On February 26th, President Obama issued his first budget, 'A New Era of Responsibility: Renewing America's Future'. It proposed the creation of a National Infrastructure Bank, something promised in an important campaign speech delivered at the General Motors plant in Janesville, Wisconsin almost a year ago. The Bank idea then made its way onto Obama's campaign website as a plank of his plan to strengthen the economy.
The Budget requests $5bn for 2010 to get the Bank off the ground with a projected additional $20bn in capitalization by the year 2014. Among other things, the Bank's mission 'will be to not only provide direct Federal investment but also to help foster coordination through State, municipal, and private co-investment in our Nation's most challenging needs.' By private co-investment, the Obama administration assumedly means that the Bank will support public-private-partnerships (P3s); that is, a move toward privately-controlled projects.
Here, the relatively modest $25bn will be used to attract substantial private equity co-financing to meet large scale needs. A group of P3 active law firms and private investors (Allen & Overy, Carlyle Group, Chadbourne & Parke, Credit Suisse, Debevoise & Plimpton, Freshfields Bruckhaus, Fulbright & Jaworski, Merrill Lynch, Morgan Stanley, Mayer Brown, and others) recently issued a paper aimed at promoting the use of P3s, 'Benefits of Private Investment in Infrastructure'. They argue that P3s will introduce 180bn additional private dollars into American infrastructure creating millions of new jobs. This $180bn has been accumulating for a number of years set aside for the American market. And, according to this group, the pot of money has been unfazed by the financial crisis.
The Obama Bank then might be a way of allowing this capital to flow into our infrastructure sector. To shepherd it in, the Bank might make investments into America less risky through tax subsidies, below market rate loans, guarantees, and publicly-backed insurance policies. The American Recovery and Reinvestment Act begins to do this through the generous set of bond provisions in the second part of the stimulus legislation.
P3s have their attractions. They promise to create liquidity. Together with the Obama Bank, they may be an effective way of beginning to overcome the credit crunch. They provide a way of financing infrastructure at a time when state and city governments are cash strapped and some of their credit ratings make raising money challenging and expensive. P3s also may provide many more construction jobs than the stimulus package will. Moreover, unlike the short-term shovel-ready projects, P3s may last decades and thus mean more stable employment.
At the same time, P3s do have risks. Experience with them has been mixed. When we used them in the 19th and early 20th century to lay our railroads, the social, labor and financial costs often outweighed their benefits. Internationally, they have contributed to both booms and busts from East Asia to Latin America to Eastern Europe. Citizen consumers often find the cost of water, electricity and travel prohibitively high. And, the financial health of P3 projects is often intimately tied to the financial products that are tearing through our social fabric. Often the most vulnerable in society are asked to disproportionately shoulder their costs. Their impact upon the health of our natural environment hasn't always been terrific.
All this means that there is good reason to have a public debate about P3s and the Obama Bank:
Should the Bank support P3s? What are the alternatives? Are they, on balance, less risky, more public good-producing than government-controlled projects? Are P3s more suited to some projects than others? In other words, are they best used for new built-from-scratch, expensive, risky projects that promise great public good returns but are too expensive for government to afford? Are they suited to lease deals involving the purchase of existing roads and bridges? If so, why have these lease deals in America been so controversial from New Jersey to Indiana? Is leasing a road different than leasing a parking garage?
Should the Obama Bank provide citizens with access to detailed information about projects and also with standing to make claims against banks and private companies? Should the Bank use money from highly profitable P3s to cross-subsidize less bankable but socially essential projects? Should the Bank insist that the wealthy and poor alike are provided the same quality of drinking water, the same access to transportation, affordable electricity through the winter years? If so, should the costs of even equitable services be shouldered by firms or the state? Will the Obama Bank take all these considerations into account on its own, or must we mount campaigns to hold not only P3s accountable but also our own Infrastructure Bank itself?
The Obama Bank is a welcome development. It may finally wean us away from the earmark system, making infrastructure decisions on the merits. The Bank also may effectively coordinate regional and national policy thus solving serious collective action problems. It may even start to solve our credit crunch, our employment problems, and jumpstart our economy.
The success of the Obama Bank depends, however, upon embracing public debate over its appropriate role and function. This means less painting the policy debate in primary colors and instead more sober discussions about real world decisions regarding costs, benefits, and risk allocation. All in the spirit of the budget's call for a New Era of Responsibility.