On the campaign trail, Barack Obama promised a national infrastructure reinvestment bank to "to expand and enhance, not supplant, existing federal transportation investments". It would spend $60bn over the next 10 years on infrastructure. Ed Rendell, the governor of Pennsylvania, and a group of leading investment firms and lawyers have expressed support for the bank.
Last week, the American Society of Civil Engineers issued its 2009 Report Card for American Infrastructure. It awarded the nation a cumulative grade of D and called for $2.2 trillion to upgrade US infrastructure. This may be an exaggeration, but even if the actual need were only half as large, it would require a massive financial commitment over many years. Government funding will be hard to come by even after passage of the stimulus package.
Privately managed and controlled projects are one way of narrowing the funding gap between what the public needs and what the government has to spend. Here is where the Obama bank comes in. It could attract investment funds from private sources – creating more jobs and economic growth. It could promote public-private-partnerships by providing subsidised bonds, loans and insurance policies. The bank would complement the Reinvestment Act now before the US Senate.
However, the proposal has risks. Before endorsing the bank, Congress and the Obama administration need to assure high levels of public accountability and transparency. The accountability mechanisms in the Reinvestment Act are insufficient and provide only limited national government oversight. They are adequate for ordinary, "shovel-ready" projects, not for sophisticated public-private partnerships.
The act requires a state or local government official to sign off on each project, creates an oversight body in the executive branch, gives the government accountability office an independent advisory role and creates a website, Recovery.gov, to publish rudimentary project information. These provisions will do little to increase the transparency and accountability of public-private-partnerships based on a prime contract with multiple subcontracts. Publishing a prime contract on the web and investigating project tendering and implementation are not enough.
America learned this the hard way from contract abuses in Iraq. USAID put prime contracts on the web, but their open-endedness and the obscurity of the vast subcontracting arrangements meant that projects barrelled ahead and accountability trailed behind. For example, Bechtel received over $2bn in contracts implemented with subcontracts to companies that subcontracted to other companies in a complex web. Only two USAID employees in Iraq oversaw the contract. They were overwhelmed by the task and could not adequately check for waste and corruption.
Congress and the Obama administration should learn from experience, both in the US and in the rest of the world. Many emerging economies have decades of experience in structuring and monitoring of public-private partnerships. These projects drove the East Asian Miracle and also underwrote the extension of western European rails, roads, waterways and airports into central and eastern Europe, consolidating the expanded EU. At the same time, accountability problems have bedevilled these large-scale projects.
Uncontrolled, P3s are prone to insider dealings, and they frequently push down wages and lead to price hikes for public services. In both Hungary and Mexico drivers rebelled against excessive tolls on private highways amid allegations of insider deals and corruption. In the worst cases, costs are high and quality is low. Citizen dissatisfaction can produce a crisis that drives projects back to government ownership. In Bolivia, the Cochabamba water concession failed to deliver clean, affordable drinking water and as a result the contractor was forced to leave the country to the detriment of all involved. These predictable abuses can be prevented up-front with better and more stringent accountability mechanisms – which are now routine in international aid and lending projects. Bank designers must not ignore the lessons of experience.
Throughout the world, citizens help hold public-private-partnerships accountable. But the Reinvestment Act fails to incorporate this possibility. It simply adds an internet portal for citizen complaints to other accountability practices suitable for wholly public projects. However, upgrading infrastructure requires foresight and coordinated strategic action. P3s combine two great strengths of our national economy: risk-taking entrepreneurship and the creativity and initiative of state and local governments. However, decentralisation has a downside. As President Obama declared in his inaugural address: "Roads and bridges ... feed our commerce and bind us together." The Reinvestment Act does not ensure that projects provide this cohesion. Its accountability mechanisms only monitor ex post, put out fires and tidy up.
An Obama bank needs a different and more comprehensive model that promotes public participation, transparency and accountability. There are three complementary responses. First, to guard against wasteful investments, the bank should prioritise projects in the public interest by combining technical criteria with citizens' input in project choice and implementation. The final decision should be in the hands of public officials, but the bank should provide opportunities for the public to be heard. Second, once the outline of national programme is set, the bank should mandate public input at the state and local level under rules that invite participation and limit delay. Third, once projects are underway the bank should make detailed project documentation, including subcontracts, publicly available, and give project-affected communities meaningful avenues for redress.
An Obama bank is a promising way to encourage private sector involvement in infrastructure projects. However, the bank must include accountability and public oversight mechanisms that go beyond the inadequate accountability provisions in the Reinvestment Act.