The <i>I-bank</i> Dilemma: Another Fannie and Freddie?
Policy + Politics

The <i>I-bank</i> Dilemma: Another Fannie and Freddie?

Reuters/The Fiscal Times

In 1999, the state of California invested a mere $161 million in an experimental “infrastructure bank” to underwrite loans to build sewer systems, light rail and other public works. Since then, the bank has generated $400 million loans to serve as seed money for important regional projects.

Now President Obama wants to replicate that plan, but on a much larger scale. His proposal to create what is commonly called an I-bank  as part of his $447 billion jobs and economic stimulus package  would guarantee up to $10 billion a year in borrowing during the first two years, $20 billion a year for the next six years and then $50 billion a year thereafter.

Obama’s I-bank has been embraced by big labor and big business, as well as Republicans and Democrats. So why is the plan likely to encounter considerable resistence, as some lawmakers and experts are predicting.

One answer is what some say is the failure of Fannie Mae and Freddie Mac, and the fear that an I-bank could morph into another quasi-government, multi-billion dollar monstrosity that will add considerable cost to the process of providing loans.

Robert Litan, vice president for research and policy at the Ewing Marion Kauffman Foundation in Kansas City, Mo., contends that with so much political horse-trading going on in Washington, the cost of operating the I-bank will almost certainly balloon and the bank’s operations could become another tangled, money-losing government venture like the government-backed mortage agencies, Fannie and Freddie.

While Litan acknowledged similar logrolling at the state level most state legislatures and governors must balance their budgets - thus limiting the amount an I-bank can spend -- while the federal budget has no such limitations, and Congress can expand the program as it sees fit. “Over time, there’s a danger to take on too much risk,” Litan said. “I don’t believe the initial cost estimate” of Obama’s plan.

The Obama idea is to build infrastructure that will generate construction jobs and attract more businesses – especially manufacturing or high tech companies that would then hire more workers. In that way, the bank would be maximizing its investments.

Michael Likosky, director of the Center on Law and Public Finance at New York University, noted that the projects that would be funded by the I-bank would be much longer-term than the projects more recently funded by President Obama’s stimulus package. “An infrastructure bank is one of the most institutional proposals on the table for creating an environment of business certainty,” Likosky said. “It helps with capital planning for firms to think about hiring because they know they are going to have money in a year or two or three. People can start to plan and hire and retain their workforce.”

An analysis by the Treasury Department and the Council of Economic Advisers last October found that 61 percent of the jobs created by investing in infrastructure would be in the construction sector, 12 percent in manufacturing and 7 percent in retail sales. Those sectors are also the ones with the highest unemployment rates, the report said.

In addition, Likosky said, big investors like pension funds would be interested in buying debt backed by the I-bank. “If we know they are going to get a return on investment, they’ll drop the money,” he said.

In the case of the California program, “The seed money was for loans to local governments for public infrastructure,” said Roma Cristia-Plant, assistant executive director of the California Infrastructure and Economic Development Bank. “What the I-bank also does is become a conduit for revenue bonds for other state entities, for non-profit entities, and for more manufacturing and processing businesses. In that sense, you are marrying the private capital market with public infrastructure and private development in order to create econ.omic activity and jobs.”

The impact of such a bank’s financing, experts agree, is over the long term and likely will not have the kind of impact on the economy that Obama could use before the 2012 election.

Nevertheless, it has backers in both parties on Capitol Hill. The bill with the most momentum behind it is sponsored by Sens. John Kerry, D-Mass.  , and Kay Bailey Hutchison, R-Texas.,

In the House, the proposal will be strongly opposed by Transportation and Infrastructure Committee Chairman John Mica, R-Fla. He said that a national I-bank “run by Washington bureaucrats, requiring Washington approval and Washington red tape is moving in the wrong direction. A better plan to improve infrastructure is to empower our states, 33 of which already have state infrastructure banks.”

The Kerry bill mirrors Obama’s proposal in that it calls for $10 billion in start-up money the first year. The bank would be run by directors who would select projects to underwrite based on a cost-benefit analysis and on the ability of the project’s sponsors to pay back the loan with tolls or fees. Urban projects would have to be at least $100 million in size, while rural projects could come in at $25 million or more.

Both Litan and Likosky noted that every other industrialized country has an I-bank, an argument for the United States to finally create one of its own. But Litan also pointed to the experience of China as an argument against such a bank. China, he said, has “way overbuilt” infrastructure in the cities in the hope that people would move there, but they haven’t.

Even with his opposition, Litan said infrastructure building is a time-honored congressional favorite, which argues for passage. “There actually is bipartisan support for this,” he said. “There are a lot of them, regardless of party, who like roads in their areas.”