It would help markets help us build things
On the campaign trail this year, Donald Trump stumped for $1 trillion worth of infrastructure investments, promising to shore up America’s flagging road networks, water systems, utilities, telecommunications systems, and public facilities. In the weeks since his election, Trump has made clear that this infrastructure package will be an immediate priority for his administration. And that means that a national infrastructure bank might end up back at the top of the policy agenda after almost a decade of gridlock in Congress, as House and Senate Republicans look for ways to forge a more cooperative relationship with the White House.
The American Society of Civil Engineers (ASCE) estimates that the U.S. faces a funding gap of $1.6 trillion over the next eight years, or $201 billion annually, for a wide range of infrastructure. More than half of that deficit is concentrated in surface transportation (e.g., highways, commuter trains, ports). Highway- and road-infrastructure experts David Hartgen and Greg Fields estimate that commuters spend more than an entire work week each year stuck in traffic in Arizona, California, Illinois, Maryland, Massachusetts, New Jersey, New York, Texas, and Virginia. More than one-fifth of the nation’s bridges are deficient and in need of repair.
This problem is not new; the ASCE has been harping on it since 1998. Everyone agrees that our infrastructure is in need of modernization. The question has been what role the federal government should play in modernizing it.
The Obama administration floated the concept of a federal infrastructure bank early in its first term, but the idea went nowhere even with a Democratic-controlled Congress. Democrats wanted to use the infrastructure bank as a means of deepening ties between the government and business, building a pot of public money that could lure private investors to public–private “partnerships” that would carry out the projects the government prioritized. Under some proposals, the bank would have made direct loans to public authorities, effectively becoming an unaccountable conduit for federal grants to politically preferred projects and government agencies. Republicans balked, stiffening their resistance after the 2010 midterm elections, which gave them control of the House.
But Trump’s White House might now create a window of opportunity to make the infrastructure bank a reality. A properly designed bank could implement fiscally conservative, free-market solutions to the nation’s infrastructure problems. By eschewing grants and centering its business model on a revolving loan fund — a portfolio that is replenished by the repayments of loans — such a bank would transparently finance large public projects. Loan performance would become a criterion for judging the bank’s effectiveness, giving it an incentive to invest in only the most viable projects. The key to the bank’s success would be leveraging private capital, rather than substituting taxpayer funds for private-investor funds.
Many large-scale infrastructure projects charge the public for their use, as anyone who’s ever paid a highway toll or a water bill will attest. The foreknowledge that a project will create a stream of revenue through such user fees can help to attract private investment that gets the project built. Many private investors are willing to take on the risk of bridge financing — funding early-stage construction — as long as they can tap into user-generated revenues once the projects open. As an indicator of willingness to pay, the promise of user fees allows investments to be evaluated by rate-of-return calculations and cost-benefit analyses. Such sources of capital also encourage local authorities to think beyond simply levying taxes and instead take advantage of market-based revenues and pricing. And revenue streams that are generated by users and tied to service delivery are ultimately more sustainable, making the future maintenance costs of new projects less daunting.
Conceived with these characteristics in mind, a properly designed bank would start private funds flowing to worthwhile public–private partnerships and perhaps even to privately developed and operated projects.
An existing program piloted under President Bill Clinton, expanded under President George W. Bush, and continued under the Obama administration provides the outlines of how a Trump-era bank might succeed. Reason Foundation transportation-infrastructure expert Robert W. Poole Jr. notes that the U.S. Department of Transportation’s TIFIA (Transportation Infrastructure Finance and Innovation Act) program is an example of a “fiscally conservative, taxpayer friendly way” for the government to administer loans for infrastructure projects. TIFIA leverages private-sector capital while requiring investment-grade ratings for the projects it considers. Most experts believe the program has worked well, enabling the construction of new facilities that could not have been built without private participation. If all bank loans are tied to capital projects that are sustainable with market-driven revenue, ensuring that the projects with the greatest likelihood of success are prioritized, the nation can avoid substantial tax increases and minimize the risks taken with taxpayer dollars.
