Trump’s Infrastructure Plan Doesn’t Have to Be Politics as Usual
Bloomberg Opinion , September 23, 2018
If the Democrats take the House, we may see a revival of President Donald Trump’s promised $1 trillion (or more) infrastructure program, this time financed through federal borrowing rather than the public-private partnerships floated last year. Former economic adviser Gary Cohn and other sources tell Axios that Trump — the self-styled “King of Debt” as a businessman — never wanted that approach anyway, preferring to have the government spend the money directly. “Another trillion in debt, here we come,” Cohn said in a CNBC interview.
The problem with writing private companies out of financing and managing infrastructure isn’t just the already-ballooning budget deficit. It would signal that both the administration and Congress are less interested in delivering high-quality highways, bridges and airports than in continuing politics as usual — hiding who pays for what amid a rat’s nest of cross-subsidies and looking backward rather than forward. Better approaches are possible, and in his new book “Rethinking America’s Highways,” veteran transportation researcher Robert W. Poole outlines one such approach. Poole, who 25 years ago first popularized the idea of adding a toll option to carpool lanes (and was my boss at the time, when I was editor of Reason magazine and he was president of the Reason Foundation), answered my questions via email. The following is a lightly edited transcript.
Virginia Postrel: You argue that we should treat highways as “network utilities.” What do you mean by that?
Robert Poole: All our other vital utilities — electricity, natural gas, water, telecoms, internet, etc. — are provided by companies, not legislative bodies. That’s true whether they are provided by government companies (city water department, a toll road agency) or investor-owned utilities (most electricity, some water, nearly all telecoms, etc.). You pay a charge based on how much service you use and get a monthly bill. Where demand varies a lot, pricing helps even out demand.
Except for toll roads, our highways are nothing like that. As Milton Friedman wrote in the early 1950s, highways are basically a poorly managed state-owned enterprise: no pricing, bureaucratic management, investment decisions made by politicians, etc. Major highways should be provided by highway companies, and I give reasons in the book why an investor-owned approach provides better incentives (and insulation from politics) than government companies, even though some toll agencies are run as efficient businesses.
VP: When we think of utilities, we usually think of regulated monopolies. How does your idea differ from the way, say, electric power is treated?
RP: My model calls for embedding regulatory oversight in the state Department of Transportation to administer the very detailed long-term franchise, which provides for enforceable performance metrics, spells out the pricing regime (without micromanaging it), and deals with a plethora of what-ifs that might come up during the long term of the franchise. This model has over 50 years of experience in Europe and several decades in Australia. It is what has been used in all but one of several dozen privately financed toll projects in the U.S. over the past 20 years or so. The only exception was the Dulles Greenway in Virginia, which is regulated (badly) by the Virginia public-utility regulator.
VP: If the Democrats win the House, we may see a return of Trump’s desired trillion-dollar infrastructure plan, financed by government borrowing. Why would that be a mistake?
RP: Adding another trillion dollars of federal debt is unnecessary and would be highly irresponsible. The original Trump infrastructure proposal, drafted by D.J. Gribbin under Cohn’s supervision, called for only modest new federal dollars, with the large majority of the estimated trillion dollars over 10 years coming from private investment and increased state and local tax and user-fee revenue.
There is ample private capital available to refurbish aging infrastructure and to build additions to it. Infrastructure investment funds have raised over $450 billion in equity to invest worldwide in revenue-producing infrastructure. Such projects typically are financed with about 25 percent equity/75 percent debt (e.g. revenue bonds), so that amount of equity could lead to $1.8 trillion worth of projects. The problem is a lack of U.S. projects being offered.
The best indication of what a Democratic majority might propose are the alternative plans (with no detail) announced early in 2018 in response to the White House proposal. There was $1 trillion of new federal money, spread over numerous categories identified as “infrastructure.” There were no definitions and the implicit message was that this would be a replay of the Obama “stimulus” program, basically a wide array of handouts to state and local governments (at a time of full employment, no less). So we would be unlikely to get projects that addressed real infrastructure needs, whose benefits clearly exceeded their costs. This is a recipe for making our economy poorer. In contrast, the White House plan was intended to lead to projects that could be financed, with a positive return on investment. That is how you make an economy more productive.
VP: Most Americans would consider the Interstate Highway System a great success. Countering the “crumbling infrastructure” cliche, Robert Krol at the free-market Mercatus Center cites data showing that U.S. highways haven’t significantly deteriorated over the past decade. Why not continue funding and maintaining highways as we did in the past?
