R Street Institute

Op-Eds

How to make private investment in infrastructure really work

by William Murray
Oct 9, 2017
Print
issues: Energy and Environment
originally published in CityLab

During the 2016 presidential campaign, Donald Trump—like his opponent Hillary Clinton—spoke glowingly about infrastructure spending, alluding to Franklin Roosevelt’s Works Progress Administration and Dwight Eisenhower’s Interstate Highway System as examples of how spending on roads, bridges and airports helped unite the country. For 2017, the American Society of Civil Engineers has given America’s infrastructure an overall grade of D+, estimating it would cost more than $4 trillion to upgrade properly. But President Trump’s $1 trillion dollar, 10-year infrastructure plan has so far moved along at a halting pace.

This tortoise-like profress may offer an opportunity to think more strategically about the means and ends of infrastructure—and increase the chances of final passage down the road. The odds are still good that Congress will act, since infrastructure spending is the closest thing to a free lunch in American politics.

If done right, the sky is the limit for U.S. infrastructure. Smart grid technologies, buried electrical lines and well-designed mechanical back-ups could advance both grid resiliency from future hurricanes and the growing threat from cyber-terrorism. New highway construction should help the country transition to electric vehicles and driver automation in the coming decades. Upgraded air traffic control systems could increase the nation’s air capacity by 50 percent, while shortening flights and saving passengers money.

The key problem with infrastructure spending is that it almost always attaches risk onto taxpayers that should fall on the private sector, which takes cost overruns more seriously. Trump’s vision of using private-public partnerships (PPPs) as a way to leverage $200 billion in taxpayer-guaranteed loans into roughly $1 trillion in infrastructure is a great opportunity for Congress to escape its previous bad habits. Allowing private firms that build projects with their own capital to earn guaranteed rates of return from tolls or other revenue streams likely would improve the efficiency of infrastructure building and make the public spending go farther.

Many of the private-public projects highest on the federal government’s list are in urban areas, and are not limited to toll-roads. These include the $235 million urban redevelopment project at Port Covington in Baltimore, and the $3 billion Penn Station rehabilitation in New York City. The first public-housing PPP was announced in April by HUD Secretary Dr. Ben Carson in Miami at the Liberty Square public-housing development. The public-private framework in Miami uses a 5:1 ratio of private to public dollars. Carson calls PPPs “the answer” to affordable housing, although 13 states, including New York, have not yet passed laws allowing public-private partnerships. In these states, each PPP must be passed into law on a project-by-project basis.

But for projects around the country to really take off, Congress will also be forced to eliminate many of the perverse incentives toward infrastructure spending currently enshrined in law. Under current law, gasoline tax revenues are returned to states based on a formula that counts how many miles of highway each contains and the distances their residents drive. These statutes penalize states with toll roads and congestion pricing, causing them to lose out on federal money.

In addition, the global construction industry is highly inefficient, and has been particularly abysmal in the United States, where it has seen productivity declines in recent decades. Part of the reason for these cost overruns are redundant environmental regulations that extend the permitting process unnecessarily by years and sometimes decades. A larger element is that the construction industry is incredibly decentralized and construction markets are so volatile that firms find it easier to fire workers—who in the United States are often undocumented—than to invest or upgrade machinery and software programs to increase productivity.

Firms applying for PPP contracts should be required to use digitized construction plans with all of their subcontractors. Moreover, states should work to harmonize building codes across their municipalities. Currently, there are 93,000 different building codes across the United States.

The American taxpayer needs to be protected from the worst recent examples of public spending boondoggles, like Boston’s “Big Dig”and Seattle’s “Big Bertha”. With Capitol Hill just beginning a slog toward corporate tax reform, the more time spent over the next few months thinking strategically about U.S. infrastructure, the better.

Image by hfzimages

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