Why Infrastructure Matters: Rotten Roads, Bum Economy

January 20, 2015

Cities, states and metropolitan areas throughout America face an unprecedented economic, demographic, fiscal and environmental challenges that make it imperative for the public and private sectors to rethink the way they do business. These new forces are incredibly diverse, but they share an underlying need for modern, efficient and reliable infrastructure.

Concrete, steel and fiber-optic cable are the essential building blocks of the economy. Infrastructure enables trade, powers businesses, connects workers to their jobs, creates opportunities for struggling communities and protects the nation from an increasingly unpredictable natural environment. From private investment in telecommunication systems, broadband networks, freight railroads, energy projects and pipelines, to publicly spending on transportation, water, buildings and parks, infrastructure is the backbone of a healthy economy.

It also supports workers, providing millions of jobs each year in building and maintenance. A Brookings Institution analysis Bureau of Labor Statistics data reveals that 14 million people have jobs in fields directly related to infrastructure. From locomotive engineers and electrical power line installers, to truck drivers and airline pilots, to construction laborers and meter readers, infrastructure jobs account for nearly 11 percent of the nation’s workforce, offering employment opportunities that have low barriers of entry and are projected to grow over the next decade.

Important national goals also depend on it. The economy needs reliable infrastructure to connect supply chains and efficiently move goods and services across borders. Infrastructure connects households across metropolitan areas to higher quality opportunities for employment, healthcare and education. Clean energy and public transit can reduce greenhouse gases. This same economic logic applies to broadband networks, water systems and energy production and distribution.

Big demographic and cultural changes, such as the aging and diversification of our society, shrinking households and domestic migration, underscore the need for new transportation and telecommunications to connect people and communities. The percentage of licensed drivers among the young is the lowest in three decades, as more of them use public transit and many others use new services for sharing cars and bikes. The prototypical family of the suburban era, a married couple with school-age children, now represents only 20 percent of households, down from over 40 percent in 1970. Some 55 percent of millennials say living close to public transportation is important to them, according to a recent survey by the Urban Land Institute.

Yet unlike Western Europe and parts of Asia, the United States still has a growing population. We’ve added 25 million people in the past 10 years. This tremendous growth, concentrated in the 50 largest metropolitan areas, will place new demands on already overtaxed infrastructure. Metropolitan areas must be ready to adapt not only to serve millions of new customers but also to help poorer residents, many of whom are jobless, have the best chance possible to find work.

A recent Brookings analysis found that only a quarter of jobs in low-skill and middle-skill industries can be reached within 90 minutes by a typical metropolitan commuter. Successful cities will be those that connect workers to jobs and close the digital divide between high-income and low-income neighborhoods. The White House notes that broadband speeds have doubled since 2009 and that more than four out of five people now have high-speed wireless broadband, adoption rates for low-income and minority households remains low (about 43 and 56 percent, respectively.)

Our economy is changing as fast as our society. Over 83 percent of world economic growth in the next five years is expected to occur outside the United States, and because of rapid globalization, it will be concentrated in cities. This offers an unprecedented opportunity for American businesses to export more goods and services and to create high-quality jobs at home. It also amplifies the importance of our seaports, air hubs, freight rail, border crossings and truck routes, which move $51 billion worth of goods quickly and efficiently each day in the complex supply chains of the modern economy.

The diverse energy boom also disrupts our infrastructure. Natural gas needs new truck, pipeline and rail networks. Rooftop solar panels have rattled electric utilities, which are scrambling to find ways to incorporate and store the energy they produce while keeping the grid operating. At the same time, finding the money to pay for the development of a smart electricity grid and for clean energy presents challenges, as hundreds of thousands of small and large projects are projected to come online in coming decades.

High-profile natural disasters, such as Hurricane Sandy, drew attention to problems with water infrastructure. Overwhelmed waste water systems, washed-out roads, shorted electrical circuitry and flooded train stations not only highlighted the economy’s reliance on these networks, but also revealed their poor condition. The nation’s water systems are now being rebuilt. Cities are working to capture storm and rain water rather than building costly pipes to sluice it away. The Center for an Urban Future recently described how New York City plans to spend $2.4 billion over 18 years in so-called “green” infrastructure such as rooftop vegetation, porous pavements, and soils to soak up rain.

