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. “More 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.”
How accurate is that picture? Although that image is sometimes exaggerated, “there is some truth to this,” Duranton asserts.
From left to right, nearly every faction in the American political spectrum agrees that the infrastructure in the U.S. desperately needs a rapid upgrade — not just as a mechanism to generate job growth but as a tool to improve the country’s 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 nation’s 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. “The administration’s goal is to seek long-term reform on how infrastructure projects are regulated, funded, delivered and maintained,” transportation secretary Elaine Chao told reporters. Chao added that the administration expects “to have more details forthcoming,” 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, Chao’s 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 “sham.” Combined with Trump’s proposed budget cuts for the department of transportation, DeFazio charged that the president’s efforts amount to a recipe for “pushing the responsibility off federal balance sheets, and replacing it with unidentified incentives for Wall Street investors to invest in transportation.”
Speaking at a recent Bloomberg Government conference on infrastructure renewal, former transportation secretary Ray LaHood, a Republican, said that the Trump administration’s proposals for infrastructure spending, which focus on public-private partnerships (PPPs), are “fine but they are only one piece of the formula. The Trump administration’s idea of investing a trillion dollars over 10 years — with only $200 billion of it coming from the federal government — is not going to get us where we need to be to rebuild America. There are 60,000 structurally deficient bridges in America today.”
“There are 60,000 structurally deficient bridges in America today.” –Ray LaHood
LaHood added: “There’s 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.” LaHood noted that the gas tax has not been raised since 1993. “Look 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.”
When Does Privatizing Make Sense?
In an interview with Knowledge at Wharton, Robert Inman, Wharton professor of business economics and public policy, addressed the strengths and weaknesses of public-private partnerships, “infrastructure banks” 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 “the government is inefficient, and therefore we have to have the private sector do it,” 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. “Assuming 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?” Inman asks. “People can buy hamburgers, but they can’t go and buy police protection. Any activity that has that economy of scale, you’re going to want to think about bringing those 50,000 people together and have them manage the activity jointly, and that’s going to be called ‘government.’” While governments can do that, in the case of a public-private partnership the government says, “Let me contract with a private firm to actually provide police services.”
Whatever the activity, “You’ve 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 don’t want the private contractor to lock the prisoners in a cell for 365 days and give them gruel, just to minimize the contractor’s operational costs and make a larger profit. That’s not the public service we’ve got in mind.”
Measuring quality is also an important factor in judging the wisdom of contracting with a private provider. As Inman explains, “If quality is a difficult thing to judge, you’re going to have to supervise these guys pretty heavily. And if you’re going to supervise them, why don’t you just do it? If quality is going to be difficult to judge, there’s no big advantage in privatizing — if you care about quality. If you do care about quality, you might as well use government. People complain, ‘they’re so bureaucratic.’ But they’re bureaucratic for a reason; they’re trying to deliver quality services, and that means watching performance.”
Privatizing makes sense only if quality is very easy to monitor, Inman notes. He cites trash collection as one example: It’s not hard to judge whether your private-sector provider collected it or not. “I drive down the street the day they pick up the trash, and I see if it’s been picked up or hasn’t.” 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, “to see if the waste is burned with a clean technology, not dumped in a river.”
“Privatizing makes sense only if quality is very easy to monitor.” –Robert 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. “If quality is easy to monitor and you can have competition in the actual provision [of a particular service], then privatize away. But if you can’t have competition, then you’re going to be giving over monopoly power to the private sector, and they are going to charge a monopoly price.”
Monitoring the competitiveness of the bidding process is harder, requiring sealed bids in the bidding process, Inman continues. “It could be corrupt, in the sense that government officials are bribed to give the contract to a private firm. But that’s no different than the public employees’ union bribing the mayor to give them big fat labor contracts.”
Corruption “is an issue that gets a lot of people’s blood boiling but it’s not an argument for or against public or private,” 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 administration’s $1 trillion proposal to reinvent America’s 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. “It 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 control” as opposed to state and local governments. “Congress was hoping for a trillion dollars of federal money to build and improve highways such as Route 30 and Route 3 in Pennsylvania” and their equivalents in other states, as well as money to put into buses or improve the subway system — which are all local/state government responsibilities. “If I’m a national taxpayer in Texas, why should I care about the transit system in Pennsylvania? That’s Pennsylvania’s problem.” Concludes Inman, “To my mind, the public-private partnership really requires some very careful thinking.”
According to Duranton, public-private partnerships in infrastructure “can be made to work” under the right circumstances. “In 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 — which has slightly higher efficiency — versus public sector inefficiency, especially when you have very influential unions.”
“One of the problems with infrastructure is the term ‘shovel ready.’ That sounds great, but it’s really the worst way of thinking about infrastructure.” –John Delaney
The bigger issue, Duranton notes, is creating the actual partnerships. “You 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.”
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. “An infrastructure bank could make a lot of sense because it could do two things. First, it could handle some of these projects that don’t 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 ‘shovel ready’ [when planning and engineering technology are in place, but funding is missing.] That sounds great, but it’s really the worst way of thinking about infrastructure. The right way of thinking about infrastructure is: ‘What’s good for the long term?’ and ‘Where is the economy going over 10, 20 or 30 years?’ and “How do we design the infrastructure to meet those needs?”
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 nation’s infrastructure. “The nicest thing about an infrastructure bank is that it could make long-term commitments, which you can’t really do in the current framework of government because it’s 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, ‘Yes, if you get all the regulatory [elements] in place, if you get the community behind it, and you do a few other things, you’ll get the money you need.’”
In a perfect world, Delaney added, “we’d have a map showing trillions and trillions of dollars” in government spending “with all the great priorities — and every year, we’d spend a little money on it, and then if we had a recession we’d spend a little more, so we’d 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, that’s not how our government works.”
