Chicago Mayor Rahm Emanuel wants to spend $7.2 billion to rebuild his city’s aging infrastructure. But he doesn’t want to raise taxes. So, on Tuesday, Chicago’s city council decided on a different approach, approving a new infrastructure bank to lure in private investors.

Rahm Emanuel by the Chicago River. (Rich Hein — Associated Press)

Already, five investors, including J.P. Morgan, Citibank and a union pension fund, have tentatively agreed to put up $1.7 billion for the Infrastructure Trust. For now, the only project on the horizon is a $225 million endeavor to retrofit various city buildings and make them more energy-efficient — but officials hope that number will grow.

The big question, however, is why Chicago would do things this way. An infrastructure bank, after all, is just another form of borrowing. Chicago would get money upfront from, say, Citibank or J.P. Morgan to build a new bus system or subway extension, and then the riders would pay the investors back over time in the form of higher fees and fares. This is just just another way to tax residents to pay for projects. So the question is whether the infrastructure bank somehow gives Chicago access to funds that the city couldn’t get any other way.

This might be the case. As Mark Bergen explains over at Atlantic Cities, Illinois is suffering from a serious budget crunch and Chicago’s credit rating was downgraded in 2010. The city already owes about $7.3 billion, and Chicago officials say that they’re struggling to sell more general-obligation bonds to raise cash. On the other hand, Cate Long of Reuters’s MuniLand is skeptical of this argument, noting that Chicago only has to pay about 1.04 percentage points more than Boston to borrow money through bonds, and it’s not clear that Chicago’s infrastructure bank will actually make things cheaper in the end (more on that in a second).

Over at Urbanophile, Aaron Renn offers up another way of looking at the question. An infrastructure bank might be thought of as a hedge against risk. Say that the city wants to shell out money upfront to retrofit a bunch of buildings and make them more energy-efficient, but it’s not at all clear what sort of electricity-bill savings they’ll reap over time. In that case, the city might want to off-load that uncertainty to private investors (assuming those investors are willing to play).

But here’s the problem. For this to work reasonably well, a city has to be smart about how it structures its contracts with private investors. Otherwise, there’s a real possibility that Chicago could pay too much for its infrastructure and, essentially, get fleeced by shrewd investors like Citibank and J.P. Morgan.

This isn’t an idle concern. Something like this has already happened — in Chicago. Back in 2008, under Mayor Richard Daley, the city leased its city parking meters to a private consortium led by Morgan Stanley for $1.15 billion. It turned out to be a potentially bad deal. According to the city’s inspector general, Chicago officials erred in calculating just how much their parking meters were actually worth. Over the next 75 years, the private investors will collect an estimated $11.6 billion in higher parking fees from Chicago’s drivers — making the contract potentially worth quite a bit more than what the city sold it for.

Indeed, one of the reasons Chicago’s credit rating got downgraded in 2010 was because of the losses on the parking meter sale. That’s why Reuters’s Cate Long worries that Chicago could actually end up paying more overall by bringing in private investors than it would by simply issuing more debt and doing things the old-fashioned way. (For his part, Emanuel has said that he isn’t planning to sell off city assets outright, the way Daley did.)

In any case, Bergen reports that other cities across the country will be following closely to see how Chicago’s experiment pans out. It’s a story worth following. As I explained at length here, there are real advantages to bringing in the private sector for things like roads, bridges and sewers: There’s some evidence that outside investors can wring more efficiency out of big construction projects. But as Chicago itself has proved in the past, these contracts can also go very badly awry.