Does a National Public Infrastructure Bank Make Sense?
The already convoluted Washington transportation bureaucracy won’t solve the problem of transportation funding.
President Trump has called for a major increase in infrastructure spending, and Treasury Secretary Steven Mnuchin has suggested that a national infrastructure bank could play a role in solving our transportation woes. For over two decades politicians have toyed with the idea to fund highway and bridge construction. It’s encouraging that our leaders may be fundamentally reassessing how we fund transportation—but in this case, the facts will reveal that an infrastructure bank is not the answer.
Bill Clinton first proposed the idea when he ran for president, before settling for a pilot program at the state level in 1995. President Obama also proposed establishing a national infrastructure bank, but Congress failed to approve the measure. Most recently, while serving as a member of President Trump’s transition team, Mnuchin suggested that an infrastructure bank could serve as a means to increase investment in highways and bridges.
Some politicians tend to favor the idea over direct grants because—as the story goes—when loans are repaid, the funds are available to be loaned out once again to support additional projects, providing a sustainable source of infrastructure funding.
This is a naïve view. State infrastructure banks offer valuable lessons as to why a federal bank is unlikely to become a long-term, sustainable source of funding.
The 1995 National Highway System Designation Act established a state infrastructure bank pilot program. Since then 34 states set up public infrastructure banks. The initial capital came mostly from federal and some state tax dollars.
According to tallies by Brookings Institution researchers Robert Puentes and Jennifer Thompson, these banks made 1,134 agreements worth $7.4 billion between 1995 and 2012, amounting to one-half-of-one percent of total state spending on infrastructure over the period. Seventy percent of the agreements were for highway construction.
However, rather than making traditional loans, 28 percent of the agreements were issued interest free—defeating the goal of providing a sustainable source of infrastructure funding. Today, many of these banks are inactive or require addition taxpayer dollars.
A national infrastructure bank would presumably allow firms to borrow at the Treasury bond interest rate, an attractive feature to private borrowers. But state and local governments—traditionally the main borrowers in this case—have historically been able to borrow at lower rates. Interest rates on infrastructure bank loans would have to be below the state and local rate in order to entice them to borrow from the bank. Again, this is a problem if the goal is a sustainable source of infrastructure investment funds.
The bank could also be allowed to leverage the initial taxpayer capital by borrowing in financial markets. Leveraging initial taxpayer funds and lending at below market interest rates in order to make loans attractive would put the bank’s capital at risk, endangering its ability to fund future projects, even if all loans were repaid. If the infrastructure bank took this approach, it would also attract projects with lower returns.
Large highway projects are inherently risky. Project costs and demand are difficult to forecast, resulting in defaults that would further reduce the bank’s capital. Unlike private banks, public lenders often fail to focus on the riskiness of a project.
The biggest problem is that a national public infrastructure bank would cement politics into transportation funding decisions. We can expect this discretionary lending institution to be guided more by partisan politics than by hard economic facts. If the past is any indication, loans are likely to go to states with close elections or to reward past political support, rather than to areas of the country where it makes the most economic sense.
And because a national bank would not be able to provide a sustainable source of highway funding on the scale envisioned by its supporters, it would most likely need additional taxpayer funding over time.
We need to find better ways to allocate transportation money, but adding another program to the already convoluted Washington transportation bureaucracy won’t solve the problem. Given its likely design, it would further imbed federal politics into state and local transportation investment decisions, at a time when states and cities need more say, not less.