Infrastructure

Ford Motor Co. and Industrial Policy

Posted on by Joseph

The U.S. government is giving the Ford Motor Co. a $9.2 billion loan, by far the biggest infusion of taxpayer cash for a U.S. automaker since bailouts during the 2008 financial crisis, to build three battery factories in Kentucky and Tennessee.  Neither Ford nor the Energy Department (DOE), which provides loans at far lower interest rates than those available in the private market, have revealed details about the loan.

The U.S. is taking a page from Beijing’s playbook.  China has a top-down industrial policy, with serious government planning and support of target industries. China’s sustained industrial policy has yielded the world’s largest battery manufacturers.  Between 2009 and 2021, the Chinese government poured more than $130 billion of subsidies into the EV market, according to a report last year by the Center for Strategic and International Studies.  Today, more than 80 percent of lithium-ion battery cell manufacturing capacity is in China.

Simply put, industrial policy means that centralized agencies formulate national visions and programs to develop specific industries.  It has been a toxic phrase in American politics.

As Gary Becker, who won the Nobel Prize for Economics in 1992, said, “The best industrial policy is none at all.” It has long been associated with pork barrel politics, picking winners, and crony capitalism.  The political rhetoric has been that the free market works best and is closely associated with freedom and democracy. The history of the U.S. does not square with this perspective.

On the surface, Ford would seem an unlikely party to receive the largest loan ever extended by the Department’s Loans Programs Office.  Just last month, Ford touted having almost $29 billion of cash on its balance sheet and more than $46 billion in total liquidity.  It is worth nothing that one of the best known loans made by the DOE was $465 million to Tesla in 2010 to support manufacturing of the Model S.

Ford aims to close the gap with Tesla on electric vehicles, just as the U.S. aims to close a similar gap with China. Ford told investors early last year that it would put $50 billion into its EV manufacturing efforts. By the end of 2026, the company wants to make two million EVs a year.

Starting with Alexander Hamilton, the first Secretary of the Treasury, who outlined a strategy for promoting American manufacturing both to catch up with Britain and provide the material base for a powerful military.  Hamilton’s “Report on the Subject of Manufacturers” promoted the use of subsidies and tariffs.  Similar practices have been expressed in various forms throughout American history.

During the 19th and 20th centuries, the government played an active role in promoting economic growth, using policies such as high tariffs to protect strategic industries, federal land grants, and subsidies for infrastructure development. The federal government has sometimes backed failures, but it also has remarkable success stories, such as nuclear energy, computers, the Internet, and building the interstate highway system

These days, industrial policy is viewed more positively, spurred by bipartisan concerns about the competitive threat China poses.  U.S. programs are now underway to cover semiconductor production, development of critical technologies, to secure key domestic supplies and support industries that are considered strategically important.

For example, subsidies from the Inflation Reduction Act and Infrastructure Investment and Jobs Act are spread across the EV value chain and are carpet bombing the entire automobile industry.  There are tax credits for sourcing critical minerals within the U.S. or friendly countries, for manufacturing or assembling the batteries and EVs they go into, for the consumers who buy the vehicles, and even for anyone building the public chargers needed to keep those vehicles moving.

The debate over industrial policy will continue because it gets to the longstanding controversy over the role of the government in our economy.  One thing is clear: the rosy rhetoric about the U.S. not engaging in industrial policy is contradicted by the country’s history.

The Future of Roadway Pricing

Posted on by Joseph

The need to find a better way of managing public roads in metropolitan areas is painfully apparent to many Americans each morning when they drive to work.

It is easy to conclude that the U.S. has made a series of wrong-headed choices about how to finance its all-important metropolitan roadway systems.  The results of these mistakes are ubiquitous and take several forms.

We have insufficient roadway capacity where it is most needed, as evidenced by severe traffic congestion on many critical roadway links in important metropolitan regions during increasingly long portions of the day.

We are chronically unable to build new roadway capacity to keep up with demand, to the point that blindly chanting “we can’t build our way out of congestion” too often replaces serious discussion of how to overcome obvious capacity shortfalls.

