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Everything You Wanted to Know About National Infrastructure Banks But Were Afraid to Ask

President Obama’s new plan to create an infrastructure bank didn’t get a lot of attention this week. And a lot of the attention it did get was from Republicans dismissing it as wasteful spending. That’s too bad. The Europeans already have a similar institution, called the European Investment Bank (EIB), and it’s been highly successful. Instead of ignoring or dismissing the concept, it might be worth examining how and why that bank works—and whether Obama’s version would work the same way.

Founded in 1958, the EIB is owned by the 27 member states of the EU. The bank makes large, direct loans (generally at least $10 million) to projects that improve infrastructure, clean energy, health or education. Would-be borrowers, who come from both the private and public sectors, must make a comprehensive proposal detailing the project’s feasibility, its ability to repay the loans, a list of other funding sources and its value in fulfilling EU policy objectives. A panel of experts then determines whether the project should receive EIB financing, which can pay for up to half of a project’s cost.

The money generally comes from private investors, although the countries that own the EIB have contributed a small portion of the bank’s approximate $300 billion in capital. Thanks to its government ownership and sound finances, the bank’s bonds receive high ratings, which allow them to raise money at very low interest rates.

The EIB doesn’t give grants—all the money it disburses has to be repaid with interest—but it does offer borrowers substantial benefits. The EIB “functions as a bank, but it does not seek to maximize profits,” says Emilia Istrate, an expert on infrastructure financing at the Brookings Institution. “It does not function like a commercial bank.” As a result, borrowers pay low interest rates, close to the EIB’s cost of raising the money. The bank also provides some technical assistance.

Basing the system on carefully selected loans rather than grants makes the arrangement sustainable. “The rate of reimbursement is high,” Istrate says, adding that the bank is always profitable. “They’ve never had a problem in terms of the bottom line.”

The EIB’s record is impressive. Over 50 years after its founding, the bank is still going strong, helping to fund development projects across the continent. A relatively small government investment attracted much larger amounts of private money, and the combination has helped fund high-speed rail in Spain, an expressway in Poland and electrical wires in Hungary, among many other projects. In 2009 alone, the EIB loaned out over $65 billion.

This system of combining public and private money could work in a narrower American infrastructure-focused bank, too. And that seems to be what Obama has in mind, very roughly, although he hasn’t yet provided many details. (Some big questions: Would the bank limit itself to loans, or would it also make grants? If the latter, what would its funding source be?)

Of course, an infrastructure bank is no panacea—after all, the bank would likely limit itself to making low-cost loans, rather than directly paying for new construction. State governments would still eventually have to come up with the money to pay for the projects, whether from tax money or charging tolls on roads constructed with bank money. But by making it cheaper to fund vital infrastructure projects, a bank would help get them built.

A well-designed infrastructure bank’s benefits could go even farther, says Istrate. “The current type of investment is … more like spreading peanut butter,” she says. “It’s not really based on strategic economic criteria.” She argues that, assuming the bank is truly independent and decisions are actually made by experts, it will lead to a projects being selected “based on a cost-benefit analysis,” and their “national and regional importance.”

That’s how the system’s supposed to work now, isn’t it? Well, yes, but that hasn’t been how things have actually turned out in Congress. Remember the infamous “bridge to nowhere” we almost funded or the even more senseless “road to nowhere” that got built with some of the money that had been intended for the bridge? They were a result of the appropriations process and pork-barrel politics run amok, not any kind of reasonable economic analysis.

A national infrastructure bank would, in theory, mean less money spent on these projects—and more spent on investments that actually make the country productive. Even Republicans can get behind that idea. Or so you would think.