The Infrastructure Bank we already have…

Yesterday I received a call from an elected official friend of mine from Washington. He had called to, among other things, get my opinion on the idea of a national infrastructure bank. There are several concepts for such a bank floating around Washington right now and the recent I–5 bridge collapse has reminded everyone of the significant infrastructure deficit the nation faces. As Rahm Emanuel said, “you never let a serious crisis go to waste”.

The gist of the ensuing conversation was one that I thought the readers of this blog might enjoy… Names and identifying circumstances have been changed to protect the innocent (and political).

So my friend, we’ll call him “Bob”, called and asked what I thought of the idea of creating an infrastructure bank to help address the serious infrastructure needs the nation is facing.

My response was, “what’s wrong with the one we already have?”

“Well that’s just it, we don’t have one.” he replied. Oh, how wrong he was.

It turns out that we do in fact already have an infrastructure bank in the US. We just don’t call it by that particular name. It turns out that our not-so-called “infrastructure bank” is also the envy of the world. I pressed Bob for an explanation of exactly what he thought an infrastructure bank was, in his own words. His response was that it would be a “fund”, seeded with +/-$5 billion of Federal funds, that would leverage the Federal investment to attract an additional $45 billion of private capital that could then be used to finance badly needed infrastructure projects. Its main benefit, he said, was that it would allow private capital to invest in infrastructure.

So, let’s break this down a bit… We are going to create a tool that matches private capital with infrastructure projects that need to be completed. Presumably, these private investors will earn a return of some sort for their investment.

Isn’t that what the $3 trillion (with a “T”) municipal bond market does everyday? Ever since the City of New York issued municipal bonds in 1812 to finance the construction of a new canal, local governments around the country have been using the financial vehicle to finance infrastructure projects. It is one of the largest and most successful examples in existence of private capital being utilized to build public works. So successful, in fact, that other countries are trying to emulate it to fund their own infrastructure gaps.

Bob promptly informed me that I was crazy (likely so…) and tried to explain that there was a huge difference between the private capital that the infrastructure bank would attract and the bond market capital.

Really??? Who do you think buys municipal bonds? I own some in my portfolio. My mother owns some in hers. In fact, my grandparents own some in their portfolio as well. Private citizens around the country agree, everyday, to give XYZ municipality some of their hard earned “private capital” so that XYZ municipality can build some sort of public works infrastructure project.

Here’s the shocker… The conduit for private investment in infrastructure is largely already in place. The US does not need some “new” type of vehicle to facilitate the capital investment.

It took a little convincing, but Bob finally came to realize that I may be right on this one. Our conversation went on to compare and contrast the existing municipal bond market vs. this new infrastructure bank. It was too good of a discussion to shortchange at the end of this post. I will have to continue recounting the balance of the conversation in more detail in a future post. Stay tuned…