A National Infrastructure Bank: Can the U.S. Learn From Europe?

On Labor Day, President Barack Obama gave a speech in which he pushed for the creation of a National Infrastructure Bank. Legislation that would establish the bank was introduced over the summer in Senate Bill 1926, authored by Chris Dodd of Connecticut and Chuck Hagel of Nebraska. But the idea of an independent financing entity for large infrastructure projects originated in Europe. The European Investment Bank (EIB) was created in 1958 as part of the Treaty of Rome, which started Europe on the path towards economic integration.

The European Investment Bank is providing
The European Investment Bank provides financing for projects like Spain's high-speed rail system.

As an inspiration for an American Infrastructure Investment Bank, the EIB makes some sense, but there are also big differences. “It has to be understood in the context of European arrangements,” said Alistair Milne, a banking and finance professor at the Cass Business School at City University in London. European institutions, he explained, are not as comfortable with selling bonds for infrastructure projects. “The EIB fills a bit of that gap which may not exist in America.”

The bank is owned by all the member states of the European Union, so its mission is to encourage investments that advance Europe, rather than the interests of any single European state. It offers loans, technical assistance, and venture capital. Last year it raised about 80 billion euros for projects. It has provided loans for windfarms, solar plants, high speed rail, and other sustainable infrastructure projects.

For example, last year the EIB agreed to provide 5 billion euros for Spain’s high speed rail system, including a line that will eventually link Madrid with Lisbon. And in May it lent 150 million euros to improve a Hungarian portion of the European electricity grid. In addition to these large infrastructure projects, it also provides some “small business finance and some lending outside of the European Union,” said Milne.

Originally, the Obama administration had planned to lend money to specific states. But this infrastructure bank model, it is hoped, will better allow private capital to be applied toward projects that cross state lines.

Because it would have the backing of the feds, there would be lower risk for investors, and it would be easier to raise capital. “The EIB can finance at lower cost than commercial banks because there is an implicit backing from the European Systems, but it is supposed to be subject to commercial disciplines,” said Milne.

But critics say the proposal for an American equivalent of the EIB falls short. For example, the administration is calling for capitalization to the tune of $60 billion: compare that to estimates from the American Society of Civil Engineers, which say it’ll take $2.2 trillion to repair America’s crumbling infrastructure. Still, the strategy is to use that Federal start-up investment to leverage another $500 billion in private investment.

UBS Americas is already throwing its support behind the proposal. And that’s the whole idea: to facilitate investment from private banks. However, according to a Reuters report, UBS advised against modeling it as an infrastructure version of Fannie Mae and Freddie Mac, which required $150 billion in taxpayer funds to remain solvent after the housing market collapsed. Others, such as Senator Barbara Boxer of California, argue that the infrastructure bank duplicates some of what can be accomplished through existing programs, such as the Transportation Infrastructure and Finance And Innovation Act (TIFIA).

But supporters like the idea of a funding institution that can, at least in theory, transcend local budgets, political turf wars, and election cycles. Some compare the Infrastructure Bank concept to the Federal Deposit Insurance Corporation and its role in retail banking. For giant electric, water and rail projects that take decades to construct and cross many state boundaries, this may be just the way to leverage the private capital necessary to keep the country’s infrastructure from falling apart.

  • As to passenger trains (any speed), Grab your wallet! They all lose money and require subsidies forever. A politician’s dream, and citizen’s nightmare.

    Dave

  • Mark Walker

    I’d grab my wallet but the highway lobby grabbed it faster.

  • TheDude

    Dave,

    You realize all highways lose money too right? In fact they lose a lot more money.

  • momos

    Dave,

    Actually, you’re completely wrong.

    France’s SNCF makes bucketfulls on its high speed trunk lines. EuroTunnel, the operator of the EuroStar London-Paris, makes tens of millions and has private share holders like any commercial airline listed on a stock exchange. Nearly even high-speed line in the world makes a profit.

    Even Amtrak, the weakest rail service provider in the developed world, makes money on its third-world quality North East Corridor trains. In fact, one of the problems for the North East Corridor is that Amtrak uses NEC profits to subsidize the rest of its system rather than targeting those profits to improve service in the NEC.

  • Bolwerk

    Dave: that’s simply not true. Just because Americans embraced the saloon “socialist” model for public spending on infrastructure doesn’t mean that all rail (or road, which follows a similar model) projects are bad. Even the quasi-HSR Acela Express service nets a profit. In Europe profitable HSR, at least after capital expenses, is the norm. It’s not unusual for urban transit to cover much of its own operating expenses either – which means it does a hell of a lot better than the American road system.

    Dave’s kneejerk rail angst aside, though, there are major problems with the regulatory environment for RRs in the United States. Something needs to be done about the FRA’s refusal to allow EU- and Japanese-style equipment and signaling, and that’s not to mention the absurd costs of labor and federal financing requirements. Freight and passenger RRs need to work together. Property taxation weighs heavily against privately owned RR infrastructure. If we’re going to dream of European results, we need that can-do European outlook!

  • It may not be true, but it’s truthy.

  • Bolwerk

    A good way to cleanse the conscience of truthiness is to ignore TV news, and its ancillary Internet presence, particularly the 24hr cable networks.

  • Robert

    Even if rail networks are net losers in pure revenue terms (a statement I believe is not universally true), a good rail network provides other benefits that should be considered. Increasing rail travel would lessen pressure on roads, highways and bridges by reducing traffic. That translates into lower costs to maintain car infrastructure. Additionally, it would reduce the time people spend in traffic and airport terminals leading to increased productivity or even better a chance to get home a little quicker to spend time with family and friends. Also cleaner air, healthier citizens, spurring of development around rail corridors… and on and on. How many reasons do we need to before we make a commitment to this basic and most efficient form of travel? The primary obstacle remains the money from the lobbyist for oil, airlines and the auto industry.

  • No, Robert, the primary obstacle is not lobbyists. Lobbyists may be annoying, but so far American cities have pledged amounts of money to transit and rail that European cities would groan at. The problem is that a kilometer of rail in the US costs several times as much as in Europe. What the US needs to learn is not political will or an infrastructure bank, but rather how to build infrastructure affordably. Then and only then will it be able to get over its driving addiction.

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