A private solution to crumbling infrastructure?

For those of us in the United States, the long Thanksgiving weekend is here. With it comes one of the busiest travel periods of the year, and a huge proportion of that travel will be by road. The American Automobile Association estimates that some 42.5 million Americans will drive at least 50 miles or more this weekend, a 4 percent increase from 2010 levels. And as Americans hit the road, chances are they will encounter traffic jams, as a surge of cars and trucks overwhelm the capacity of highways and bridges that were planned and built decades ago.

The experiences of holiday travelers testify to the declining quality of America’s transportation infrastructure. The World Economic Forum’s Global Competiveness Report, 2011-2012 ranked the U.S. 24th among 142 countries in overall infrastructure quality, 20th in road quality, and 31st in air transport, trailing much of the developed world. In its most recent Report Card for America’s Infrastructure, the American Society of Civil Engineers (ASCE) rated American roads a D- and bridges a C, noting that over one in four of American bridges are “either structurally deficient or functionally obsolete.” Recent decades of growth have overwhelmed the capacity of the U.S. road network: between 1980 and 2006, the number of miles traveled by cars and trucks doubled while the total number of highway lane miles grew by just 4.4 percent, according to the Transportation Transformation Group.

The ASCE has estimated that “in order to bring the nation’s existing transportation infrastructure up to tolerable levels, policymakers would need to invest $1.7 trillion between now and 2020 in the nation’s highways and transit systems.” That would mean an additional $94 billion in infrastructural investment above current levels each year over the next decade. But federal and state authorities face a growing shortfall of funds, and cash-strapped transportation authorities have begun to turn to a new source for infrastructural maintenance: the private sector.

Dwindling public funds

As arguments over deficits and government spending have engulfed Congress and several state legislatures, additional infrastructural funding has been stymied. Congress has been unable to pass a comprehensive federal program for highway spending since 2009, resorting to a series of temporary extensions. Earlier this month, the Obama administration’s attempt to pass a $60 billion highway infrastructure bill was torpedoed by Senate Republicans. Meanwhile, the issuance of municipal bonds, a major source of infrastructural funding at the state and local level, has fallen to its lowest levels in over a decade, according to the Financial Times (see the FT article sidebar).

Additionally (and somewhat paradoxically), advances in fuel efficiency have actually added to the funding crisis for U.S. highways and bridges, as The Economist reports. Some 22 percent of the national funding for highways and 17 percent of the funding for mass transit is linked to federal fuel tax revenues. However, while the gasoline tax has remained at 18.4 cents per gallon since 1993, fuel economy in the average new passenger car has improved substantially, from 28.4 miles per gallon in 1993 to 33.7 miles per gallon in 2010. On top of that, as fuel prices have increased Americans have been using their cars less, driving fewer miles in 2010 than in 2006. Consequently, fuel-tax revenues have been drying up, rendering the Highway Trust Fund (HTF), the federal agency that finances highway maintenance and improvements, chronically short of cash. Any attempt to raise the federal gas tax to bring it into line with current fuel-economy standards would likely face strident opposition from anti-tax lawmakers, and both President Obama and Ray LaHood, the Secretary of Transportation, have opposed the measure. But with higher fuel economy standards on the way for cars and trucks, HTF funding for highways will continue to dwindle unless the gas tax is adjusted.

Going private

With state and federal transportation funds tightening, state and local authorities have increasingly reached out to private investors to help construct and maintain transportation infrastructure, including highways and bridges. As this excellent report by Cezary Podkul for The Washington Post illustrates, these public-private partnerships (PPPs) are steadily growing and have become a global phenomenon. Over the past five years, worldwide private investment in infrastructure has risen to as much as $180 billion, and could rise by as much as $95 billion more. Among these private investors are investment banks such as Goldman Sachs and Morgan Stanley as well as a number of large pension funds from the U.S., Canada, Australia, and Europe.

The Federal Highway Administration has actively encouraged the growth of PPPs, arguing that private sector involvement in highway construction or maintenance “can bring creativity, efficiency, and capital to address complex transportation problems.” Examples of PPPs abound. They include the widening of the Capital Beltway in Northern Virginia, the improvement of U.S. Route 3 near Boston, and the construction of Texas State Highway 130 in Austin, Texas. In each of these projects a private investor will finance a significant part of the construction costs and then take responsibility for subsequent maintenance over a fixed concessionary period. Other PPPs, such as the Chicago Skyway and the Indiana Toll Road, are operating agreements rather than new-construction projects, whereby private investors lease infrastructure from public-sector authorities.

Shortcomings of the PPP

While the PPP approach may help address the problem of highway and bridge maintenance, it is not without its shortcomings. Because the construction of completely new highways and bridges entails a significant amount of risk in the planning and development stages, it is less likely that private investors looking for a steady return on their investments will opt for new projects over operating and maintaining existing ones, unless the demand for a new project is readily apparent. At the same time, PPP highway projects could lead to higher user costs, as private operators will want to earn back the returns on their investment. In practice, this could mean the imposition of tolls on formerly free roads or higher tolls on existing toll roads. PPPs have also provoked criticism from some opponents who see the partnerships as the “sale” of public infrastructure to private interests out to make a profit on already hard-pressed American drivers.

The reality is more mixed, according to Ronald Wirtz of the Minneapolis Federal Reserve, who addressed the criticism of PPPs in a June 2009 report (see page 29 of the report). Wirtz writes that a primary problem with public-sector funding for transportation infrastructure is a failure to account for “life-cycle costs”, the long-term maintenance needs for infrastructure to remain operational and meet demand. These costs are often unaccounted for in the budgetary planning for new projects; instead, they are simply assumed to fall under future budgetary concerns, where they may be passed over again by legislators in favor of more short-term funding needs. On the other hand, private investors would have to consistently maintain a highway to ensure demand for their asset, and thus they would be more likely to consider the highway’s life-cycle costs. And while Wirtz acknowledges that private firms are also susceptible to short-term profits, he argues that if public-sector authorities can draw up effective maintenance and performance standards as a part of the PPP contract, private actors could be incentivized to minimize long-term maintenance costs.

Private investment in a national strategy

Testifying before the Joint Economic Committee of Congress this month, Robert Puentes, a transportation policy expert and Senior Fellow at the Brookings Institution, outlined a vital role for PPPs as part of a comprehensive national infrastructure policy. Puentes has proposed harmonizing state regulations governing the operation of PPPs and establishing a federal office to coordinate and standardize PPP projects, allowing these partnerships to expand across state boundaries and to conform to national transportation policy goals. The Obama administration has also signaled its interest in encouraging private investment in American infrastructure through its proposal to establish a National Infrastructure Bank. In his 2009 report, Wirtz also argued that PPPs can play a useful role in a national transportation strategy; while PPPs may be initially limited to “high-use or high-toll projects,” they could help rural or lower-use infrastructure by diverting public-sector funds away from maintaining higher-cost urban infrastructure.

Improvements to American highways, bridges, and other transportation infrastructure have been cited by the ASCE as an imperative for economic improvement; the association argues that deteriorating surface transportation infrastructure could cost the U.S. economy more than 870,000 jobs and suppress U.S. GDP growth by $897 billion by 2020. Reports from around the country further illustrate the economic costs of crumbling infrastructure. But if public finances continue to decline or remain entangled in partisan budgetary debates, the private sector will have an important role to play if America’s transportation system is to be built and improved to last.