2013-05-24

A New Model To Pay For Infrastructure in Chicago

The Chicago Infrastructure Trust creates a new way to pay for things like improvements to bridges and roads that won’t destroy the city’s already stretched budget.

The next big thing is funding urban infrastructure is now coming online in Chicago, and Tim Logan has done a deep dive on what that means at Next American City. The core idea is simple:

Governments across Europe, Canada and Australia have long turned to the private sector to help finance public assets, and even in the U.S., more places are dabbling in it. But it’s still rare for cities to take the lead. And no place, at least in this country, has tried what Chicago is launching this year: A nonprofit agency devoted to tapping private capital through structured financing while retaining public ownership, both for big-ticket items but also for workaday municipal infrastructure.

That agency, the Chicago Infrastructure Trust, could be a model not just for other cities, but for the federal government, where Obama has renewed his calls for a national infrastructure bank.

The need for infrastructure investment is immense—$3.6 trillion by the end of the decade according to the American Society of Civil Engineers, at a minimum. Given a political and economic climate that is combing the budget for places to cut, that’s a lot of juice to squeeze from the same old stones of federal grants and municipal bonds.

That’s particularly true in Chicago, since the state of Illinois is notoriously broke, and 675 of 1,624 bridges in Cook County are "structurally deficient or functionally obsolete." The Chicago Infrastructure Trust, unveiled last March by Rahm Emmanuel, proposes turning repairs for this kind of infrastructure into a project everyone from J.P. Morgan to boutique investment banks will want to invest in.

What sets the Chicago solution apart from its peers isn’t just its scale—the original announcement discussed preliminary commitments as high as $1.7 billion—it’s the clause on "public ownership." Instead of selling off assets (as Chicago infamously did with its parking meters), letting the private sector reap the long-term gains, the city will keep ownership of its own infrastructure, while paying back its private sector investors.

At the same time, they’re claiming to privatize the more onerous risks.

Take its first project, now in its early phases: $101 million worth of energy retrofits in city-owned buildings. The Trust is seeking cash up front from investors, to be paid back over time with the money saved from those improvements. The city has plotted out what it thinks those upgrades will save in lower energy costs, but unlike a general obligation bond, for instance, it’s making no guarantee on the return.

The trust has been taking its time in materializing, and it still has its skeptics, who are worried that, like with the parking meters, outsized returns will flow to investors that could have been kept in the government’s control.

James Irwin, who advises cities across the country on infrastructure as a senior associate of the Center of Wisconsin Strategy, told me the trust was "the biggest, most interesting thing in this space, in terms of large-scale financing. Whether that ends up being a real thing is, I think, an open question."

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