The Infrastructure Footrace: Why is the US Stuck in Reverse?

There has been much discussion over the “crumbling infrastructure” in the US, the risk to the economy and the time and money needed to update and strengthen it.

The Trump administration has made bolstering the US infrastructure a major pillar of their to-do list for the country and plans to commit well over a trillion dollars to the initiative. While on paper it sounds like a hefty sum, a closer look shows that we may not see much in the way of meaningful progress over time.

Over the past several decades, government investment in infrastructure as a percentage of gross domestic product (GDP) has declined. Annual infrastructure investment by federal, state, and local governments peaked in the late 1930s, at about 4.2% of GDP, and since has fallen to about 1.6% of GDP in 2016. State and local governments consistently spend more on infrastructure directly than the federal government. In 2016, direct federal spending on nondefense infrastructure was less than 0.1% of GDP, whereas state and local spending was about 1.5% of GDP…The United States also lags many other developed countries with respect to annual infrastructure spending. Spending on infrastructure, as a percentage of GDP, is higher in all G7 countries, except for Italy and Germany, than in the United States.

Source: Economic Impact of Infrastructure Investment

Congressional Research Service, July 18, 2017

In fact, the US is very much stuck in reverse as it pertains to its infrastructure and where it is headed. Why? There are five reasons.

One

The first reason is governance. Throwing money at the problem is not enough. It comes down to solid, long-term strategic decision making. The core of the infrastructure issue in this country is the lack of good policy decisions at a national and strategic level that has persisted for decades. This has resulted in a very large and difficult problem to solve. The solution is a change in the governance structure for US infrastructure. Yes, there are instances of sound, tactical decision making at the state and local level which find more immediate solutions; however, politicians, especially at the national level, have proven largely incapable of making long-term strategic decisions in the interest of the country’s overall infrastructure, and consequently it’s long-term economic health.

Yet, there is a federal role. Any plan that leaves the current governance structure largely in place is not going to result in a materially improved infrastructure landscape (“insanity is doing the same thing over and over again, but expecting different results.”) The solution may lie in non partisan, truly-independent commissions at the federal and regional levels with the authority to make all decisions related to national infrastructure. This includes funding and surviving election cycles.

Two

The second is the lack of clear national priorities. Money is needed, yes. But what is needed first is a comprehensive, national needs-and-priorities assessment based on economic impact and social importance. That is yet to happen in any meaningful way. Before we dedicate a trillion or more dollars for any purpose, shouldn’t we know what needs to be done and what is the best strategy? For example, if a port or an airport is further developed this will need supporting transportation infrastructure such as roads and rail which may be the responsibility of a different government entity. In the UK, a National Infrastructure Commission has been set up to provide impartial, expert advice on major long-term infrastructure challenges. This performs the national infrastructure assessment and makes recommendations and then hold the government accountable on implementation. Infrastructure Australia also plays an analogous role. This does not take away the political cross-department and cross-party debate and input on infrastructure investments but channels it for better decision-making.

Three

The third reason is gaps in responsibility. There are many states that have made tough decisions to fund large infrastructure investments and are working with each other using their own identified resources. Yet, the federal government is largely looked to for money by most states but ironically not for policy direction. The states, on the other hand, have a more parochial focus on infrastructure. Federal laws and regulations surrounding infrastructure do not facilitate timely and cost-effective action. While all arms of government do strive to make things better, we can agree that results matter and they show a multi-trillion dollar infrastructure deficit. These gaps in responsibility and accountability need to be filled for better results. There are projects with national and regional significance like the interstate highway system, navigable waterways, transmission networks, and large regional hydro-power generators and drinking/agricultural water resources. Then there are projects that are important to a state like local highways, roads and bridges, water systems, and local power generation and distribution. The former needs greater federal involvement and possibly leadership while the latter requires primarily state leadership and regional projects need a combination of the two. Leaving it to individual states to make all decisions will not necessarily provide the desired outcomes.

