NEW YORK ( Breakingviews) – 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 U.S. 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.
Graphic: U.S. government entities aren’t investing enough
The shortage is in the number of projects suited for such investors. The American Society of Civil Engineers has famously graded U.S. 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 America’s 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.
Graphic: U.S. states own far more infrastructure than the federal government
Another hurdle is the deep, $4 trillion U.S. 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 big ideas that might bring meaningful slugs of private-sector cash as part of a serious partnership, the thinking remains rather small. For example, New York Governor Andrew Cuomo just floated the idea of selling train-station naming rights in return for corporate contributions of $600,000 apiece, money in danger of being spent without a comprehensive plan.
Graphic: New York’s transport infrastructure is a stock of unrealized value
In another related example, the three major airports in the Big Apple area are controlled by the Port Authority of New York & New Jersey, a fractious collaboration in which politics often defeats sensible planning. The Reason Foundation earlier this year pegged the value of Newark Liberty, John F. Kennedy and LaGuardia airports at up to $35 billion. Putting those in private, or at least autonomously managed, hands could free up huge capital resources for other regional projects while also ensuring each receives needed investment.
Instead of hunting for cash, U.S. authorities should be rushing to streamline the approvals processes. Among its other infrastructure ideas, the Trump administration has zeroed in on this problem. Officials have talked of reducing a 10-year process to get a project started to two years. The White House budget sections on infrastructure suggest, among other things, a single federal entity to take responsibility for green-lighting projects, rather than several agencies.
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. The Federal Highway Administration argues this “means motorists can stop without any pressure to make purchases,” a quaint notion. Airport privatizations, by way of another example, are allowed only in limited circumstances and the relevant rules give too much veto power to airlines.
Another role Washington could play is in coordinating major infrastructure projects among states. Aside from a funding mandate for certain types of investments, the Canada Infrastructure Bank – approved by Ottawa’s parliament in June – has an advisory and planning role. Perhaps in the United States this could extend to helping states make approval for new projects and asset sales faster and easier. It’s not just federal red tape that holds things up.
The U.S. government also could add value by gathering expertise and helping states strike the best possible deals. So-called public-private partnerships, or P3s, can work well, but the incentives need to be right. This can mean ensuring private investors, not governments, are on the hook for cost overruns or downtime, for example. Likewise, if things go far better than expected the government could get a cut of profit – or tolls or other charges come down. That requires knowledge and negotiating expertise, however.
Some minor tax adjustments would help, too. The uneven playing field in municipal funding, for example, could be corrected either by scrapping tax exemptions on municipal-bond interest – one idea already included in some Republican tax plans – or by allowing private-sector-led projects to borrow on the same tax-advantaged basis as local governments when they meet certain criteria.
While P3 projects do happen in the United States, many state and local governments still need to be persuaded of the merits of private-sector options. That also means addressing consumer concerns, for example about new or excessive tolls or environmental impact. This may take education, but it could also require incentives.
Graphic: The United States has been slow to embrace private-public partnerships
Australia’s federal government has hit upon a simple one 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.
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