A $1 trillion infrastructure plan? Here's how America can pay for it.
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The United States could easily consume a trillion dollars in infrastructure spending, given the well-documented deterioration of our nation’s capital assets. Spending is the easy part. What we haven’t figured out is how to pay it all back.

There are tens of billions of private-sector dollars available to be invested, but only so many toll roads and parking meters that can be privatized to unlock value for taxpayers. So how can we free up dollars currently trapped in infrastructure assets that could be invested and leveraged against additional spending?

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The federal government could do several specific things to unlock value in existing infrastructure and reach the trillion-dollar mark quickly. First, expanding the use of public-private partnerships (P3s) will engender faster, leaner, and safer spending. P3s enable private-sector partners to design, build, and operate infrastructure, speeding up project schedules and bringing down life-cycle costs. If the federal government can shave 15 percent to 20 percent off a project’s total cost by utilizing P3s, then it has the potential to save a couple hundred billion over the course of a trillion dollars’ worth of work. However, current federal and (some) state rules make this efficient process more difficult or impossible in a variety of ways.

 

We must reform restrictions in the tax code that needlessly limit the ways in which the private sector can work with the government to produce public assets. For example, if a private company were to acquire a wastewater facility or an airport and manage those assets as public infrastructure, then that company would, in many cases, be required to immediately repay previously received federal grants. Instead of putting new capital to work, private action instead triggers Environmental Protection Agency (EPA) or Federal Aviation Administration (FAA) payback obligations on previous grants.

Imagine the hundreds of billions of dollars in equity like value locked up in wastewater plants and airports across the country. Private sector management could help realize much of that potential if the federal government changed course and removed the roadblocks currently in place. When I was mayor of Indianapolis, the city had the first large wastewater privatization in the United States. Our system was already very efficient, but the winning bidder reduced the cost of operation by 25 percent.

That 25 percent saving was then capitalized into an investment of hundreds of millions of dollars in infrastructure construction. Multiply that 25 percent in Indianapolis across the country — Scranton just realized $395 million new value from the sale of its sewer system. In 2006, then-Indiana Gov. Mitch Daniels demonstrated the huge potential inherent to P3s when he leased out the Indiana Toll Road for an astounding $3.8 billion which he invested in other critical infrastructure needs.

The government could also make an immediate and substantial difference simply by addressing what’s called the defeasance of tax-exempt debt. Essentially, if an asset has unpaid tax-exempt debt when a private sector company acquires it, that company must pay back that debt even if it is otherwise not yet due. How much better would it be if the new owner or operator serviced the debt instead and invested the newly-available funds into the physical asset?

Another way to find that trillion dollars is by changing the way the Office of Management and Budget (OMB) scores federal projects. Given there is no federal capital budget, a new government project usually gets scored in a single year, essentially preventing investment and pushing the maintenance problem down the tracks until the asset deteriorates so much that it must be repaired and then at a much greater cost. Moreover, private operators usually cannot apply user fees to directly improve an asset — a process known as ring-fencing. For example, soybean growers who depend on barge traffic along the Mississippi River may want to contribute to repairing aging locks, but their payments would go to the Treasury Department and not the project.

Beyond simply enabling P3s as a means of building, operating, and maintaining infrastructure, the federal government could take the next step of incentivizing these creative approaches to asset modernization. By offering a “matching grant” to cities that successfully implement P3s for substantial first-round projects — such as airport, wastewater facilities, and parking assets — the federal government could greatly expand the impact of infrastructure investment. Cities could add the money they save through working with a private partner to the “matching grant” and invest all those dollars into second-round infrastructure projects like local light rail or school programs.

Each of these recommendations incentivizes private participation in core public infrastructure, and can help eat away at a very large percentage of President Trump’s trillion-dollar goal, attracting more private capital and more private know-how. The proposals I’ve outlined will reduce the long-term maintenance costs of infrastructure projects, and make this essential work more affordable for local governments to invest.

Stephen Goldsmith is the Daniel Paul Professor of of Government and Director of the Innovations in American Government Program at Harvard University. He has 25 years of experience with infrastructure finance and economic policy as a two-term mayor of Indianapolis, deputy mayor of New York City, and advisor to public entities.


The views expressed by contributors are their own and are not the views of The Hill.