Infrastructure banks are all the rage. Rahm Emanuel’s infrastructure bank in Chicago received national attention for its innovative approach to Chicago’s infrastructure needs. Governor Cuomo of New York has also been in the national spotlight as a result of his creation of an infrastructure bank.
Infrastructure banks leverage private investment to achieve improvements in public assets. An infrastructure bank identifies public projects that will result in government savings and then attracts private dollars for the projects by offering investors a cut of such savings. For example, Chicago’s Infrastructure Trust is seeking private money to make city buildings more energy efficient. Private investors will receive a portion of the energy-related cost savings that the project achieves. This model is lauded because it allows cities to tackle public works projects even when they are struggling with budget shortfalls. Infrastructure banks can also help cities and states leverage federal funding because, as demonstrated by Emanuel’s and Cuomo’s efforts, the establishment of a bank sends a message to federal officials that a city or state has an innovative plan in place for utilizing federal funds.
Of course, infrastructure banks have their flaws. Many have raised questions about infrastructure banks because of worries about sophisticated private actors exploiting public assets and resources. Furthermore, as illustrated by the slow start of Chicago’s Infrastructure Trust, infrastructure banks are extremely complex and require a large up-front investment of time. Nonetheless, this model provides a way forward for state and local governments desperately in need of funding for public projects.
In addition to providing a means to upgrade aging physical infrastructure, the infrastructure bank model presents cities and states with the opportunity to strengthen their pools of human capital. State and local governments can create “human capital banks” that allow individuals and private organizations to invest in workforce training programs and receive a portion of the financial returns that these programs generate.
For example, a state government’s human capital bank could develop a training program tailored to a specific company’s needs. The goal of the program would be to attract the company to the bank’s state – developing company-specific training programs has proven to be an extremely successful strategy for luring companies to states. The bank would attract private dollars for the program by promising investors a percentage of the returns generated by the company moving to the state, such as increased property and income tax revenues. If executed properly, all parties win – residents of the state get access to job training, investors receive reasonable returns, and officials accomplish their goal of growing the state’s jobs base.
This idea might be criticized because, from a strictly financial perspective, the end result is the same as if a city or state provided tax breaks to a business. Through a human capital bank, future tax revenues would be provided to companies indirectly in the form of workforce training subsidies. However, this approach presents a less risky investment than simply giving away tax incentives. Ten years after receiving tax incentives, a company could move out of a city, leaving the city with little to show for its years of tax breaks. In contrast, using a human capital bank model, if a company relocates, the city retains its investment: a more skilled population.