We insist on “saving money” in government operating budgets by reducing needed roadway maintenance, which causes roads to wear out faster and reduces long-term capacity.

To move beyond these mistakes, transportation policy makers must recognize the potential of recent technological breakthroughs that enable effective, market-oriented roadway financing systems that can dramatically improve how the U.S. manages, maintains, and pays for existing metropolitan roadway systems.

In simple terms, technology can now allow access to metropolitan roadway capacity through the same kind of marketplace mechanism traditionally used to distribute access to a host of private sector goods and services.

We can charge motorists directly for access to each roadway in a metropolitan area without requiring them to stop or slow down. Prices can be based on the distance they travel on that roadway and can be differentiated based on the “popularity” of each route as measured by the number of vehicles per hour traveling on them.

Prices can also be differentiated based on vehicle type, so trucks and other heavy vehicles that cause more wear and tear on pavement pay higher prices than small vehicles that cause less wear. Charges can be adjusted frequently to reflect changes in the number of vehicles traveling on a roadway.

Frequent price adjustments can also be used to guarantee motorists a certain minimum average speed on a particular route. Charges can be raised or lowered to maintain a target maximum number of vehicles on the roadway.

Intelligent use of these new technologies narrows the often considerable gap between a roadway system’s theoretical capacity and its functional capacity by using the classic economic principle of using price to control the demand for scarce resources.  It also results in better service for all roadway customers in a metropolitan area.

Note the term “customers.”  A customer is a willing buyer of what you have to sell at the price you are charging. What makes someone a willing buyer is a personal judgment about whether the value they are getting is greater than the price charged.

Suppose a driver can use two different lanes to reach their destination.  One lane charges a price per mile but promises an average speed of 60 mph.  The other charges nothing, but moves at less than 10 mph.  If the driver is on their way to an important business meeting and can’t afford to be late, they may decide that the value of time saved by using the priced lane is greater than the cost.  But if they are simply making a discretionary trip to the mall, they may opt to use the fee one and put up with the additional travel time.

Put simply, roadway pricing lets you create value for drivers by offering them shorter travel times for high-priority trips.  Drivers determine the priority of their trips, making personal judgments about which are the most important and how much they are willing to pay to reach their destinations faster.

Using price to distribute travel demand rationally at and raise resources for roadway maintenance?   Now that would be something to write home about.

Pay Me Now or Pay Me Later

Posted on by Joseph

Maintenance is often seen as the stepchild of infrastructure.  It easily slips from public notice in the face of more glamorous new construction.

Yet delayed or poorly executed maintenance can add billions of dollars to the private and public costs of infrastructure.  In addition, deferred maintenance hastens the need to replace assets by years, if not decades.  Many urban transit systems are testament to the high cost of inadequate maintenance.

Infrastructure spending has traditionally been divided into two categories: capital and operations and maintenance.  But such a breakdown can be misleading and is too simplistic to serve as a basis for allocating resources.  A more useful approach would be to think along functional lines. So capital spending can be split into new capacity and rehabilitation and operations and maintenance divided into its two components:

  •      New Capacity—expenditures for the engineering design or construction of new facilities or for plant and equipment that significantly expand existing capacity.
  •      Rehabilitation—capital-intensive activities that extend the useful life of a facility more than two years.
  •      Maintenance—expenditures on routine schedules to repair or maintain the good working order of existing facilities, plant, equipment, or rolling stock that neither adds new system capacity nor extends the life of facilities beyond two years.
  •      Operations—expenditures incurred on a routine basis for labor, utilities, engineering, and other overhead activities that support the day-to-day delivery of services.

For certain, a rigorous breakout of spending into each category is difficult.  It is particularly easy to confuse maintenance and rehabilitation.  For example, the two-year criterion used to differentiate between them is somewhat arbitrary.  The key is that “pure” maintenance focuses on short-term improvements (filling potholes) while rehabilitation has a longer-term impact.

Similarly, rehabilitation work and new capacity are often combined.  A road may be resurfaced at the same time that additional lanes are added.  Maintenance and operations also overlap.

