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Asset recycling could be the best fix to crumbling national infrastructure

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The word “crumbling” is most associated with our infrastructure. C minus is the most recent assessment by the American Society of Civil Engineers, as disastrous failures such as the Texas blackouts and California wildfires underscore problems across the country. Without fresh investment and new management changes, the worst is yet to come.

Our infrastructure gap, which is the difference between available funding and what is necessary to maintain a state of solid repair, is in the trillions of dollars. While passing an infrastructure bill is a legislative priority, what should be a bipartisan issue could fail because of funding issues with the lack of dollars to pay for maintenance and upgrades.

There is little appetite for massive new deficit spending after the $2 trillion coronavirus relief bill, so it is now critical to extract all possible value from current infrastructure. This can be done with new efficient technology and better management strategies. Federal policy should also be changed to update the traditional ways of conducting business.

One of the most promising proposals is asset recycling, which starts with new federal policy frameworks to encourage state and local governments to enter into contractual deals, such as public private partnerships, and obtain new value from their infrastructure assets. These include leases and concessions. The critical element is that government owners would get more value by adopting cleaner technology and better management of assets. It can be reinvested to bolster infrastructure.

Such contractual deals can also reduce deferred maintenance, a pressing problem that has led to the sorry state of our current infrastructure today, by stipulating the minimum level of maintenance and reinvestment over time. Owners would obtain more value from current infrastructure while retaining public control. The older and the more poorly maintained the infrastructure, the greater the potential value realized.

In an asset recycling program, public infrastructure owners have options to obtain fresh funds from assets they control. The federal government incentivizes state and local governments to seek out new operations and technology by offering a 15 percent bonus on all new funds raised by the program. Australia and other countries have run similar programs with success to attain more value from current infrastructure.

The first step is for public owners to conduct a thorough inventory of the infrastructure assets they own. The second step is to estimate the value of those assets. That may be simply for some assets, such as land and office buildings, and more difficult for others, such as toll roads or airports. But this is critical because it provides a benchmark to gauge new value. The third step is to assess how to best use and manage those assets for the long term. Can more value be captured? Can parking garages or excess office space be sold or leased? Can salt storage sheds be moved to less valuable locations and have the land be sold or leased?

Added value can come through new technology to improve infrastructure operation, such as methane capture at wastewater treatment plants or any facility producing such gases. This allows the conversion of an otherwise wasted fuel into electricity which is used to power the plant. Other ideas abound, such as contracts to convert old chemical sodium street lights to light emitting diodes, and the adoption of smart stop lights that change color based on traffic actually nearing the intersection. The key is to use scarce federal dollars to incentivize state and local owners to take a fresh look at traditional ways of managing public infrastructure.

The final step is for public owners to finalize these transactions, receive the incentive bonus, and plow or send back all the proceeds back into the infrastructure, hence the term asset recycling. So given that much of our infrastructure has been managed for decades under a traditional delivery approach, there is likely to be enormous latent value. One study revealed that up to $885 billion could be realized with asset recycling through long term leases. Providing states and local owners with more flexibility would likely generate even more value with minimal spending.

The federal government should provide technical training for owners who may be risk averse and attached to old ways of managing infrastructure. While not done under the asset recycling moniker, there are instances of similar completed transactions. Those include the Chicago Skyway lease, the San Juan International Airport lease, the Bayonne Water System lease, the Seagirt Marine Terminal lease, and more. It is time to abandon the old ways of delivering infrastructure and embark on new strategies. A federal asset recycling program would be the wisest first step.

Richard Geddes is a visiting scholar with the American Enterprise Institute. He is also the founding director of the infrastructure policy program and a professor for policy analysis and management based at Cornell University.

Tags Construction Economics Finance Government Infrastructure Market Policy
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