Buried liabilities haunt the infrastructure debate
Unfortunately, at the same time, protectionist trade policies have already started taking their toll on the development of the American-built environment. The National Association of Home Builders estimates that the recent duties imposed on Canadian softwood lumber are raising the cost of that material by 6.9 percent and inflating new single-family home prices by an average of $1,360. Housing builders and infrastructure investors alike are now facing the reality of dramatically-higher costs for another of their stalwart materials: steel.
For the U.S. to achieve any of its infrastructure goals, it will have to get serious about the most fundamental determinant of any project: paying for it. Toward that end, the government should be looking for opportunities to implement competitive and performance-based procurement policies.
The greatest liability facing many cities and counties is their outstanding water bill. Most water infrastructure was buried in distinct historical phases, and due to an unfortunate coincidence of which materials were used in each phase, much of this infrastructure is coming to end-of-life at once. Ours is the first American generation to face large-scale water infrastructure replacement, and the costs run into the hundreds of billions of dollars, including for towns that are often having difficulty simply keeping their lights on.
Exacerbating this situation are laws and regulations pockmarking the regulatory landscape that require pipes (which make up the majority of the cost of water infrastructure) to be replaced with certain materials — often whatever it is that just came out of the ground. These policies were handy rules of thumb when first passed, but the changed situation requires local governments to tailor their procurement to get as much bang for their buck as possible. Toward that end, policies need to be updated to allow a competitive material procurement-process.
Sometimes local conditions will mean that an old cast iron pipe can be replaced with cost-effective plastic replacements, especially if corrosive soil conditions would degrade new iron pipes just as it did the old ones. In other situations, extreme temperature or pressure variations could suggest iron to be a more fiscally sustainable alternative. The most important priority is to allow procurement to account for these variations and to choose the lowest-cost option for the taxpayer over the long term.
These principles should be applied across the board in infrastructure investment, from water to roads to bridges to new 5G wireless deployment. Given the heightened fiscal pressures that come with keeping existing infrastructure in service even as it is rehabilitated and replaced, the last thing the government should be doing is finding new ways to drive up costs.
It is toward this end that the president’s announced infrastructure plan makes serious progress. Increasing the local spending-share discourages the proliferation of projects that exist solely to take advantage of available federal dollars, such as Shreveport, Louisiana’s I-49 connector. Even necessary projects can benefit from the natural discipline imposed by a reduced federal subsidy, such as the New Jersey-New York Gateway program. Though the states have expressed outrage at President Trump for rescinding his predecessor’s promise of a 50 percent federal match for the project, they have remained curiously silent about the severe cost inflation that makes them dependent on federal government money in the first place.
That welcome message of budget discipline is undermined, however, when the same government demanding cost-containment from the states drives up the cost of their core materials with ill-considered tariffs. The proposed blanket 25 percent tariff on steel and 10 percent tariff on aluminum will further escalate the cost of housing in markets already struggling through a supply crisis, and will potentially endanger the new or rehabbed bridges, tunnels and tracks that the president has envisioned unleashing. In order to stand firmly and effectively for sound infrastructure, the administration should pursue smart cost strategies consistently.
President Trump has the opportunity to make historic improvements in our infrastructure, and he has already made significant movement toward implementing some major changes. He and Congress should take care to build consistently on that foundation of fiscally-conservative innovation.
Image credit: mandritoiu