In many ways, these four activities represent a continuum that, taken as a whole, could be called lifecycle costing.  In other words, inattention to one aspect increases the cost of all the others.  Finding the most cost-effective combination of spending, as opposed to focusing exclusively on building things, is one of the keys to effective infrastructure management.

Proper maintenance of infrastructure assets is important for two reasons.  First, there is a direct link between the quality of current services and the performance of the nation’s infrastructure.  Second, public perceptions of the overall quality of infrastructure services depend on good routine maintenance.

Just to be clear, lack of maintenance spending impacts long-term infrastructure costs.  Effective maintenance reduces rehabilitation costs and/or delays the time when such spending is required.

Although maintenance spending plays an important role in lifecycle costing, it is not always an obvious part of the infrastructure decision-making process.  This can result in maintenance being ignored or afforded neither adequate attention nor funding.

Since local governments own and operate most infrastructure assets, they also bear the heaviest financial burden for maintaining those assets.  Yet local governments do not always possess the financial resources or have the institutional flexibility to implement innovative maintenance programs. Consequently, they must be the main focus of efforts to ensure adequate maintenance.

Maintenance of infrastructure assets is surely not a politically compelling category of public spending. That adds to the dilemma of getting it properly funded.

Putting maintenance on par with other categories of infrastructure investment is not a simple matter, especially given the temptation to defer maintenance when the much higher costs it causes would likely hit on somebody else’s watch. That explains why elected officials all too often put the politics of new construction ahead of maintaining existing infrastructure.

With regards to aging infrastructure, we can pay now or pay later

Posted on by Joseph

The list of America’s infrastructure shortcomings is long, and deferred maintenance is near the top.  A 2019 report from the non-profit, non-partisan Volcker Alliance warned that repairs to the nation’s aging infrastructure (roads, highways, and other critical public assets) could cost more than $1 trillion, or about 5 percent of the country’s gross domestic product.

Reflecting the poor condition of U.S. infrastructure, the American Society of Civil Engineers gave it an overall grade of C- in 2021.

Congress is considering a $1.2 trillion, eight-year bipartisan physical infrastructure package that includes about $579 billion in new spending on roads, broadband, and other public works projects.

It is unclear how much, if any, of the new funding will be used to eliminate the backlog of deferred maintenance that plagues America’s public works infrastructure. Deferred maintenance is broadly defined as maintenance and repair needed to bring current infrastructure assets up to a minimum acceptable physical condition.

Democrats hope to follow up this legislation by moving a $3.5 trillion spending package that includes funds for education, climate change, Medicaid, and other social programs. They plan to expand the social safety net without Republican support using the budget reconciliation process, which avoids the 60-vote threshold typically needed in the Senate.

When it comes to the hard infrastructure package, it is important to remember that maintenance funding is often seen as the step- child of infrastructure assets, since it does not generate the excitement associated with new capital projects.

Given maintenance’s relative invisibility (except when a system failure occurs), it is often the first expense to be deferred, a short-term, stop-gap that usually leads to higher costs in the long run. Another challenge is that government often sets the price for using the asset too low to cover the cost of service delivery.

The maintenance of existing infrastructure is not politically compelling.  Short-term political incentives conflict with asset management activities that focus on the long-run sustainability of infrastructure assets. Guaranteed media coverage for ribbon cutting events and the ability to issue debt (to be paid by future taxpayers) encourage politicians to favor new public works projects, perpetuating the Build, Neglect, Rebuild model.

Ignoring or reducing ongoing maintenance funding enables politicians to move resources to more politically rewarding investments in new infrastructure.  The idea of states having balanced budgets is fiction if they fail to account for the cost of infrastructure maintenance that has been deferred.

Poor asset management means infrastructure maintenance is conducted on an ad-hoc basis and is reactive rather than routine and preventive. Delayed maintenance of infrastructure assets can add billions of dollars to the cost of assets and accelerate the time when they must be replaced.

Infrastructure investment has traditionally been divided into two categories: Capital, and Operations and Maintenance (O&M).  A more useful breakout would include four categories:  New Capacity, Rehabilitation, Maintenance and Operations.  These represent the life-cycle cost of an infrastructure asset.

