In the December issue of Governing magazine, Ryan Holeywell takes a look at Rahm Emanuel’s big public works idea, the Chicago Infrastructure Trust. In some corners, the idea of an infrastructure bank has become almost a shibboleth, with some bold-faced names seeing it as a panacea — based on the tone of the press coverage, at least — for cities consistently coming up short on money for large projects.
Traditionally, infrastructure projects have been funded through a combination of state and federal dollars, plus whatever money a city could cobble together by selling municipal bonds. The idea is for the Trust to leverage scarce government resources by inviting private firms to put up equity for projects in return for a future revenue stream, with their stake ensuring the long-term health of whatever the investment may be.
“If Chicago can point the way for other cities to attract new forms of financing, it will have done a great service,” Peter Orszag, President Obama’s first director of the Office of Management and Budget, wrote of the plan.
Also supporting the Trust is none other than Bill Clinton. “What we’re trying to do is to get other cities to do the same thing,” the former president said on MSNBC this past summer. “Every mayor in the United States has an opportunity to do something without the financial support of the federal or state capitals.”
Back in January, Tanveer Ali wrote for Next City that with the Trust off to a slow start, “This next year will prove crucial for the Trust and its ability to turn back years of skepticism.” A few months later Tim Logan checked back in for an April Forefront story. “Even if the Chicago Infrastructure Trust doesn’t thrive in the way we hope it will, they’re setting up the legal aspects, the project criteria, all the process,” the Brookings Institution’s Patrick Sabol told Logan at the time. “Other people can replicate it. That’s huge.”
Circling back, Holeywell finds that the idea hasn’t quite reaped the dividends its backers had hoped it would in the Windy City:
Despite the early promise, the [Chicago Infrastructure Trust] still hasn’t finalized financing on even one project. And though it was pitched with great urgency in spring 2012, the CIT didn’t get an executive director until February of this year. Moreover, the trust issued its first request for qualifications for the energy retrofit back in January. So even if the deal is completely finalized this month, it will have taken almost all of 2013, at a minimum, to finalize that first deal.
That project, dubbed Retrofit One, would have raised $115 million to pay for energy-efficiency retrofits at more than 100 city buildings, including lighting improvements in city schools and the conversion of a pump station from steam to electricity. But the work in the schools had already been completed. That development undermined the core argument that was made last year for the trust – that it will build things that otherwise would go unbuilt. (In another embarrassing hiccup, the Chicago Public Schools announced dozens of school closures earlier this year; the Chicago Tribune revealed that some of those buildings were among the ones that had already been outfitted with thousands of dollars worth of low-energy lighting that the trust was planning to finance.)
One early doubter of the scheme was Urbanophile blogger Aaron Renn, who in April 2012 examined some of the possible reasons for creating an infrastructure bank — he came up with five — and found all of them lacking in some way.
On the idea of raising funds in a debt-constrained environment, he wrote:
…we’ve seen enough of what happens when companies load up with special purpose vehicles and off balance sheet transactions to know that it dramatically reduces transparency. This will make it difficult to assess just how much debt the city has taken on. If the ratings agencies haven’t caught on to this, you can believe they will at some point if more cities shift to these types of financing structures.
Unfortunately, infrastructure banks are often presented as if they are “free money” to the public. I believe this greatly misrepresents the reality. Any money invested by the bank has to be paid back. An infrastructure bank seems to be just another fancy name for borrowing money. We should probably evaluate it just like we do debt.
And on limiting public exposure to risk, he was even harsher:
I used to crow about how privatization transferred risk to investors. After reading some of these contracts and seeing how they operate in practice, I’m much more skeptical. In practice, most of these contracts ensure that the public retains almost all of the risk associated with the deal. For example, pretty much the only risk the parking meter lessee took on in Chicago was whether or not people continued to put quarters in the slot. Anything else – like hosting a NATO summit that requires meter closures – is the city’s responsibility.
As I noted in my piece “The Privatization Industrial Complex,” cities are pretty much at the mercy of sophisticated investors who do transactions like this day in and day out for a living. Even in a sophisticated financial town like Chicago, multiple contracts have blown up in the city’s face. The idea that somehow governments will do a better job of negotiating deals with an infrastructure bank than they’ve done with other private investors seems dubious.
The idea of leveraging public-private partnerships is not new. The Dual Systems of the New York City subway — which built the majority of today’s system in the 1920s — was perhaps the most successful example, though its success largely rested on the two private railways involved not realizing how bad of a deal it would turn out for them.
As Holeywell concludes:
…it’s not clear whether Chicago’s infrastructure bank is anything other than a high-profile way for the city to signal its openness to [public-private partnerships], which have long been popular abroad and have gained increased use and attention over the last 15 years in places like Colorado, Texas and Virginia. [CIT CEO Stephen] Beitler, a former Green Beret who later founded a venture capitalist firm, is the first to admit what the trust is doing isn’t entirely original. He says the CIT is trying to learn lessons from places like Australia, British Columbia, the United Kingdom and Virginia about how best to run organizations specifically tasked with arranging P3s. “Basically, I think, the amount of publicity is not warranted,” he says, “and there are such great organizations that don’t get anywhere near the publicity that is warranted for them.”
The Works is made possible with the support of the Surdna Foundation.
Stephen J. Smith is a reporter based in New York. He has written about transportation, infrastructure and real estate for a variety of publications including New York Yimby, where he is currently an editor, Next City, City Lab and the New York Observer.