RP: The 1956 interstate system legislation was successful in federally funding (80 to 90 percent) construction of the interstates. However, Congress subsequently turned the federal highway program into a vast array of 120 different programs, including mass transit, bike lanes, sidewalks, etc., each with its own constituency. Now that the original interstates are nearing the end of their original 50-year design life, there is no federal program remotely capable of funding the estimated $1 trillion to $2 trillion cost of rebuilding and widening the interstates.
Fuel tax revenues are beginning a long-term decline, due to ever-increasing fuel economy and the projected increase in electric and other modes of propulsion. We will need to replace per-gallon taxes with per-mile charges, and the book recommends starting this process with toll-financed interstate reconstruction and modernization. Reason Foundation analysis found that all but five of the 50 states could do this on their own with realistic (but CPI-adjusted) electronic toll rates.
VP: Drivers don’t want the government tracking their every move. How do you deal with privacy concerns and still charge people by the mile?
RP: For limited-access highways like freeways and interstates, current transponder technology (E-ZPass, SunPass, FasTrak) is widely accepted and poses no privacy concerns. Many states are now testing an array of ways to charge per mile on all other roadways without having to install huge amounts of equipment on all that road mileage. Some systems use cell towers, others use annual odometer readings, while some do use GPS. Increasingly, they are also using private companies as the ones doing the actual charging, with strict controls on access to the data collected. We are still a good ways from reaching a consensus on the best ways to charge per mile.
VP: One of your early chapters recounts a pretty brutal litany of failed toll projects. What should we conclude from the history of U.S. toll projects in the 1990s and 2000s?
RP: There was a lot of learning by doing in the 1990s and early 2000s. Some projects failed because the model was flawed (a nonprofit corporation with no equity) or because the financing was hugely overleveraged and could not withstand the traffic and revenue declines in the wake of the Great Recession. And several simply had widely overoptimistic traffic and revenue forecasts. Projects since the Great Recession are generally more conservatively financed, with more prudent traffic and revenue projections. Ratings agencies are giving most of the recent investor-financed toll projects investment-grade ratings.
Also, there is no example of a U.S. or Australian toll concession project getting any taxpayer bailout after a bankruptcy filing. The revenue risk was successfully transferred from taxpayers to investors, as recommended by Bent Flyvbjerg in his book “Megaprojects and Risk.” And in cases such as the Camino Colombia Toll Road in Texas and the Southern Connector in South Carolina, where the projects were inherently unviable, highway users and the state department of transportation ended up with a nice new highway without having to have paid for it.
VP: Toll projects face popular opposition, from both left and right. People get riled up about the idea that they’ll have to pay tolls when they’re already paying gas taxes. They fear political authorities will grant monopoly privileges to cronies, who will then jack up rates. They object to letting foreign companies operate U.S. roads. The case against highways as network utilities seems more emotionally compelling than the case for it. How do you counter that appeal? Are there examples of success — both political and customer-service-wise — that might be persuasive?
RP: Right-wing populists don’t seem to realize that they are defending what Friedman reviled as a socialist enterprise. But I do agree that paying both tolls and gas taxes for the same highway is not right. Today’s electronic toll collection makes it easy to calculate the gas used for driving n miles on a toll road, or in a toll lane. From knowing the customer’s vehicle and using the Environmental Protection Agency’s miles-per-gallon rating to calculate the gallons used, tax authorities can then apply the gas-tax rate, and calculate the gas-tax rebate due to the customer.
On monopoly providers, except for a few major bridges crossing the Mississippi, nearly all highways have alternatives. And the long-term franchise agreements always provide some form of control over the rates charged. They cannot be raised arbitrarily. On the foreign-companies question, states these days go to great lengths to subsidize (!) foreign companies to locate plants there (Foxconn in Wisconsin, BMW plants in South Carolina, etc.). Yet those plants can be shut down if business conditions change and the machinery moved somewhere else. A toll road company cannot roll up the road and take it back to Australia or Spain!
There are some great U.S. and overseas success stories — beginning with the Millau Viaduct in France (on the book’s cover), the innovative tunnel underneath Versailles that filled in the five-mile missing link on the Paris A86 ring road, and the amazing express toll lanes on the LBJ Freeway in Dallas and on the Capital Beltway in northern Virginia — that are bringing real congestion relief to commuters on those previously very congested freeways. The Indiana Toll Road has been converted to electronic tolling, repaved, and had its aging service plazas completely revamped.