Sure, a rigorous breakout of spending into each category is difficult. For example, maintenance and rehabilitation in particular are easily confused. Maintenance focuses on short-term improvements while rehabilitation has a long-term focus. Effective maintenance reduces rehabilitation costs.

Still further it is difficult to separate maintenance from operating activities.  But an effective asset management program must account for the full life-cycle costing of a public infrastructure asset.

In short, the story of maintaining infrastructure assets is pay me now or pay me many times more later.  Current funding programs need to be modified to make sure maintenance is not ignored.

If government is to be a responsible steward, new infrastructure projects should not be pursued until the sponsor has demonstrated the true life-cycle costs of existing assets can be paid for.

The economy and COVID-19, Part 2

Posted on by Joseph

Americans are struggling to adjust to a pandemic whose future progression is uncertain. They have not seen an economic downturn of quite such scale or scope, and people are unsure about how the United States can pull out of the crisis.

Righting the economic ship will require a delicate balance of managing debt and encouraging growth. A large infrastructure investment program that includes private contributions is a feasible way to achieve that goal.

Governments are struggling to prop up economies while confronting the serious and immediate public health challenges of COVID-19, resulting in unprecedented emergency spending and huge budget deficits throughout the world. In the United States, Congress has passed huge spending bills to help businesses and households that have swollen the national debt by about $2.4 trillion. The Congressional Budget Office numbers for its Doctor Doom scenario recently projected a budget deficit of more than $3.7 trillion for the current fiscal year.

Outstanding national debt now exceeds $25 trillion. Additional outlays in response to a second wave of COVID-19 outbreaks could further increase the debt and add to sovereign risk. Even in a low interest rate environment, higher debt service costs will crowd out other government spending. Trying to explain to the average politician that debt is a drag on future growth is a waste of time. Spending today and making a suitcase of promises is what helps them get reelected tomorrow. The future is someone else’s concern.

The Federal Reserve Bank has taken emergency measures to make credit easier to obtain with a bigger money supply and lower interest rates. Additionally, the Fed is lending more than $2 trillion to businesses and state and local governments. There is concern that the Fed’s actions risk future price inflation which would decrease the purchasing power of the dollar. The era of the dollar as the world’s primary reserve currency may also come to an end. In that case the U.S. would no longer benefit from the typical safe-haven demand from foreign investors as the value of the dollar collapses.

Policymakers note that these concerns must take a backseat to addressing the immediate crisis. The present commands their attention, but they may insufficiently appreciate that the future may be more of the present.

Going forward, the U.S. will have to manage the debt, deficits, and debt service payments, and at the same time find ways to support economic recovery to grow its way out of all this debt. While fiscal consolidation—raising taxes, cutting spending, or both—is the tried and true method for tackling debt challenges, it is likely to encounter some major tactical problems.

Raising taxes is politically difficult given the perception among many in Congress that voting for tax increases is tantamount to announcing your retirement from elective politics. Similarly, cutting high-dollar payment programs like Social Security, and Medicare is bound to be strongly opposed by legions of elderly voters.

Another approach is to focus and allocate resources to areas that create the most jobs. The time is long overdue for a bipartisan infrastructure investment package that rebuilds America’s crumbling roads and bridges, invests in future industries, and promotes increased productivity while immediately employing people whose income would give the American economy a shot in the arm. There is a broad consensus among mainstream economists that infrastructure investment has a large multiplier effect through the economy.

The problem is where the actual dollars can come from to fund such an ambitious program. One solution is to recruit private firms to help start, fund, and run as many of these infrastructure projects as possible. If properly structured, such public-private partnerships could tap into the billions of dollars in private capital hungering for low-risk investment opportunities able to offer decent rates of return.

COVID-19 has introduced a host of new economic challenges. A robust infrastructure program that includes private participation would be an effective way to begin to address them.

Congestion pricing is part of the solution to gridlock

Posted on by Joseph

The problem of traffic congestion is reminiscent of Mark Twain’s comment about the weather, “Everybody talks about it, but nobody does anything about it.” It is no easy matter to deal with the congestion problem in major urban centers.

