In recent years, pessimism about the U.S. infrastructure has been growing, notes Wharton real estate professor Gilles Duranton, a specialist in urban and regional development, transportation and local public finance. âMore and more, it is said that the overall infrastructure is old and decaying, that bridges collapse and roads are full of potholes. Water poisons residents in some places like Flint, Michigan; electricity is not always reliable; airports and seaports are under strain; cellphone coverage is piecemeal.â
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How accurate is that picture? Although that image is sometimes exaggerated, âthere is some truth to this,â Duranton asserts.
From left-wing progressives to right-wing libertarians, nearly every faction in the American political spectrum agrees that the infrastructure in the U.S. desperately needs a rapid upgrade â not just as a mechanism to generate job growth but as a tool to improve the countryâs competitiveness. Yet when the Trump administration laid out its promised vision for a $1 trillion, multi-year national infrastructure plan on May 23, the plan sparked controversy about what kind of infrastructure deserved top priority, and how to finance it.
According to the American Society of Civil Engineers (ASCE), an industry group that lobbies for more infrastructure spending, federal, state and local governments need to spend many times more than what the Trump administration is proposing to meet the nationâs infrastructure needs. The proposal calls for only $200 billion in direct federal spending over the next decade on such needs as roads, bridges, tunnels, railroads and expanded broadband, along with incentives for states, cities and private investors and efforts to reduce the burdens of regulations. âThe administrationâs goal is to seek long-term reform on how infrastructure projects are regulated, funded, delivered and maintained,â transportation secretary Elaine Chao told reporters. Chao added that the administration expects âto have more details forthcoming,â including a legislative package later this year.
While many Democrats and independents agree that infrastructure should be a significant priority for any U.S. administration, Chaoâs proposal was criticized for allocating only $5 billion in federal funding for the effort in fiscal 2018, and providing no details about where the funding would go or how it would be paid for. Oregon congressman Peter DeFazio, the top Democrat on the transportation committee, called the plan a âsham.â Combined with Trumpâs proposed budget cuts for the department of transportation, DeFazio charged that the presidentâs efforts amount to a recipe for âpushing the responsibility off federal balance sheets, and replacing it with unidentified incentives for Wall Street investors to invest in transportation.â
Speaking at a recent Bloomberg Government conference on infrastructure renewal, former transportation secretary Ray LaHood, a Republican, said that the Trump administrationâs proposals for infrastructure spending, which focus on public-private partnerships (PPPs), are âfine but they are only one piece of the formula. The Trump administrationâs idea of investing a trillion dollars over 10 years â with only $200 billion of it coming from the federal government â is not going to get us where we need to be to rebuild America. There are 60,000 structurally deficient bridges in America today.â
âThere are 60,000 structurally deficient bridges in America today.â âRay LaHood
LaHood added: âThereâs not enough money in public-private partnerships to invest, so we need to look at raising the gas tax, to indexing it to the cost of living. Raise it to 10 cents a gallon.â LaHood noted that the gas tax has not been raised since 1993. âLook at an infrastructure bank, which President Obama proposed five different times. Make it $50 billion. That will tap some private money. [Also,] give states the ability to toll if they want to toll. Tolling has worked in some states. In my own state of Illinois, it has worked very well.â
When Does Privatizing Make Sense?
In an interview with Knowledge@Wharton, Robert Inman, Wharton professor of business economics and public policy, addressed the strengths and weaknesses of public-private partnerships, âinfrastructure banksâ and other alternatives. Inman explained that there are four possible kinds of infrastructure projects: Interstate projects that are publicly funded; interstate projects that are privately financed; state and local projects that are publicly financed, and state/local projects that are privately financed.
