progress called “300 Million Engines of Growth.” One of its recommendations for improving US infrastructure was the establishment of a NIB:
Private-sector investors and companies can be important players in the funding of infrastructure projects by providing up-front financing in exchange for a dedicated stream of revenues from user fees or taxes. A National Infrastructure Bank would support these projects by providing direct loans, loan guarantees, or credit assistance, which would lower the costs faced by state and municipal governments and their private partners. The bank would create a more efficient environment for private investors to participate in rebuilding public assets.
In a world where transportation, home heating, and water utilities were provided like any other good or service in the private sector, the idea of the government needing to establish a bank to finance infrastructure would be largely anachronistic. If a developer sees an area suffocating in traffic because of insufficient highway capacity, he would approach a bank or investment fund and build a road on credit. The loan would then be repaid through tolls the developer collects from the users of his road. This is the model for financing a significant share of infrastructure development in the developed world outside of the United States.
If created, a NIB would not in any way be operating as a market-driven financial intermediary. A bank directs borrows money from savers to finance projects that yield the greatest return. If a NIB operated in this way, it would issue revenue bonds that deliver returns based on the fees that are collected from users of the infrastructure it builds. This instrument would make sure that savings would be allocated to projects that would create the greatest return to its lenders by serving the greatest number of users. If investors have a choice between buying bonds to add capacity to a traffic-snarled highway or a bridge to nowhere, their search for high yields will ensure that capital will be allocated to its most productive uses.
But in all of the proposed NIB legislative proposals, not one would have the bank financed through revenue bonds. After a federal capitalization of $10 billion and $30 million for administrative costs, the bank will primarily be financed through general purpose bonds and infrastructure bonds. Holders of these bonds have no more say in what projects are chosen to be developed than holders of treasuries have in deciding what the federal government spends general revenue on. Decisions regarding which projects to finance and which not to finance will made by the board of the NIB. The only difference between a new NIB and the status quo of state and local governments choosing infrastructure projects to finance is that this discretionary authority will be largely moved from state capitals to Washington, D.C. Essentially a NIB would be just as unaccountable when deciding what projects to finance as state and local governments are today.
Rep. DeLauro’s bill insists that the taxpayer would not be on the hook in the likelihood that such a federal entity was to become insolvent. But as we have seen recently with Fannie Mae and Freddie Mac, the federal government cannot be trusted when it claims taxpayers will not be on the hook for its failures. DeLauro herself claimed her bank would be “an innovative public-private partnership like Fannie Mae.” In all likelihood, a NIB would end in similar circumstances. This is because DeLauro’s NIB would set funding priorities for projects that “contribute to economic growth, job creation, and are of regional or national importance.” So rather than select projects that would generate high returns and control costs, priority will made for projects that are labor intensive and large (i.e. expensive) enough to be considered “regionally or nationally important.”
The state of our nation’s expensive and wasteful infrastructure will not change with a new federal bureaucracy that is just as unaccountable as previous infrastructure agencies. Decisions regarding the financing of infrastructure projects should be moved from central planners at a NIB to the individual choices of millions of savers and investors deciding what projects would generate the greatest returns and thereby serve the greatest number of users.