New York is getting ready to address the issue with a congestion pricing plan. After many years, it may be an idea whose time has finally come, but there is even more governments can do to combat traffic bottlenecks.

Congestion pricing advocates point to an array of health, safety, and environmental benefits, including air pollution, pedestrian injuries, and unclogging city streets. They cite the success of congestion pricing plans in places like London, Stockholm and Singapore.

These cities use different methods to toll drivers in their respective congestion zones. London uses a video surveillance system to record car license plates. Singapore uses larger gantries with sensors to read license plates, or directly charges E-ZPass-like units in cars. Stockholm has installed gantries and cameras at all entry points to the tolled zone.

Some New Yorkers claim congestion pricing is an unfair tax that disproportionately hurts poor people who do not have access to public transit. While affluent motorists can pay for a quicker ride, the working class will struggle to pay the toll. Suburban commuters, of course, see the plan as benefiting the city at their expense.

After years of hesitation, New York is on the verge of becoming the first U.S. city to charge motorists for driving into a central business district. The program is expected to be implemented in 2021, once the necessary infrastructure is in place.

The congestion pricing plan will help pay for badly needed repairs to the city’s transit system and reduce gridlock. The goal is to generate $1 billion annually to secure the issuance of $15 billion in municipal bonds.

Drivers could pay $12 for cars and $25 for trucks to enter the heart of Manhattan. Prices may vary based on time of day and traffic volume, and potentially offer exemptions and credits to certain travelers, such as discounts for buses, taxis and motorcycles. For example, residents in the congestion zone who earn less than $60,000 annually will be eligible for credits.

Not surprisingly, politicians avoided making many of these difficult decisions. Instead, they will be made by a six-member Traffic Mobility Review Board.

The idea of road pricing was developed by Professor William S. Vickrey, the 1996 Noble Prize winner in economics who passed away four days after winning the prize. He argued that the consequences of not charging motorists for their rush-hour usage could be “disastrously expensive”.

Society pays a high price for congestion. When traffic flow nears maximum road capacity, each additional motorist imposes a delay on others (as density increases, speed drops and travel time lengthens). The delays increase geometrically. Vickrey argued that only peak-load pricing could solve the congestion problem in urban transportation.

Major U.S. cities including Los Angeles, San Francisco, Seattle and Boston are exploring various forms of congestion pricing to unclog city streets and raise money for transportation. And the time may be right to consider tying price to performance. Money-back travel time guarantees could be offered to help customers accept higher prices for transportation services.

For instance, a turnpike a charge of 10 cents per mile during a particular time of day would be linked to a minimum average speed. If the average falls below the minimum, customers are charged progressively less. Advances in technology make it possible to put customers first and introduce a new level of accountability for public transportation providers by offering these guarantees.

This would promote customer trust and acceptance of pricing changes and provide a turnpike operator with an incentive to insure that the road is providing superior service. Former House Speaker Tip O’Neil famously said, “All politics is local”. The same can be said for trust in government transportation agencies.

Originally Published: April 12, 2019

 

Shifts in automobile technology and ownership will have consequences for public transit.

Posted on by Joseph

TechBy Joseph M. Giglio and Charles Chieppo

The rise of shared electric self-driving cars and the transition from a world of ownership to one of consumers purchasing transportation as a service holds the promise of significant economic, environmental, and quality-of-life benefits. But it will also pose an existential threat to public transportation in general and commuter rail in particular.

The first recommendation in the December report from Governor Baker’s Commission on the Future of Transportation is “Prioritize investment in public transit as the foundation for a robust, reliable, clean, and efficient transportation system.” In broad terms, the commission is right. But maximizing potential benefits from the unprecedented disruption of surface transportation that lies ahead will also require fundamental change at the MBTA and a hard look at which transit modes are positioned to compete in a brave new world.

The commission’s charge was to look at the Commonwealth’s needs and challenges over the next 20 years. But if that horizon is extended to 40 years, station-to-station service to the suburbs is unlikely to be very attractive in a world where shared electric self-driving cars will offer much faster door-to-door service at a price that won’t be much higher.