Over and above the new types of needed infrastructure is a big change in how projects are financed.

Despite the importance of infrastructure, the U.S. has not spent enough for decades to maintain and improve it. It accounts for about 2.5 percent of the economy, compared to about 3.9 percent spent in Canada, Australia and South Korea, 5 percent for Europe and 9-12 percent in China. The McKinsey Global Institute estimates that the U.S. must spend at least $150 billion more a year on infrastructure through 2020 to meet its needs. This would add about 1.5 percent to annual economic growth and create at least 1.8 million jobs.

Split between Republicans and Democrats, the federal government appears incapable of doing this. For the foreseeable future, the Highway Trust Fund, the State Revolving Funds for water and others will face cuts and squeezed budgets. Other experiments, such as a National Infrastructure Bank, seem prohibitively complex in the current political environment. And of course, rising interest costs on federal debt, increases in entitlement spending and declining traditional revenue sources such as the gasoline tax mean that competition for limited resources is fiercer than ever.

Some cities and states are enjoying budget surpluses because property and sales tax revenues. But most localities will take years to build back their reserves, repay additional debt incurred during the recession and pay for deferred maintenance on infrastructure. Unfunded pension obligations and other debts facing all levels of government mean there just aren’t the public funds to pay for necessary infrastructure. And though interest rates remain at historically low levels, the ability of many governments to borrow from capital markets is hindered by debt caps and weak credit ratings.

Despite gradual acceptance in the past decade that infrastructure is vital to economic growth, debate of spending remains an amorphous and simplistic. Infrastructure is made up of interrelated sectors as diverse as a water treatment plant is from an airport, a wind farm, a gas line or a broadband network. The focus on infrastructure in the abstract led to unrealistic silver-bullet policy solutions that fail to capture the unique and economically critical attributes of each. In reality, each infrastructure sector involves fundamentally different design frameworks and market attributes. And they are owned, regulated, governed and operated by different public and private entities.

The federal role should not be exaggerated. American infrastructure in selected, built, maintained, operates and paid for in a diverse and fragmentary fashion. For certain sectors, such as transportation and water, federal spending is relatively high, averaging $92.15 billion each year from 2000 to 2007. But even there, according to the Congressional Budget Office, Washington’s share of spending never topped 27 percent. For other sectors, such as freight rail, telecommunications, and clean energy, the federal role is more limited.

So what does all this mean and how are we going to pay for what we need?

Roads, bridges and transit must be paid for largely from public funds. Ballot measures have been important for fund raising, particularly at the local level, because general obligation bonds require popular approval. That’s how regions and municipalities pay for public transit systems, bridges, road construction, water and sewer improvements and a host of other infrastructure projects. Many cities are following this trend. Those places, especially in Westerns cities such as Los Angeles, Phoenix and Salt Lake City, are taxing themselves, dedicating substantial local money and effectively contributing to the construction of the nation’s infrastructure.

Metropolitan transportation initiatives are popular among voters. According to the Center for Transportation Excellence, 71 percent of measures were passed in 2014 as were 73 percent in 2013. While state level ballot measures on infrastructure spending are far less common, in 2013, eight states voted to raise taxes for such projects. This includes both conservative strongholds such as Wyoming and Democrat-controlled legislatures in states such as Maryland.

A number of cities are using market mechanisms that capture the increased value in land that accrues from infrastructure. This provides a more targeted way to finance new or existing transportation projects by matching the benefit from infrastructure with its cost. These techniques include impact fees where land developers are assessed a charge to support associated public infrastructure improvements, generally local roads and public works like sidewalks. The lease or sale of air rights is another practice that has been used by to finance development around transit stations for decades, famously around Grand Central Station in New York, and more recently in Boston and Dallas.

Another growing trend is the use of tax increment financing districts. These TIFs support infrastructure projects by borrowing against the future stream of additional tax revenue the project is expected to generate. Examples include a TIF used to pay for improvements at the Atlantic Station project in Atlanta and Portland, Ore.,’s similar strategy to fund its streetcar by creating a local improvement district that leveraged the economic gains of nearby property owners.

For its part, the federal government can allow greater flexibility for states and cities to innovate on projects that connect metros. Passenger Facility Charges used to fund airport modernization are artificially capped at $4.50 and do not begin to cover the airport’s operating and long-term investment costs. Busy airports could be freed to meet congestion and investment costs by removing the caps. Archaic restrictions on interstate highways tolls could also be lifted. Metropolitan and local leaders, with the states, are in the best position to determine which segments of road could best raise revenue.

