What Republicans get wrong about infrastructure investment

During his campaign and at the start of his administration, President Trump said he wants to spur job creation with a large infrastructure package.

While no legislation has been proposed, during the campaign, two key advisers to President Trump — National Trade Council Director Peter Navarro and Secretary of Commerce Wilbur Ross — released the outline of a plan to finance infrastructure investment.

{mosads}The Navarro and Ross plan unfortunately continues a recent tradition of policy proposals that rest on a mistaken premise — that “innovative” proposals for financing infrastructure are needed to boost this investment. But it is not financing that is the bottleneck for infrastructure; it’s policymakers’ unwillingness to specify funding.

Funding refers to how the infrastructure is ultimately paid for. Broadly speaking, there are only two options — charge user fees, like tolls, or charge more in taxes. But user fees and taxes only raise revenues gradually, over time, and tolls only materialize after a project is built. Conversely, a defining characteristic of infrastructure building is large, upfront fixed costs.

Workers, equipment, and materials are necessary to build the infrastructure before anybody starts using it. Financing bridges this gap between when money rolls in to fund infrastructure and when it’s needed to build it.

For example, funding for a new road may come from a state or city tax on gasoline. But financing the road — making the upfront payment to the builders who construct it — is often done by borrowing money through municipal bond issuance.

Investors pay upfront for the bonds (providing the finance for infrastructure) and then receive a steady stream of income over time from infrastructure’s funding sources (either taxes or user fees).

Typically, infrastructure investment, operations and maintenance are provided by the public sector. A primary reason for this is that infrastructure’s large, upfront costs coupled with the low marginal costs of additional users create what economists call “natural monopolies.”

The initial costs of building a new highway are large, but the extra costs of allowing an additional car to drive it are trivial. The large, upfront cost serves as an effective barrier to competition. Natural monopolies require either public provision or at least public oversight to provide services efficiently, hence the large public role.

Despite this clear economic logic arguing for a strong public role in infrastructure provision, the newly-fashionable catchphrase in infrastructure is “engaging the private sector,” generally coupled with claims that it is a lack of “innovative financing” that holds back investment.

A common solution put forward to this alleged need for “innovative financing” is public-private partnerships (P3s). Public-private partnerships are contracts between the public sector and a private partner, where the private partner participates in the financing, operating, or maintenance of the infrastructure.

Critically, the private partner is providing financing of infrastructure — not funding. The private partner brings along some of the necessary upfront cash in return for an equity stake in the project. P3s are not a funding source.

Private companies, unsurprisingly, will not build our infrastructure for free — taxes or user fees are still required. The only difference being that the associated revenues now go to pay the private provider rather than bondholders.

In theory, P3s could provide some useful incentives to infrastructure provision (private companies may better internalize the long-run costs of deferred maintenance), but the real world experience with them is spotty. Moreover, P3s do not provide free lunches.

In the end, policymakers who genuinely support infrastructure investment need to level with taxpayers (and/or toll-payers) about where the money is coming from. It is this failure of political will and courage — not lack of innovative financing options — that has discouraged infrastructure investment in recent years.

For example, the existing Transportation Infrastructure Finance and Innovation Act (TIFIA) program already leverages P3s to provide infrastructure financing. But in the most recent surface transportation reauthorization bill in 2015, TIFIA’s federal funding was cut by 70 percent. Funding is the problem, not financing.

Senate Democrats deserve credit for not shirking the responsibility of specifying funding sources with their plan to invest $1 trillion in the nation’s infrastructure over the next decade. Their plan does so without gimmicks or questionable assumptions by raising revenue from progressive sources.

Conversely, Republican plans shirk the funding challenge. The details of the president’s campaign plan are mildly complex, but the upshot is that the plan gives tax credits to incentivize private financing of infrastructure.

This leaves open routes for cronyism, but also leaves crucial funding questions unanswered, such as what happens to projects that are socially vital but not privately profitable, like fixing Flint’s lead-water pipes?

Speaker of the House Paul Ryan’s (R-Wis.) outline is not much more upfront on the funding challenge. As in previous Ryan fiscal efforts, much relies on magic asterisks and dodgy assumptions.

For example, take his unlikely assumption: “A great agency… has public-private partnerships. For every one dollar of federal dollars, there’s $40 of private sector spending.” At this proposed leverage ratio of 40-to-1, $1 trillion in infrastructure would require just $25 billion in federal subsidies.

In its history, the TIFIA program mentioned before has been able to hit pretty high leverage ratios — up to 30-to-1 at times. But this has always been a small program (never more than $1 billion in subsidies in a year) and the ability to scale leverage ratios like this in a significantly larger program is highly uncertain.

This also comes with a major asterisk. While Ryan’s claim that his funding mechanism means there’s “not a trillion dollars coming from federal taxpayers into the transportation system” is technically true, it’s also beside the point, as we’ve seen. Federal taxpayers would only subsidize $25 billion of the $1 trillion investment.

But the full $1 trillion must still be funded. So while that is indeed not a trillion dollars from federal taxpayers, state taxpayers and infrastructure users (i.e., the same real-world households who pay federal taxes) will still be on the hook for the rest of the bill.

The irony is that all of this talk about “innovative financing” is happening during a time when traditional financing is more attractive than ever. Interest rates remain exceedingly low; the traditional way of financing infrastructure has never been cheaper or easier to use.

This really should lay to rest claims that anything but lack of political will to find the necessary funding is holding back infrastructure investment. 

Hunter Blair is a budget analyst for the Economic Policy Institute, a nonprofit, nonpartisan think tank created to include the needs of low- and middle-income workers in economic policy discussions. Blair specializes in tax, budget, and infrastructure policy analysis.

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