The US Should Privatize its Infrastructure

By Roy C. Smith

We are told that public infrastructure investment creates jobs and efficiencies, and should easily be financeable, but politics prevent this from happening.  Privatization can help.

The American Society of Civil Engineers recently awarded the US a minimally passing grade of D+ for its crumbing infrastructure, and identified $3.6 trillion of unfunded requirements.

This is because US public infrastructure (highways, bridges, airports, etc.) is paid for by user taxes and tolls that politicians are loath to raise, or by direct government grants that are equally unpopular.  Thus, it is continually under-depreciated, under-maintained, and under-financed.

The New Jersey Turnpike (constructed in 1951) is in poor shape and needs to be improved and renovated. In 2007, Governor Jon Corzine proposed a $30 billion sale/leaseback arrangement, but the New Jersey Legislature would not approve it because doing so was feared to involve job losses and wage cuts, as well as raising the tolls. The current toll to travel the turnpike’s entire 122-mile length is less than the cost of crossing once over the 1-mile George Washington Bridge. Raising the toll, about half of which is paid by motorists passing through the state, is still politically toxic in New Jersey.

The Tappan Zee Bridge over the Hudson River was constructed in 1955 with an expected life of 50 years. The bridge is now being replaced at a cost of $5 billion that has not been funded by the NY State legislature. Raising the toll from $5 appears to be completely off the table (the George Washington Bridge’s toll is $14).

The US Highway Trust Fund, established in 1956 to fund and maintain the federal highway system by assessing a national gasoline tax (last updated in 1993 at 18 cents per gallon), would have run completely of out money last month except for a last-minute, three-month, $8 billion fix. This does little to address the $92 billion deficit that the Congressional Budget Office expects the Highway Trust Fund to run over the next five years.

The simple truth is that public infrastructure is fully financeable as long as tolls are set at rates sufficient to generate revenues to cover capital and operating costs. If so, bonds issued by the entities readily can be sold to investors in global capital markets.  New entities such as Infrastructure Banks are not necessary. What is necessary is getting agreement on how to set up infrastructure projects at market rates so they can be financed and we can get on with them.

In other words, a kind of privatization needs to be applied.

In Europe, privatization began in the 1980s and resulted in several hundred billions of dollars of sales of shares in state-owned-enterprises, including portions of the national highway system in France, Spain and Italy.

These programs involved acute political struggles at first as opponents feared job cuts, wage reductions and rate increases, and resented the idea that rich people would end up owning all the public goods.

But it wasn’t just Mrs. Thatcher and her Tories who became believers; most of the rest of Europe, Latin America and Asia joined in as the positive results of privatization became clear.  The enterprises, required to follow economic laws of the marketplace, became profitable, paid taxes, made new investments and increased employment once they returned to a growth mode. If they didn’t they would be taken over by other companies or private equity funds that would try again.

In America, however, there are very few state-owned-enterprises. Instead, the idea of regulated “public utilities” was preferred. This meant that potentially monopolistic, but very capital-intensive energy, water, transportation and other companies could remain in the private sector if state or federal utility commissions regulated their rates and other activities. These private sector companies have been successful and are not the ones getting failing grades from the American Civil Engineers. They fund what they need as they go along.  In 2014 these types of companies raised $750 billion in global capital markets.

The ones with the failing grades are the government owned “public goods” enterprises that operate highways, passenger rail, airports and other systems that are used by the public at large and are important to the economic infrastructure of the country. The public expects these goods to be provided by the government at a cost that is affordable and fair, but it is also capable of resenting the subsidies that are necessary to keep fees low.

The system for funding public good infrastructure, however, has collapsed into a morass of politically overlapping jurisdictions of federal, regional, state and government-sponsored corporate entities that politicians are reluctant to fund.

For example, a 104-year old railway drawbridge in New Jersey carries 450 trains a day into and out of New York City. It is owned by an under-funded government-sponsored-enterprise called Amtrack, but also carries commuter trains operated by under-funded NJ Transit. The drawbridge, when opened, frequently fails to close properly and causes massive travel delays. Amtrack needs $1 billion to replace it, but it is unable to either raise it or get the federal or New Jersey government to pay for it.  The bridge, which is typical of many such bottlenecks in the US transportation system, remains un-improved.

The system clearly needs to be changed. One idea to do so is to separate transportation public goods and public utilities based on re-consideration of the subsidies.

The Highway Trust Fund, NJ Turnpike, Tappan Zee bridge and the ancient railway bridge are all part of a federal interstate transportation system that is large and robust enough so as not to require subsidies. If left alone to do so, it could fund itself (as gas and electric utilities do) but at present each part has to fund itself.

Congress could authorize an “integrated federal interstate transportation system” to operate as the governing public utility regulator for government controlled assets in the transportation industry.  It could take over decaying infrastructure from states that are unwilling to pay to upgrade it, and privatize it, either by resetting user fees to market rates or by selling it to private operators.

This would get state legislatures out of the rate-setting business, and could enable them to recover some of the proceeds from privatization sales. Considering the dismal financial condition of many large states, this should be a very welcome proposition.

Congress then might even be able to abolish the federal gasoline tax, releasing transportation infrastructure finance from the crippling constraint of ongoing partisan politics.

Privatization solved a lot of problems in Europe after facing a lot of the same political issues.  It is time for the US to apply some of the lessons.

From: eFinancialNews, Aug 10, 2015