Other infrastructures could be public-private partnerships. These often complex agreements allow the public sector to bring in private enterprises to take an active role during the life of the infrastructure asset. At their heart, these partnerships share risk and costs of design, construction, maintenance, financing and operations.

The public-sector interest in partnerships is propelled by the shortage of money. Ever since the recession, many states and local governments have been plagued by high debt, low credit ratings and limited options to borrow. PPPs are not “free money,” but they can offer benefits such as better and faster completion of the project, more budgetary accountability and overall savings.

Partnerships with the private sector are not appropriate for all infrastructure sectors or projects. Some may not be profitable enough to attract investors. Green infrastructure or public parks, for example, may lack a revenue stream. Private conservancies maintain and oversee parks in New York, Pittsburgh, Houston and St. Louis, but they are all nonprofit organizations set up solely for that purpose and do not help spread risk.

The best infrastructure projects for private sector involvement are those with a clear revenue stream from rate-payers, such as water infrastructure and toll roads. The private sector can bring in new technologies for metering and billing that can improve services. Thoughtful procurement can also facilitate projects that do not include ratepayers. Nearly any project can be suitable for a private partnership as long as there is a mechanism to spread risk among all parties, even without user fees. So-called availability payment models allow the public sector to pay a recurring user fee for the use of an asset based on its condition and accessibility. These payments are a form of debt since but require continuous public expenditure and a binding budgetary obligation.

It would help spur public-private partnerships if there were standard contracts and pricing, risk sharing and returns. In the past, Washington has set these kinds of standards for such vast areas of the consumer market as housing and small business. But the federal government appears unlikely to do so for infrastructure investment. A mix of public, private and civic bodies will have to do so instead.

An emerging example is the West Coast Infrastructure Exchange, a collaboration between California, Oregon, Washington and British Columbia standardizing transparency, contracts, labor and risk allocation. The goal is to build a market for projects. By sharing details, project finance and delivery methods can be scaled and replicated.

If successful, the WCX could be a model for other state, city and metro infrastructure exchanges. Each exchange could focus on the infrastructure delivery and finance strategies suited to the culture, traditions and needs of the region it serves. An East Coast or Mid-Atlantic Exchange could focus on rebuilding coastlines and climate resiliency after Hurricane Sandy, or on transportation projects that cross state borders. A Midwestern Exchange might focus on water infrastructure in a largely slow growth environment or on projects with Canada. A Southern Exchange might facilitate new infrastructure to accommodate fast growth and new manufacturing, supply chains and movement of goods. Regardless of their focus, exchanges could be linked through a project clearinghouse to share data, information and best practices.

Energy, telecommunications and freight rail will remain dominated by the private sector typically with federal and state regulatory oversight. But there will also be new types of public and private relationships in these sectors, too. For example, while broadband networks are still delivered by private companies, local governments recognize that this kind of network access is equally important to the future economic success of households as well as businesses. So as cities such as Los Angeles explore ways to extend broadband to all homes, they also are working to figure out the financing arrangements and business opportunities for firms interested in developing those networks.

The trade and logistics industry is highly decentralized, with private operators owning almost all trucks and rails, and the public sector owning roads, airports, and waterway rights. Unlike such countries as Germany, Canada and Australia, the U.S. does not have a unified strategy that aligns disparate owners and interests around national economic objectives. Innovative partnerships are therefore necessary to make freight movements in and around big cities more efficient and reliable. The CREATE program in Chicago aligns several such interests in a citywide effort to relieve freight and passenger bottlenecks that cause delays. The $2.5 billion for the program will come from a mix of traditional sources (federal grants), private investments (railroads), state loans (bonds) and existing local sources.

It is clear that projects are becoming more complex. There is not one-size-fits-all form of financing for them. It very much depends on the place, time and particulars of each project. The level of private engagement will depend on market and business opportunities.

In many respects, America’s ability to realize its competitive potential depends on making smart infrastructure choices. These must respond to economic, demographic, fiscal, and environmental changes if they are to help people, places and firms thrive and prosper.

This commentary was originally published by the Washington Examiner.