Drivers are normally the largest expense for any transportation business. It currently costs about 55 cents a mile to operate a vehicle with a single occupant. But it’s estimated that the cost could fall to 15 cents a mile for autonomous vehicles carrying two or three passengers, which would significantly reduce public transit’s price advantage.

Connected vehicles will also dramatically reduce human error, resulting in big increases in throughput thanks to variables like higher travel speeds, less space between vehicles, and less frequent braking in response to accidents and other travel events.

In the future, agencies like the MBTA will probably subsidize trips that are currently taken on commuter rail rather than operate them. Even with the transportation transformation in its infancy, Florida’s Pinellas Suncoast Transit Authority, which serves the St. Petersburg/Clearwater area, eliminated some bus routes further from the urban core, after it experienced an 11 percent overall drop in ridership, and replaced them with subsidies for Uber and Lyft rides. Since then, over 25 US communities have established similar partnerships — and the disruption caused by ride-hailing services is minuscule compared with what is to come.

MBTA commuter rail ridership has declined. Nonetheless, it will remain with us for the next couple of decades. It still needs to be improved, but massive investments in new lines like South Coast Rail or, even worse, Springfield, would be a fool’s errand.

The biggest challenge for the future will be making transit work in congested downtown areas. One Boston traffic simulation model showed that while shared autonomous vehicles would reduce travel times and the number of vehicles on the road even as total miles traveled rose by 16 percent overall, downtown travel times would be 5.5 percent longer because the vehicles would substitute for transit use.

Rising to this challenge will require focusing more investment in the urban core. But success will require something more: changing the MBTA’s top priority from providing jobs and pensions to serving its riders.

During a three-year exemption from the Commonwealth’s costly anti-privatization law, the T dramatically improved performance in areas such as cash collection and reconciliation and warehousing and logistics, and saved millions. Despite this success, there was nary a peep about extending the exemption or making it permanent.

Few would argue that the MBTA is skilled at putting customers first. The question is whether — in the face of an existential threat to public transit and with far less margin for error — political leaders, bureaucrats, and unions can change the authority’s culture and begin to lay the groundwork that will allow the T to perform the way we’ll desperately need it to in the future.

Part of that culture change will be recognizing that commuter rail is poorly positioned to compete over the long-term. When the Patriots win the 2060 Super Bowl, stories about a suburban rail network overwhelmed with riders are likely to generate the same reaction as when we tell our kids about having to get up and walk to the television to change the channel.

Originally Published: February 15, 2019.

Joseph M. Giglio is a professor of strategic management at Northeastern University’s College of Business Administration. Charles Chieppo is the principal of Chieppo Strategies.

 

Private firms offer a route to financing infrastructure

Posted on by Joseph

President Trump and his advisors have identified recruiting private firms as active participants as one solution to the choking shortage of money to finance critical infrastructure needs. He’s right, but maximizing the private sector’s impact will require the administration to think outside the box.

If properly structured, public-private partnerships could tap into billions of dollars of private capital hungering for low-risk investment opportunities that offer decent returns. Piles of dough would be deposited on the front steps of city halls and state houses with the steely hand of the private sector at the tiller, minimizing the need for scarce taxpayer dollars to get infrastructure projects underway.

This means designing such partnerships as overtly commercial enterprises able to demonstrate reasonable prospects for earning reliable income streams large enough to pay consistent returns to their private investors. Not a simple challenge to be sure. But scarcely one that’s beyond the capabilities of Wall Street’s more innovative investment bankers.

Making this work on a sufficiently large scale would require significant rethinking of how government deals with private firms (which may be overdue anyway), since some of these partnerships may require user charges to generate the necessary income streams. If approached creatively, this could actually enhance the likelihood that the activities of these partnerships would meet environmental goals and other regulatory mandates that serve the public interest.

In many jurisdictions, the public may not sit still for turning over the responsibility to operate an infrastructure project to the private sector because they know a business’ natural instinct is to maximize profits. Government could set up some sort of regulatory commission to oversee the project like they do for utility companies. But a better approach might be to set up an independent commercial corporation fully funded by user fees to build, own, and operate the infrastructure asset so taxpayers can participate in any upside from the project.

The state or local government could solicit bids from private investors to buy shares of equity ownership in return for annual dividends paid by the corporation. That brings private equity capital to the corporate balance sheet, reducing the amount of debt capital it has to issue.

In theory, government’s incentive is to offer the most service for the lowest cost. Private investors, on the other hand, have the opposite incentive: to charge the highest user fees the market can bear while providing the least service it can get away with.

But a second class of private investors would likely purchase equity shares in the enterprise mainly because they have a vested interest in assuring better roadways or other transportation infrastructure in the area. These investors might be private utility companies, local banks, and other local firms whose future revenue growth depends heavily on rising levels of economic activity. This class of owners would push for user fees that make sense from a financial standpoint and service levels that meet public needs in a financially responsible manner.

This model may be a reliable way to ensure that, for example, the original cost of every facility is evaluated on a lifecycle basis so customers and operators alike don’t wind up being confronted by expensive ongoing maintenance nightmares. There would also be the certainty of long-term financial commitments so taxpayers never have to deal with orphaned facilities displaced by disruptive technologies such as autonomous ride sharing vehicles.

This model holds owners responsible for sound asset management in a clear and unambiguous way. Opportunities for abuse by limited-life warranties, guarantees written by “paper companies” that melt into the woodwork when push comes to shove, and the kind of multi-party finger pointing that only ends up enriching the legal profession would be minimized. These realities are unlikely to be lost on the relevant parties.

Alternative models based on elaborate legislative mandates might accomplish the same thing. That is, if you believe the necessary legislation could be passed without being riddled with compromises, trade-offs, escape clauses and weasel language.

originally published: April 15, 2017

No easy or cheap fix for America’s infrastructure

Posted on by Joseph

Earlier this month, the American Society of Civil Engineers’ “2017 Infrastructure Report Card,” which looks at 16 categories of infrastructure from schools to airports to dams, gave the nation an overall grade of D+. Creative approaches can be used to finance some of the needed improvements, but others will need to be paid for the old-fashioned way.

The report is yet another in a series of reports making the case that America has under invested in infrastructure for decades. Such chronicles of wretched conditions are a national sport that is nearly as popular as the Kardashians. But although much of the material is familiar, infrastructure is a gift that keeps on giving; there always seems to be something new to chew on.

The report card projects that $4.59 trillion will be required to bring America’s infrastructure to a grade of B. That is more than the nation’s annual budget of about $4 trillion.

Americans can quibble about the actual size of these projections, just as maritime historians quibble about the size of the iceberg that sank the Titanic. But it scarcely matters whether the estimates are off by 5 or 10 percent (give or take). What matters are the general proportions of these needs and the risks for the U.S. economy if they are not addressed. The longer we wait, the bigger the problem becomes.

Most who deal with this issue agree that the country’s infrastructure is in a bad way, but there is much partisan disagreement over how to pay for the fix.

Using public-private partnerships to invest in infrastructure was one of President Trump’s major campaign promises, but fiscal conservatives in Congress are reluctant to back massive spending that exacerbates the federal budget deficit and skyrocketing federal debt.

Democrats, on the other hand, are for more direct federal spending. By reducing taxes on overseas profits, they believe some of the estimated $2-$3 trillion companies have kept outside the U.S. could be repatriated. The result is that the political hills come alive with the sound of heated debates over proposals to address the infrastructure gap.

The permanent political aristocracy’s failure to deal with infrastructure reflects the simple fact that talking about balancing the budget is easy, but doing the things you have to do to balance it is hard. By the very nature of the process, politicians are focused on the very near term.

Upcoming elections, like hangings, have a way of focusing the mind on the here and now. That is why the federal gasoline tax of 18.4 cents per gallon and the diesel tax of 24.4 cents per gallon, the most important sources of federal transportation funding, have not risen since 1993. During that time, they have lost about 40 percent of their purchasing power due to inflation. Fuel tax revenues can no longer keep pace with needs.