Of course, some capital projects, such as schools and rural water systems, don’t generate sufficient user revenues to be built without public subsidies. A smartly designed infrastructure bank would require that those projects be paid for with a mix of user fees and dedicated revenue streams such as earmarked sales taxes, rather than with legislative appropriations, before they could qualify for a loan. It would also apply performance measures to subsidized projects, clearly defining and measuring progress and tying continued financing to loan performance. This would ensure that loans are evaluated on their economic merit rather than by a political standard, improving the overall performance of the bank.
The gridlock that has prevented us from addressing the nation’s infrastructure problems is not the result of the private sector’s unwillingness to fund infrastructure projects. It is the fault of federal, state, and local governments that either cannot or simply don’t want to tap into capital markets and public–private partnership opportunities to upgrade their systems and improve productivity. As Poole writes in the industry newsletter Public Works Financing, what infrastructure-fund investors and the private companies that implement infrastructure projects “lament is the lack of a pipeline of U.S. projects,” not the lack of incentive to invest. The U.S. has a target-rich environment for private capital, but the targets don’t necessarily want to play, often preferring to wait for taxpayer-funded grants to shore up dilapidated or outmoded facilities.
Some of the public-sector inefficiencies are startling. Economist Lawrence McQuillan recently highlighted the extraordinary incompetence of certain state departments of transportation, bestowing the Independent Institute’s Golden Fleece Award on California’s transportation department for its wastefulness and inattention to service quality. The agency has a backlog of some 30,000 maintenance-service requests that have gone unresolved for 90 days or more, even as its $10 billion budget funds about 3,300 staff positions that are unnecessary. Government agencies rife with this kind of complacency and ineffectiveness are unlikely to look to the private sector to improve service delivery or fill infrastructure gaps.
A national infrastructure bank, properly designed and constrained, could change this dynamic by providing incentives for public agencies to play ball. Specifically, Trump’s administration could mandate loan criteria that would encourage state and local governments to adopt pricing policies that accurately reflect full operational costs; to create sustained revenue tied to product delivery and quality; and to utilize private capital. This would help the public sector identify and set priorities for the services it delivers. If public services can be sustained through market pricing, and government facilitates the process of connecting private capital markets (and operators) to the public sector, significant headway toward closing the infrastructure-funding gap can be made relatively quickly.
The private sector’s value in building infrastructure is not theoretical. Across the globe, other nations have learned to embrace private investment in their efforts to create new infrastructure, maintain existing systems, and upgrade systems falling into disrepair. The entire limited-access highway network in France is managed by private companies using tolls. Just in the past month, Public Works Financing reported financial closings with the private sector for $9 billion worth of transportation megaprojects in the U.S., including investments in LaGuardia Airport, Maryland’s mass-transit Purple Line, and Texas’s SH 288 toll road. Canada has finalized agreements for transit and highway projects worth $3.7 billion. Deals have been closed on transportation projects in Colombia, Chile, France, Mexico, Germany, Ireland, the Netherlands, Slovakia, and Japan. China developed most of its highway and rail network using private capital in the mid 1980s and 1990s.
The U.S. has fallen behind in large part because our public authorities have too often been unwilling, or unable for political reasons, to tap into markets. This is where Trump’s private-sector inclinations might provide an important boost to efforts to revitalize and modernize America’s infrastructure if he is willing to spend his political capital on making his campaign-trail promises a reality. At long last, there is an opportunity to improve public-service delivery and put our nation’s infrastructure on a sustainable financial path. It will be up to President Trump, his political appointees, and their allies in Congress to make it happen.
– Mr. Staley is the director of the DeVoe L. Moore Center at Florida State University and a research fellow at the Independent Institute. He is a co-author of Mobility First: A New Vision for Transportation in a Globally Competitive 21st Century, among other works.