NIB Superior to PPPs

National Infrastructure Banks are Proven Superior to
Public-Private Partnerships

By the Coalition for a National Infrastructure Bank
 Last Updated 4/21/2020    

This Brief makes the case that National Infrastructure Banks (NIBs) are historically proven to be superior to Public-Private Partnerships in building American Infrastructure.

There have been four major National Infrastructure Banks/Systems in our nation’s history, starting with the First Bank of the United States created in 1791 by Treasury Secretary Alexander Hamilton, and ending with Franklin Delano Roosevelt’s Reconstruction Finance Corporation (RFC, 1932-1957), which lifted us out of the Great Depression and contributed to our victory in World War II. In all four cases, during the periods when these Banks were in operation,
• American infrastructure spending expanded sharply;
• Economic growth became supercharged, leading to better paying jobs, reduced income inequality, and a more productive private sector (1); and 
• Expanded government tax receipts (from higher growth) meant that nearly all infrastructure loans were repaid, and the Banks either broke even or turned a profit.

Meanwhile, since the 1970’s, as the availability of public funding for infrastructure projects started to wane (2,3,4), governments increasing turned to Public-Private Partnerships (5)   to fill the financing gap. A Public-Private Partnership (P3) often involves a private entity financing, constructing, operating, and maintaining a public investment project, in return for a promised stream of payments (directly from government or indirectly from user fees), over the projected life of the project. 

Proponents of P3s make the case that private companies can finish projects more quickly, cheaply, and innovatively than governments can, although there is no clear evidence of this over the long run. At the same time, P3s have exhibited serious disadvantages, including:(6,7)   
  • Higher project costs (resulting in higher public costs) on account of:
    • The need for private investors to earn a rate of return far greater than the government's bond rate, in exchange for taking on various forms of risk (e.g., for delays and/or cost overruns) associated with complex infrastructure projects.
    • The tendency of for-profit companies to maximize their revenue (a conflict of interest), especially as the public services they provide are natural monopolies to begin with. And
  • Contract problems, associated with:
    • Long contract lengths that may not be sustainable if the private provider is inept or corrupt, in which case bankruptcies (8)  may occur, or local government may feel obliged to bring a project back in-house because of poor service provision or escalating user fees. (9)
    • Real-world limitations on the degree to which risks for delays and cost overruns can actually be transferred from the government to P3 concessionaires. Examples are projects in difficulty, and contracts containing ambiguities or limitations clauses that end up being litigated in court. (10)
    • Non-compete clauses, such that jurisdictions cannot make improvements near or within P3 projects, even to fix design flaws in the P3 project. And,
    • Lack of technical capacity by public officials to formulate and manage sufficient oversight over complicated infrastructure projects.
Possibly the most serious drawback of P3s, however, is that they have NOT stepped in to fill the infrastructure financing gap. The American Society for Civil Engineers (ASCE) estimated in their 2017 Report that $4.6 trillion is needed over the next ten years to repair our nation’s infrastructure, of which $2.1 trillion is currently NOT funded ($1.1 trillion is not funded for road transport alone). (11)  Meanwhile, only about 1.5% of the country’s infrastructure projects are financed by private capital, despite banks having plenty of liquidity (cash on hand) to fund them, (12) and despite multiple Federal programs to promote such lending (see, for example, the Box below on the Transportation Infrastructure Finance and Innovation Act (TIFIA) Program). If P3s could have financed critical infrastructure projects over the past 60 years (since the RFC was wound down), they would have done so already.

The above observation is echoed by the House Committee on Transportation and Infrastructure, in a 2014 study of P3s, that concluded: “… given the limited number of high-cost, complex projects, P3 projects have the potential to address only a small portion of the Nation’s infrastructure needs.”  (13)

Rather, the proven alternative to P3s would be a new National Infrastructure Bank to lend for infrastructure repair, as was done four times before in our nation’s past. That Bank would simplify lending procedures, and provide technical support, in order to keep public investments in public hands. Such a Bank would have the scale and technical expertise to rebuild infrastructure all across America. Moreover, it could work closely with existing P3s, such as utilities and transit and port authorities, to provide all of the critical funding that is sorely lacking today.
 
 



The Transportation Infrastructure Finance and Innovation Act (TIFIA) Program


The Transportation Infrastructure Finance and Innovation Act (TIFIA) Program, by William Mallet, Congressional Research Service, Updated February 15, 2019. In this review, William Mallet describes 19 years of experience with the TIFIA Loan Program, including that it:
• Is designed to support large complex projects, for which Federal grant money is not enough.
• Raises remaining funds through Federally subsidized bonds, and by encouraging private sector investment through P3s.
• Must provide a dedicated source of user fees, or dedicated taxes, in order to guarantee loan repayments.
• Has cumulatively provided Budget assistance of $32 billion, to 74 projects with total costs of $117 billion (in FY2018 inflation-adjusted dollars). 

However, there have been complaints that:
• There is little geographic dispersion of TIFIA loans, with the bulk going only to 10 states, and none to rural projects.
• Relatively few projects can take advantage of the program, with the result that $1.65 billion in TIFIA funds has gone unused. Even if Congress increases the lending capacity of TIFIA, there may not be enough suitable projects to increase lending through TIFIA.
• Most highway and public transportation projects cost less that the current TIFIA thresholds, and have no obvious revenue stream to generate repayments. Despite threshold modifications, smaller loans are still not taking place.
• Even though there has been strong Federal involvement in loan selection, there have been bankruptcies, on account of which the Federal Share in covering project costs was lowered from 49% to 33%, which limits TIFIA assistance. 'The American Public Transportation Association has argued that an increased federal share "would enable TIFIA credit assistance to meaningfully support certain projects with large public benefits that may be difficult to finance conventionally without federal credit support, while still ensuring other investors share in project costs and risks."'
• Even after 19 years on the job, TIFIA has only provided an effective Federal Share of 27%. And, its size and structure has been inadequate to cover the $1.1 trillion funding gap in transportation identified by ASCE in 2017.

Share by: