infrastructure investment

No easy or cheap fix for America’s infrastructure

Posted on by j.giglio

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 j.giglio

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

Infrastructure spending must look forward

Posted on by j.giglio

Many economists and politicians are once again peddling the conceit that billions of dollars in infrastructure spending (aka investment) will create new jobs, raise incomes, boost productivity and promote economic growth. After all, a report card from the American Society of Civil Engineers gave America’s infrastructure a D+ grade and claimed that an investment of $3.6 trillion is needed by 2020.

But before we accept this idea as gospel, we should remember that the future isn’t likely to look like the past.

Americans are reminded that a large part of President Roosevelt’s New Deal to “Save Capitalism in America” was massive federal investments in economic growth projects like rural electrification, the Tennessee Valley Authority, the Boulder and Grand Coulee Dams, and other monumental hydroelectric generating facilities. Not to mention hundreds of commercial airports like La-Guardia and JFK in New York City, thousands of modern post offices, schools and courthouses.

The investments culminated in the 41,000-mile Interstate Highway and Defense System, begun in the 1950s under President Eisenhower (the Republican New Dealer”) because of what he had learned from his military experiences leading the allied armies in Europe during World War II.

It is further claimed that Americans have been living off these federal investments ever since. Their contribution to decades of job growth and increasing national prosperity has been so enormous that Americans have come to take them for granted as cost-free gifts from a beneficent God, like the unimaginably bountiful resources of crude oil discovered under that legendary East Texas hill called Spindletop, which came exploding out of the Lucas Number 1 well in 1901 with a roar that shook the world.

The $828 billion stimulus plan President Obama signed in 2009 focused on “shovel-ready” projects like repaving potholed highways and making overdue bridge repairs that could put people to work right away. Still as Gary Johnson noted in 2011, “My neighbor’s two dogs have created more shovel-ready jobs than the Obama stimulus plan”.

Let’s not kid ourselves, spending for these projects scarcely represented “investment in the future.” Had we been managing infrastructure assets sensibly, they would have been little more than ongoing maintenance activities that should have been funded out of current revenues, like replacing burned-out light bulbs in a factory.

One problem with initiating a massive new capital investment program is figuring out where the dollars to fund it will be found. Projections for escalating federal deficits and skyrocketing debt are bound to raise questions about the federal government’s ability to come up with the necessary cash.

For starters, it’s time to recognize that the future will be quite different from the past, particularly when it comes to transportation infrastructure. Large projects may be rendered obsolete and the burden of stranded fixed costs left to the next generation.

Disruptive technologies such as electric or hybrid, semi-autonomous or self-driving vehicles, and changing consumer preferences, especially among urban millennials who are more interested in the on-demand riding experience than driving, is a cause for optimism about the future of America’s infrastructure condition.

These new patterns of vehicle ownership and use and the emergence of privately funded technologies are changing the way people and goods move, and transforming the transportation industry in both the public and private sectors. They offer the potential for dramatic improvements in traffic congestion (due to improved safety and reduced spacing between vehicles) and reducing motor vehicle accidents and fatalities.

They can also generate environmental gains from smoother traffic flow, promote productivity growth as reduced congestion improves access to labor markets, and improved utilization of transportation assets such as existing highway capacity with higher through put without additional capital investments.

These changes create an opportunity for a new generation of political leaders to present the public with a modern vision for transportation, the economy, and the environment, not one that harks back to an earlier time.

Originally Published: Nov 12, 2016

MBTA financial plan is Band-Aid, not a solution

Posted on by j.giglio

Massachusetts transportation managers seemed to pull another rabbit out of the hat when the most recent chapter in the ongoing drama of MBTA budget woes ended with relatively minor service cuts and fare hikes that aren’t as steep as had been contemplated. But with $8.6 billion in debt and a $3 billion maintenance backlog, those managers are the first to say that the T will be right back in the budget soup again next year.

And the MBTA is just the latest piece of the Massachusetts transportation system to face financial meltdown. Before that there was an emergency program to address the deteriorating condition of our bridges. It is a trend that will continue until we adopt a sensible means of allocating and pricing transportation capacity.

Several transportation professionals have compared our transportation network to Garrett Hardin’s common pasture. It’s a worthwhile analogy.

In Hardin’s pasture, local farmers graze their cows for free. Not surprisingly, each grazes as many cows as s/he can on the pasture because it results in increased milk production at no additional feeding cost.

All is well until the number of cows exceeds the pasture’s feeding capacity. Because the cows get less nourishment, their milk production declines. Yet the farmers’ response is to add even more cows to the now barren pasture.

And so it is with our transportation system. Fuel taxes don’t nearly cover the cost of building new roads and maintaining the ones we have. Other than fuel taxes, the vast majority of roads are free.

Riders pay to use the MBTA and other transit services. But unfunded expansion has left the T owing so much that fares barely cover what it pays in interest on its debt. Yet the clamor is to build more roads and transit lines. When we do, we too often budget based only on the cost of construction, without taking operating and maintenance costs into account.

Pricing is the key to a functioning and sustainable transportation network. Revenue is needed to operate and maintain the system, and also to build new assets when needed. Fares and tolls also help regulate demand, avoiding the consequences of overuse that rendered Hardin’s pasture barren. The goal should be to price each transportation asset based on the value it provides to customers. Doing that effectively is the essence of good management.

A logical pricing system also provides the framework for debates about whether to expand capacity. If toll revenue in a particular area is robust, perhaps new capacity should be considered. If it’s determined that expansion is the best option, toll revenue offers a rational way – as opposed to just borrowing more, like we now do – to pay for it.

And paying for expansion doesn’t just mean the cost of building a new road or transit line; it means covering the cost to build, operate and maintain the asset over the course of its useful life.

Nobody wants to pay more, as Gov. Deval Patrick learned when his proposed a gas tax hike was largely ignored in 2009. But as the MBTA teaches us, the commonwealth’s current transportation system­ which is in shambles due to an unwillingness to face up to actual construction, operation and maintenance costs – simply isn’t sustainable.

Stopgap measures like those being employed to keep the MBTA afloat don’t solve our transportation problems. In fact, they make the problems worse. Next year, the T’s budget crunch is likely to be even more severe.

Perhaps by then voters will see that a rational pricing system is far less painful than dealing with the fallout from massive debt and maintenance backlogs. If they don’t come to that realization soon, inexorable decline will produce a transportation network that looks eerily like Garrett Hardin’s common pasture. 

originally published: April 26, 2012

Rhetoric a major roadblock to transportation policy

Posted on by j.giglio

In his annual set piece State of the Union address last week the president acquitted himself admirably – well, except for neglecting to engage on the issues of deficits, debt and the changing demographics of America.

Barack Obama did use his State of the Union address to renew his call for increased infrastructure spending. In the speech, the president proposed increasing infrastructure spending and paying for it with half of the savings from the troop draw-downs in Iraq and Afghanistan. This proposal will add about $500 billion to infrastructure spending over the next 10 years, based on estimates included in the president’s fall deficit-reduction plan. (Of course, the president did not explain his claim that reprogramming future borrowed funds once designated to finance the wars could be counted as “savings”). According to the Congressional Budget office, that much spending could, thanks to the multiplier effect, spur the economy by more than a trillion dollars, while giving the nation’s workforce a helping hand.

The American Society of Civil Engineers has estimated that an investment of $1.7 trillion is needed between now and 2020 to rebuild roads, bridges, water lines, sewage systems and dams that are reaching the end of their planned life cycles. In fact, in its most recent report card for America’s infrastructure, ASCE gave the nation’s infrastructure a grade of D.

Obviously, this crowd is not impressed by grade inflation!

Many of these infrastructure funding issues can be addressed if Congress, with aggressive presidential leadership, enacts the multi-year, surface transportation reauthorization legislation. This measure has been extended eight times since the law expired on Sept. 30, 2009. The current extension expires March 31. Establishing certainty for long-term funding is critical to highway and transit planners in developing, financing and constructing long-term capital projects.

Currently, the House of Representatives and the Senate are working to complete the legislative language for their reauthorization plan. The House Transportation and Infrastructure Committee released its transportation bill this week. This legislation will fund transit and highway programs at $52 billion annually, or $260 billion over five years. Additionally, the House committee will provide vital flexibility to the states in developing and financing their own transportation needs and to encourage the use of public-private partnerships.

In the Senate, the Environment and Public Works Committee announced that it will hold mark up sessions this week on its version of the legislation. The Senate bill is for two years and for $109 billion.

Neither bill addresses a fundamental issue: the highway trust fund is now in deficit and dependent on general revenue because of reduced growth in federal fuel tax revenues. Of course, Congress and the president have no appetite to raise the federal fuel tax of 18.3 cents per gallon that was last increased in 1993.

We all know that greater fuel efficiency results in lower gas-tax proceeds and, therefore, a shrinking trust fund. Ironically , the president’s secretary of transportation , Ray LaHood , has said he does not expect the debate on a multi-year transportation bill to be resolved this year because it is an election year and the differences between the Senate and House bills are too large to be resolved.

Even as both the House and the Senate bills are far smaller than what is needed just to maintain current levels of inflation-adjusted spending, we need to have a transportation bill to minimize the uncertainty that is stalling our economic recovery. The president cannot continue to just make easy lay-up speeches on the need for greater infrastructure spending and post up against the congressional leaders to get a bill passed before March 31. It’s time to match up his rhetoric one-on-one with reality and take the point on getting this badly needed legislation passed.

originally published: February 21, 2012

Moving too slowly

Posted on by j.giglio

Clearly, we have some serious huffing and puffing to do if we are going to pull ourselves out of the current economic crisis. But it must be the right kind of huffing and puffing; the kind that grows our economy fast enough to produce the millions of steady jobs needed to put Americans back to work.

That means emphasizing major capital investment programs that are proven growth generators for an economy stuck in low gear; programs that create new jobs by the thousands and ensure America’s place as a 21st century economic leader, not a declining giant.

In short, we must focus on infrastructure programs that transform and modernize America’s obsolete capability to produce goods and services efficiently and get them to market with dispatch. That means upgrading the rickety transportation infrastructure that currently undermines the country’s growth potential.

We are at a crossroads. I guess the federal government could move aggressively to shrink the economy to a level where our mobility needs can be met by existing transportation capacity. Sometimes it seems like that’s exactly what they’re doing now.

Maybe we could convert our top 100 metropolitan areas into true 24-hour societies; improve the efficiency of existing transportation capacity by spreading out demand more evenly. It’s a winner for those of you who harbor a secret ambition to work the graveyard shift.

More realistically, we could forget about investing huge sums to build the new transportation capacity our economy needs and instead learn to live with what we’ve got. Stop bellyaching about bottlenecks that diminish our mobility. Leave earlier in the morning to accommodate a more time-consuming commute. Have dinner an hour or two later after the kids are in bed. At least we’ll be able to keep more income in our own pockets, instead of paying it to support transportation projects.

The last option is to do the unthinkable and move aggressively to build the new transportation capacity we need. Marshal the best talents of government and private enterprise to get it done in a sensible way. Face up to the costs and figure out clever new ways to cover them. Act like grown-ups for a change. As some pundits might say, this is the worst option – except for all the others.

For years, the federal government has told us “We can’t build our way out of congestion.” Of course we can. And we must, if we expect our children to live better than we do.

If we don’t man up and do it, we are looking into an abyss of lost dreams. The time for idle speculation over cold beers on warm summer afternoons is over; we have to start now. We need a new Moses to lead us out of the wilderness. This one will be wearing boots and a hard hat, with building plans rolled up under his or her arm.

If we do it right, we won’t just get some temporary construction jobs; we’ll have the foundation for generations of prosperity.

originally published: June 21, 2011