Infrastructure: Paralysis and Reality

A federal infrastructure solution may not be found in the near future; can private funding help?

By Manuel H. Lazerov

It was all too predictable that the recent meeting between the President and the Democratic leaders in Congress would produce nothing, insofar as infrastructure was concerned – theatrics aside. This is simply because the Democrats are looking at taxes as the fundamental solution, which the Republicans regard as kryptonite.

Let’s back up and actually define the scope of the problem. The American Society of Civil Engineers (ASCE) is now assessing a need for two trillion dollars in infrastructure spending over the next 10 years. Previously, estimates were as high as nine trillion dollars. The latter figure is probably more accurate, but has probably been lowered so as not to frighten legislators into doing nothing. The fact is, that even at two trillion dollars, they are still gridlocked. So, if the true number is somewhere between two trillion and nine trillion dollars, then what is being discussed is grossly inadequate to begin with, and our infrastructure will continue to deteriorate at an accelerating rate for lack of any action by Congress. That would mean that what is being discussed may be a total exercise in futility.

The President favors a much deeper involvement of the private sector, which, philosophical or not, avoids the issue of higher taxes to pay for new infrastructure. No progress on legislation in his mind may mean more progress in creating greater private investment in public infrastructure. And, from his point of view, that would be a win.

It is not all that irrational. Unfunded pension liabilities are $210 trillion. Just how much more debt can local government conceivably pile on? And, do their credit ratings actually reflect the true extent of their willingness and capacity to live up to those contractual commitments? The Highway Trust Fund has not increased its levies for 26 years, and there is no prospect that this will change. Personal debt is at an extraordinarily high level, which is what makes raising taxes such a toxic political decision.

But, how about the Republicans, too, who favor no taxes whatsoever and have no infrastructure funding plan of their own? Actually, it is much worse than that. When Republicans talk about funding infrastructure, they ask, “Where are we going to get the money?” This is remarkable coming from a party that allegedly favors business as the solution to everything. They claim that they would privatize everything, if they could. Yet, when it comes to infrastructure, they never raise the possibility of anyone other than government being the sole provider.

Why? Would it not make sense to Republicans to see market-based, economically sustainable projects built by private enterprise, supported by revenues that reflect life cycle costs? Part of the answer is that projects might not get built in their districts because voters would not want to pay possibly higher rates, which is not necessarily a given. In other words, many voters may not want to pay for the realistic cost of services.

So, general taxation becomes a default, wherein projects are built, lifecycle costs are suppressed for political purposes, and projects eventually fall apart for failure to properly maintain them. This is exactly what has gotten us to where we are today, with trillions of dollars of deficient infrastructure.

Many prospective concessionaires claim that they can deliver services more cheaply than government. If so, they should be given an opportunity to prove it.

How? Some governments have a procedure, where they compile costs for what they could do a project for, and will then put it out for bid. If a concessionaire comes in at a defined percentage below that, that concessionaire would get the award. And, the concessionaires would also provide the financing.

How about voter sentiment? Voters can reject anything. Getting infrastructure built is going to require leadership, including paying for lifecycle costs – not doing so only leaves it to the next generation.

There is no assurance that the existing economic conditions will continue forever. Raising taxes during a recession to fund infrastructure becomes even more problematic, and there is a finite limit to how much debt government can accumulate before the interest on the debt crowds out an increasing amount of social services.

Gridlock may actually provide the impetus for action. As individual local jurisdictions accept the reality that the federal government is not coming to their rescue, local initiatives may be the solution for a number of infrastructure types. There are huge amounts of private money for investment in infrastructure. At least some projects will get built, rather than everyone sitting on their hands, waiting for some grand federal government compromise — which may never happen, given today’s political environment.

Manuel H. Lazerov is President of Infrastructure Financial, Inc. He may be reached at lazerov@infrastructurefinancial.org.

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