The general logic behind favoring public-private partnerships, which play a major role in the Trump proposal, is that âthe government is inefficient, and therefore we have to have the private sector do it,â notes Inman. Two important factors need to be considered when opting for private versus public financing: the incentives that should be given to the private sector, and the rates of return these projects should achieve. Also, some activities lend themselves to privatization more than others. âAssuming that the incentive for private firms is to make money, when does it make sense to hand over to the private sector what is ostensibly a public activity, in the sense that citizens as a whole collectively want to engage in this activity?â Inman asks. âPeople can buy hamburgers, but they canât go and buy police protection. Any activity that has that economy of scale, youâre going to want to think about bringing those 50,000 people together and have them manage the activity jointly, and thatâs going to be called âgovernment.ââ While governments can do that, in the case of a public-private partnership the government says, âLet me contract with a private firm to actually provide police services.â
Whatever the activity, âYouâve got to make sure that [the private contractors] are not short-changing quality in favor of lowering costs in order to make money. In the case of prisons, for example, you donât want the private contractor to lock the prisoners in a cell for 365 days and give them gruel, just to minimize the contractorâs operational costs and make a larger profit. Thatâs not the public service weâve got in mind.â
Measuring quality is also an important factor in judging the wisdom of contracting with a private provider. As Inman explains, âIf quality is a difficult thing to judge, youâre going to have to supervise these guys pretty heavily. And if youâre going to supervise them, why donât you just do it? If quality is going to be difficult to judge, thereâs no big advantage in privatizing â if you care about quality. If you do care about quality, you might as well use government. People complain, âtheyâre so bureaucratic.â But theyâre bureaucratic for a reason; theyâre trying to deliver quality services, and that means watching performance.â
Privatizing makes sense only if quality is very easy to monitor, Inman notes. He cites trash collection as one example: Itâs not hard to judge whether your private-sector provider collected it or not. âI drive down the street the day they pick up the trash, and I see if itâs been picked up or hasnât.â On the other hand, some aspects of waste disposal might benefit from government monitoring, such as managing the quality of public disposal centers where citizens bring waste, âto see if the waste is burned with a clean technology, not dumped in a river.â
âPrivatizing makes sense only if quality is very easy to monitor.â âRobert Inman
Avoiding Monopolies
Incentives are an even more complicated matter. Policymakers generally know that private-sector investors need to get a return on their capital but not an excessive return. That means addressing the question: How can the government keep a private contractor from charging a monopoly price? The answer, says Inman, is competitive bidding. âIf quality is easy to monitor and you can have competition in the actual provision [of a particular service], then privatize away. But if you canât have competition, then youâre going to be giving over monopoly power to the private sector, and they are going to charge a monopoly price.â
Monitoring the competitiveness of the bidding process is harder, requiring sealed bids in the bidding process, Inman continues. âIt could be corrupt, in the sense that government officials are bribed to give the contract to a private firm. But thatâs no different than the public employeesâ union bribing the mayor to give them big fat labor contracts.â
Corruption âis an issue that gets a lot of peopleâs blood boiling but itâs not an argument for or against public or private,â Inman adds. PPPs are perfectly fine for state and local services, so long as you monitor corruption and quality, he says.
Federal vs. Local
Meanwhile, the Trump administrationâs $1 trillion proposal to reinvent Americaâs infrastructure is focused on privately funded projects that have a scope that is state/local, rather than national. This combination of attributes, while pleasing to some who advocate a stronger role for the private sector, is not generally popular in the U.S. Congress, explains Inman. âIt is private [funding], so there is no money under the control of Congress. And it is state and local, so there is no spending under their controlâ as opposed to state and local governments. âCongress was hoping for a trillion dollars of federal money to build and improve highways such as Route 30 and Route 3 in Pennsylvaniaâ and their equivalents in other states, as well as money to put into buses or improve the subway system â which are all local/state government responsibilities. âIf Iâm a national taxpayer in Texas, why should I care about the transit system in Pennsylvania? Thatâs Pennsylvaniaâs problem.â Concludes Inman, âTo my mind, the public-private partnership really requires some very careful thinking.â
According to Duranton, public-private partnerships in infrastructure âcan be made to workâ under the right circumstances. âIn France, which is always viewed as the type of country where the government runs everything, the French highway system is nearly entirely private, and so is the French water system. The big worry is that we need to balance the private sector â which has slightly higher efficiency â versus public sector inefficiency, especially when you have very influential unions.â
âOne of the problems with infrastructure is the term âshovel ready.â That sounds great, but itâs really the worst way of thinking about infrastructure.â âJohn Delaney
The bigger issue, Duranton notes, is creating the actual partnerships. âYou can talk about PPPs all you want, but when the Obama administration looked really hard for PPPs, after a year they found only $27 billion worth of transportation projects.â
Banking on the Long-term
Infrastructure banks are another old idea whose time may have come, according to Congressmen John Delaney, who spoke at the Bloomberg conference. âAn infrastructure bank could make a lot of sense because it could do two things. First, it could handle some of these projects that donât fit well into some of the existing programs. Second, it could start people thinking differently about infrastructure. One of the problems with infrastructure is the term âshovel readyâ [when planning and engineering technology are in place, but funding is missing.] That sounds great, but itâs really the worst way of thinking about infrastructure. The right way of thinking about infrastructure is: âWhatâs good for the long term?â and âWhere is the economy going over 10, 20 or 30 years?â and âHow do we design the infrastructure to meet those needs?â
Delaney joined other speakers at the conference in arguing that an infrastructure bank could help erase the current focus on short-term fixes to the nationâs infrastructure. âThe nicest thing about an infrastructure bank is that it could make long-term commitments, which you canât really do in the current framework of government because itâs all funded on a budget cycle. If you had an independent bank that was a nonprofit structure, with independent governance, and it could go around the country and make 10 or 15 or 20-year commitments to say, âYes, if you get all the regulatory [elements] in place, if you get the community behind it, and you do a few other things, youâll get the money you need.ââ
In a perfect world, Delaney added, âweâd have a map showing trillions and trillions of dollarsâ in government spending âwith all the great priorities â and every year, weâd spend a little money on it, and then if we had a recession weâd spend a little more, so weâd have a counter-cyclical demand-driver in the economy. And when economic times got better, you might spend a little less. That would be the perfect way to run it. Unfortunately, thatâs not how our government works.â
Article by Knowledge@Wharton