That infrastructure privatization bank

Muniland is a Reuters blog that specializes in municipal bond-related issues, and this caught my eye. That infrastructure bank Obama proposed? The AIFA would require that funded projects generate revenues to repay the loan to the infrastructure bank. That is, charge tolls for bridges that used to be free — which to an extent, privatizes the public works:

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.

Is this a free-market solution in search of a problem?

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.

Consider the source of this article, though. The pinstripe patronage pit of the municipal bond market is where politicians hide all kinds of payoffs (i.e. “fees” and kickbacks), so muni dealers complaining about this isn’t necessarily a bad thing. I just have to wonder if this private infrastructure bank isn’t just a way for rent-seeking investors to siphon off the value from public projects. Seems like it would be a good thing for someone to explain!

5 thoughts on “That infrastructure privatization bank

  1. Susie, I couldn’t find the link for the Muniland post*; googled and found this:

    Since I had to scroll down through newer posts, there’s lots of interesting information about how Obama seems to be structuring things toward favoring municiple-type loans being used for privately owned projects. This guy and his econ team do not miss a beat in privatizing American, do they?

    Referenced here.

    *But on my PC, the links are very pale and don’t stand out from the regular copy unless I look very carefully or the mouse happens across the linked words; so maybe I missed it. I’ve been trying to figure out how to increase the contrast, but no luck so far.

  2. There is no doubt that the President is working for the other side. This kind of thing is no simple mistake. Fortunately it is unlikely to work as Hoover’s Reconstruction Finance Corporation failed.

    A real eye opener is to read the end of Arthur Schlesinger’s “Crisis of the Old Order” about Hoover’s attempts to deal with the depression and then with all the pressures and political forces that led to Roosevelt’s election. All the terms and catch words were there as are now: “confidence”, “balanced budget”, “cut regulations and government interference”, “purge the system”, etc. etc. The only real difference was that there was a powerful, active, articulate, even threatening left wing of progressives, socialists and all the way to communists.

  3. I wrote comments about this at another blog last month and last week (to zero notice I think). Robert Reich called it in early August:

    “(Obama) says he wants an ‘infrastructure bank’ that would borrow money from private capital markets to pay private contractors to rebuild our nations roads, bridges, airports, and everything else that’s falling apart.”

    “Fine, but the new deal he just signed may not let him do this either – if the infrastructure bank relies on federal funds or even federal loan guarantees to attract private money. The only way he could create an infrastructure bank without sweetening the pot would be by privatizing all the new infrastructure. That means toll roads and toll bridges, user-fee airports, and entry fees everywhere else.”

    Lots of money in it for the profiteers:

  4. Prag, thanks for the info about FDR’s RFC and especially the bit about same terminology. Wow, everything old is new again!

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