Four

Fourth, there needs to be a glide-path towards self-sustainable investment. The citizens of this country have to pay for it no matter what (be it taxes, tolls or utility bills). But the problem is too large just for the states to do what they are able and willing to do. This is a recipe for haphazard investment especially for projects with national or regional significance. A small percentage-matching program doesn’t meaningfully help change things. On the other hand, a sizable program to seed investments (needs assessment, prioritization and initial funding) that buys states the time they need to put in place the necessary fiscal and legislative policies and institutions to ultimately make themselves more self-sustaining, which is the ultimate goal, would be valued. You cannot get there overnight. Only the federal government has the means to bridge that gap and a federal role will always remain.

Five

Finally, there is no sustainable funding source identified. Instead, the unending debate between public or private funding of infrastructure has been a surefire way to avoid making a decision on taxes. There is little evidence to show that the private sector or user fees by themselves will be any more than a small subset of the funding needed for US infrastructure. Everything cannot have a user fee. Some can and should, like highways, airports, power and water. They can be self-sustaining but their ability to support all aspects of the national infrastructure grid are limited. Rural road, power, water and airport systems, for example will need a subsidy. Large urban projects with their significant environmental and remedial risks may not all be self-sustaining. Projects focused on system resilience will not have a dedicated revenue stream. There is considerable evidence to show that tax sources fund most infrastructure globally and any plan to move measurably to improve US infrastructure will, like it or not, need a sizable tax component. Ultimately, it makes sense for people to pay their fair share when costs can be effectively allocated directly to the user so it will be all hands on deck — a combination of taxes and user fees (like tolls) that fund a sound infrastructure plan.

Having said that, there is also considerable evidence to show that core government is not always best equipped to execute on delivering or managing certain infrastructure assets. With the resources identified by the public sector, the private sector or truly independent authorities with performance-based compensation can act as an arm of government, and often can deliver better infrastructure outcomes. There is ample evidence that there are benefits, even if they may be vulnerable to overstatement, with the experience of Infrastructure Ontario, BC (British Columbia) and UK Partnerships.

Trump Infrastructure Plan

The President’s infrastructure plan appears to provide what everybody wants on the surface. It provides the possibility of money. The Federal government is planning to match up to $200 billion of the $1.5 trillion price tag. This means the other $1.3 trillion ostensibly has to come from the states.

It does have constructive proposals that will:

• Improve access to capital
• Level the playing field for private sector involvement by making tax-exempt Private Activity Bond’s (PAB) applicable to a broader array of infrastructure projects thereby eliminating the current bias in the tax code against private sector involvement
• Eliminate disincentives to expanded use of the private sector to manage existing public assets
• Provide federal agencies incentives to dispose of surplus property
• Provide credit enhancement across a wider set of assets
• Bring a more reliable revenue stream to finance the maintenance and expansion of interstate highways
• Dedicate funding for rural infrastructure
• Shorten the environmental permit timeframe by giving the agency with the most expertise the lead and a coordinating role. This could quicken project development and have a meaningful cost savings.

The question still is: does it have the potential to meaningfully address the US infrastructure deficit? Using the yardstick laid out above in this article, the answer is no. The proposals make tactical improvements but they do not strategically alter the bigger infrastructure picture.

What the plan does not:

• Address infrastructure governance
• Establish and link critical priorities to resources
• Propose a better alignment of responsibility
• Establish a clear glide path towards sustainable investment
• Identify a sustainable source of funding.

It is true that most countries struggle with finding ways to pay for and deliver infrastructure. No model has proven to be a panacea. Western developed countries have a greater willingness to pay issue as the public sees the costs of reinvestment as greater than the benefits. Developing countries have an ability to pay issue due to stretched central government budgets but the benefits if investments were made are more readily seen.

Conclusion

Solely dealing with infrastructure at the margins is simply not enough. It is time for the country to take a step back and do a thorough assessment of where the infrastructure in the US is at currently and where it needs to go. This not been done on a holistic level. Strengthening the country’s infrastructure is not solely about money but just as importantly thoughtful, coordinated decision making. Will the partisan divide prevent these discussions from taking place? Time will tell.