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Privatization Fri Sep 07 2012

Rahm, Obama, and the Future of "Socialist" Infrastructure Funding

Last month, Rahm Emanuel made a curious remark in an interview with Bloomberg BusinessWeek about his plans to upgrade Chicago's infrastructure. While explaining how his newly-created Chicago Infrastructure Trust would operate, he claimed that the United States had the world's most capitalist economy, yet was also "the only economy that still does its infrastructure on a socialist model, state-owned."

Rahm's old boss, President Barack Obama, currently oversees the country's supposed "socialist" road-building enterprise. But if he gets re-elected, he may actually follow Rahm's lead in advocating more private investment in infrastructure projects. In fact, he has been trying to create his own version of the Chicago Infrastructure Trust on the federal level since before he was elected.

Traditionally, the United States funds things like road construction, sewers and airports through direct government spending, grants or earmarks. The Chicago Infrastructure Trust, on the other hand, is an example of the "public-private partnership" (PPP) model. This works by funding a public infrastructure project through private investment, and allowing the investor to profit off its future use. In the case of the Trust, several major investment banks, including J.P. Morgan and Citibank, will have the opportunity to invest in to-be-determined Chicago infrastructure projects and make money off the results in unspecified ways. According to the city's official press release, the Trust will "provide advantaged financing, enabling each project to customize a financing structure using taxable or tax-exempt debt, equity investments and other forms of support."

Back in 2007, senators Chris Dodd (D) and Chuck Hagel (R) proposed the creation of a National Infrastructure Reinvestment Bank to generate more funds for infrastructure spending. Obama backed the idea as early as 2008, and called for investing $60 billion into a bank over 10 years to loan out to mass transit and green energy projects and make money on the repayments with interest. The details of how the proposed bank would work were never agreed upon, so it never materialized as part of the American Recovery and Reinvestment Act of 2009 (aka "the stimulus package"). Instead, the law only funded infrastructure through direct payments and grants.

Last year, senators John Kerry (D) and Kay Bailey Hutchison (R) sponsored a bill to create an independent national bank called the American Infrastructure Financing Authority (AIFA), in order "to complement our existing infrastructure funding." It was to be funded by private sector investment to "to provide loans and loan guarantees for projects of regional or national significance." This later evolved into another bipartisan-sponsored bill called the Rebuild American Jobs Act, but the Senate voted not to deliberate on it or another competing infrastructure bill over partisan differences.

During his speech at the Democratic National Convention last night, Obama never once used the word "infrastructure" when highlighting his goals to stimulate the economy and create jobs at home. But at one point, he did say, "I'll use the money we're no longer spending on war to pay down our debt and put more people back to work -- rebuilding roads and bridges; schools and runways."

The 2012 Democratic Party Platform describes another way the party will fund infrastructure spending, explaining that the Democrats "will fight for immediate investments for highways, transit, rail, and aviation and for the creation of a national infrastructure bank to help modernize our infrastructure, put hundreds of thousands of construction workers back on the job, and help businesses grow."

However, the platform doesn't just rely on a national, PPP model bank to raise capital. "In order to reduce the deficit while still making the investments we need in education, research, infrastructure, and clean energy," the platform reads," the President has asked for the wealthiest taxpayers to pay their fair share."

So on the national level, Obama and the Democratic Party are on the same page in believing in a combination of federal spending, budget savings, and some form of a public-private partnership to subsidize the future of American infrastructure and spur job creation. While a federal PPP program may ultimately look and act differently than the Chicago version, they will both be used as a supplement or alternative to spending tax dollars.

Of course, there are critics to the PPP approach, particularly towards the Chicago version. Many (myself included) have voiced suspicions about the Trust's accountability and the mayor's already-close ties with Republican-supporting investment bankers. In a recent column pointing out how Chicago Democratic figures like Rahm cozy up to Republican figures and causes, the Reader's Ben Joravsky suggested, "For all his reputation as a pit bull for Democrats, he's currently advancing an agenda that would go over well at a GOP convention."

As it turns out, he's right. The official 2012 Republican Party Platform calls for public-private investment right from the first page, noting, "A federal-state-private partnership must invest in the nation's infrastructure: roads, bridges, airports, ports, and water systems, among others."

In the mayor's defense, the GOP platform's approach to funding basic infrastructure needs goes farther than what he claims he'll use the Trust for. Projects like upgrading the city's water system and CTA will use federal funding and local financing, whereas the mayor claims that "The trust is going to be used for what I call transformative [projects]." The only currently announced Trust-funded project will be retrofitting buildings to save energy. Potential future Trust investment projects may include funding the proposals included in the Chicago Cultural Plan, along with those from CDOT's newly released Chicago Pedestrian Plan. But what the future of the Trust holds for Chicago beyond that remains to be seen.

The Chicago Infrastructure Trust may not have the kind of "bipartisan support" Bill Clinton claimed it did in his DNC speech. But on a national level, expanded use of the PPP model for infrastructure funding has bipartisan consensus between the two party platforms. Obama will likely push it during a second term, and ex-Bain Capital head-honcho and Republican presidential nominee Gov. Mitt Romney will surely be familiar with how the process works. And no matter who ends up president, infrastructure spending that doesn't involve any sort of leasing or sale of debt to private interests will continue to exist in some form in the federal and state governments... at least in the short-term. Whether or not you want to call it socialist, government spending may someday go from being the expected approach to rebuilding the country to the exception.

But the money has to come from somewhere.

 

Tom Tresser / September 12, 2012 5:41 PM

Don't trust the Trust. It SHOULD be called The Investment Banker's Sweet Deal Fund. Rad book, "Public Service, Private Profits" by Prof. John Loxley, who studied Canadian PPPs. It's a payday loan scam - paying investment banks like MorganStanley for assets we already own as they collect fees regardless of soundless of the deal for taxpayers. It's just paying for expensive debt. Ask yourself - WHAT service are the private investors offering? What is their rate of return? MorganStanley will make TEN for ONE on the parking meter deal. No wonder private capital is drooling to get in on the public assets infrastructure market. KEEP THEM OUT OR WE WILL PAY DEARLY.

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