This is not just a problem with politicians, it’s also a problem with voters, who say the deficit is a major concern, yet favor lower taxes, more benefits and fixing our infrastructure. Put simply, they don’t want to pay for the government they want.

It’s time to get real. Nothing works without a funding source and we will need hard cash to correct our under-investment in infrastructure. The feds, state and local governments, and the private sector have plenty of access to capital markets to finance infrastructure; the real issue is identifying revenue sources such as user fees or taxes to repay the debt.

A partial solution is to minimize the need for scarce government dollars by recruiting private firms as partners to help start, fund, and run infrastructure projects that have predictable revenue streams, like toll roads. But a larger universe of projects such as schools, dams, and local roads, for example, cannot be monetized.

Infrastructure’s biggest challenge is funding. In the real world, that comes down to a choice between taxes and user fees. There is no free lunch.

originally published: April 1, 2017

Put a money-back guarantee on infrastructure work

Posted on by Joseph

Americans are told that the most serious problem facing the nation’s transportation infrastructure is a lack of money. Perhaps people would be willing to pay more if they receive a money-back guarantee in return.

Today’s roadway funding depends primarily on motor-vehicle fuel taxes and state and local appropriations. But federal fuel tax revenues no longer keep pace with needs because of the self-serving assumption that it’s become politically impossible to “raise taxes.” Everyone wants better roads and bridges, but almost no one wants to pay for them.

All this makes finding adequate funding to rehabilitate the nation’s highway system, add new lanes and highway corridors a major challenge. Between 2005 and 2015, there were two five-year federal surface transportation reauthorization bills and 34 short-term funding extensions. To maintain the committed level of funding, the federal government was forced to raid the General Fund for an average of $10 billion per year to supplement the dwindling Highway Trust Fund

Even so, Congress struggled to find the revenues to support a long-term bill without increasing the fuel tax, which has remained at 18.4 cents per gallon for cars since 1991. Congressmen have moved in unison to avoid dealing with an increase in the federal fuel tax.

In real terms, fuel tax revenue is actually projected to decline as the nation’s motor vehicle fleet becomes more fuel efficient. It is safe to say that the fuel tax is like a marriage that dies long before divorce papers are filed.

At the same time, state and local government budgets are increasingly burdened with funding demands for education, fighting crime, better security against terrorist threats and a host of other deserving services. Roadway funding inevitability gets shortchanged which is relatively easy to do, since it takes a while for the impact to become apparent.

A new U.S. Department of Transportation “conditions and performance” report estimates that there is a $926 billion backlog of needed highway and transit infrastructure projects, and that many more billions more will be needed to keep up with demand over the next 20 years. The congressionally mandated biennial report identifies an $836 billion highway and bridge backlog.

The public can quibble about the size of these numbers, just as maritime historians do about the size of the iceberg that sank the Titanic. But their magnitude is so enormous that it scarcely matters whether the estimates are off by 5 or 10 percent. What matters is that the needs are enormous, and the longer you wait to address them, the worse they become.

Senate Democrats just unveiled a 10-year, $1 trillion infrastructure plan that includes $210 billion to repair “crumbling” roads and bridges, but they are vague about how to finance it other than through direct federal spending. During the campaign, President Trump also called for a $1 trillion infrastructure investment that proposed leveraging new revenues and using public-private partnerships to incentivize investment and spare taxpayers from bearing the burden.

At one end of the funding spectrum are people who think the public should pay for it via tolls. At the other end are those who argue that the benefits transportation infrastructure provides aren’t confined to users, so society as a whole should pay out of general tax revenues. Between these extremes lies a range of payment mechanisms.

But for a plan to be accepted by American motorists, it must be perceived to deliver superior travel service with appropriate regard for equity and environmental considerations. One thought is to pair any increase in taxes or user fees with a money-back performance guarantee so customers can rest assure that they will get guaranteed travel-time savings in return for paying for access to surface transportation such as highways. This gives the travelling public confidence that they are getting their money’s worth.

The rapid introduction of intelligent transportation technologies facilitates an efficient way to implement a money-back guarantee. The result would be a dramatically transformed approach to transportation infrastructure.

originally published: February 4, 2017