We must solve the infrastructure financing puzzle before we build

We must solve the infrastructure financing puzzle before we build
© Getty

2017 was the year of tax reform and, if the stars align, 2018 could be a very productive year for infrastructure investment. However, given the initial lukewarm reaction to the administration’s infrastructure plan, the road ahead looks to be filled with obstacles.

Much attention has been devoted to a couple key issues within the plan, such as whether the $200 billion of federal spending proposed by the plan is too small, even with potential future leverage at the state and local levels or how speeding up the permitting process could impact the environment.

ADVERTISEMENT

While these are important points to discuss, it is also important to consider the big picture: Do we have the right approach to infrastructure planning and investment in the U.S.?

 

The puzzle is not easy to solve, especially with constrained federal and state budgets. But one possible starting point is whether we are using existing resources to achieve the maximum impact. This problem is not unique the U.S.

According to a recent McKinsey Global Institute Report, “On the whole, countries continue to invest in poorly conceived projects, take a long time to approve them, miss opportunities to innovate in how to deliver them and then don’t make the most of existing assets before opting to build expensive new capacity.”

In many cases, infrastructure investment is driven by short-term political cycles rather than long-term goals and planning. Various organizations have outlined a number of important steps to consider in designing and implementing a successful infrastructure investment program from inception to delivery and management.

In a new white paper, I combine these suggestions, which range from identifying needs and expectations, improving the project selection process and optimizing infrastructure portfolios for successful execution.

At the heart of all these suggestions lies the importance of accurate cost-benefit analysis with reliable and accurate data, taking into account the long-term nature of infrastructure investment.

For example, Life Cycle Cost Analysis (LCCA), a data-driven tool that provides a detailed accounting of the total costs of a project over its expected life, has gained prominence in recent years. Various agencies, such as the Port Authority of New York and New Jersey, have used this technique and the outcomes have proved that it can be a major cost-saving tool to help stretch limited funds.

Despite its potential, LCCA is not widely used by the public sector. With the right incentives at the federal and state level, such as tying the funding of a project to performance, establishing a LCCA pilot program or simply providing consistent, quality data could be the key to increasing the use of LCCA nationwide.

Another idea that has been widely ignored is bringing in more innovation and competition through a well-designed bidding process. Establishing market discipline and opening projects up to competition from different and innovative technologies, as well as competing materials, could help achieve more efficient and cost-effective proposals.

For example, according to a study by Looney, the Commonwealth of Kentucky’s Alternate Pavement Bidding Practice, which encourages competition between competing materials by requiring two equivalent pavement design plans for an existing project, saved $148 million on 44 projects. That saving could mean a couple more extra projects get funded that otherwise could not have been afforded.

Many of the remedies outlined in the paper, such as LCCA or improved bidding process, would provide confidence and certainty to private-sector partners, especially for the projects that require a long-term financial commitment.

Despite its increasing use in the world, public-private partnerships (PPP) have not been a significant portion of U.S. infrastructure financing. For example, China recently released new directives governing PPP investments that are expected to launch more than 1,000 PPP projects worth $318 billion.

On the other hand, in the U.S., between 2007 and 2013, just $22.7 billion of public and private funds were invested in PPP transportation projects, which represents just 2 percent of the overall capital investment in U.S. highways over the same time period.

Many experts think that a well-developed tax-exempt municipal bond market in the U.S. is one of the culprits of the lack of PPP. But others have also noted that PPP, mainly private-sector financing, requires a lot of work to vet the projects and that this requires a strong and financially sound pipeline of infrastructure projects that would justify the time and effort to do so.

There is bipartisan consensus on the need to invest in U.S. infrastructure, not only to improve the condition of existing assets, but also to help economic growth by increasing productive capacity and creating jobs.

If the government sets the right framework, the financing of these projects could be an attractive investment opportunity for the private sector. This could be an effective way of delivering certain projects better, faster and at a lower cost. With our spiraling debt, reframing our infrastructure puzzle is an opportunity the country cannot miss.

Pinar Çebi Wilber, Ph.D., is chief economist for the American Council for Capital Formation, a free-market, pro-business think tank. She is an adjunct professor in the economics department at Georgetown University.