US still getting its infrastructure strategy all wrong

By Richard Beales Source:Global Times Published: 2017/8/27 21:53:39

Illustration: Luo Xuan/GT


Washington has infrastructure all wrong. There's a big funding gap, but cash isn't the problem. There's more than enough capital in search of long-term investments. What the federal government needs to do is remove hurdles to private financing, be willing to take good ideas from elsewhere and help change the mindset of states, localities and consumers.

President Donald Trump's administration wants to mobilize $1 trillion for infrastructure investment. His 2018 budget calls for $200 billion of federal outlays, and his advisers have talked about tax credits too. Democratic ideas include heavier federal spending in many areas and a new infrastructure bank offering subsidized debt, among others. There's more than one solution, of course, but the emphasis on federal dollars and links to contentious tax reforms distract from easier wins.

The financial firepower is already available, exemplified by Blackstone's recently announced up-to-$100 billion US infrastructure fund, backed by Saudi Arabia. There are also smaller sector funds and specialist owner-operators of toll roads from Europe and Australia eager to get in on the action. Trillions of dollars in pension and insurance assets in North America also are in search of returns to match their long-term liabilities. Among them are retirement funds like the Canadian Pension Plan Investment Board and Ontario Teachers' Pension Plan with nearly $500 billion under management between them.

The shortage is in the number of projects suited for such investors. The American Society of Civil Engineers has famously graded US infrastructure D-plus and identified a $2.1 trillion funding shortfall out of $4.6 trillion needed over the coming decade. Even though local and federal governments are strapped for cash, the private sector is not getting enough of a look-in.

Moreover, the returns on many infrastructure investments are perfectly adequate for fund managers without any tax breaks or subsidies. Put another way, if a state government sells a 75-year concession on an existing road to a private operator, for example, the new owner simply will set the toll price to deliver a sufficient return. Not every worthwhile project provides a commercial return, but that shouldn't prevent pushing ahead with those that do.

The Washington back-and-forth often obscures the fact that the bulk of the US' infrastructure is owned by state and local governments. Even so, one roadblock to private-sector funding deals is that many projects require a tangle of federal, state and local approvals, which can take years to come through. Such delays ought to present less of an issue for so-called "brownfield" projects, where assets already exist but need upgrading, like roads or bridges. To bring in the private sector most effectively - which means handing over the economic risks and appropriate incentives, not trying to control everything - can be stymied by the past, however. For example, any prior federal funding has to be repaid rather than becoming available to a state for new infrastructure outlays or even to pay down debt.

Another hurdle is the deep, $4 trillion US market for state and local bond issues, allowing governments to finance investments cheaply. In some ways, this is a big advantage. There is, however, a limit to what governments can prudently borrow, and sometimes the private sector is more efficient, for instance in completing construction projects on time and on budget. Municipal-bond interest is usually spared federal and other taxes, but private entities can't borrow on this basis, so the public-sector cost of funds always looks lower.

Yet another barrier to private money is a reluctance to cede partial or temporary control over assets considered public. This is particularly surprising in a country whose early infrastructure was largely privately funded and which prides itself on a market economy and entrepreneurship. Take New York City's subway system: It is in dire need of billions of dollars of investment, and New York state, the metropolis and others routinely clash over who should pay. The result is inefficient drip-feeding of cash and overall underinvestment.

Instead of hunting for cash, US authorities should be rushing to streamline the approvals processes. There are specific areas where laws could usefully be changed, too. One example is interstate highways, which are subject to restrictions on commercial activity, for example in rest areas.

Australia's federal government has hit upon a simple idea to encourage so-called asset recycling. If a state sells a concession on existing infrastructure assets, bringing in cash, Canberra will chip in 15 percent extra as long as the entire proceeds plus the contribution from the federal government are then spent on new infrastructure. This is a neat solution for various reasons. One is that it realizes the value of assets that do suit the mountain of private capital. The cash goes to state and local governments, which can then invest in infrastructure that may have a more significant social than financial return, such as school upgrades or rural broadband service. Another is that it keeps the federal government out of the projects themselves, reducing the complexity.

Though money is required for this last idea, much of what the government can do to advance myriad projects does not. It's hard to wrap most of it in a 10-year budget number of the kind Washington prefers, but it would be a far better way to jump-start the needed upgrade of America's infrastructure.

The author is a Reuters Breakingviews columnist. The article was first published on Reuters Breakingviews.

Posted in: INSIDER'S EYE

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