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If you build it: A guide to the economics of infrastructure investment

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Introduction

A founding principle of The Hamilton Project’s economic strategy is that long-term prosperity is best achieved by fostering economic growth and broad participation in that growth. In that spirit, this paper seeks to provide an economic framework for evaluating infrastructure investments and their methods of funding and finance. Why should we invest in infrastructure, what projects should be selected, who should decide, and how should those investments be paid for are all questions that can be better answered with the help of sound economic theory and evidence.

In recent years American infrastructure investment has been insufficient to meet maintenance and expansion needs. By one important measure, annual investment has declined: net public non-defense investment at all levels of government was 1.5 percent of GDP in 1980 and only 0.6 percent in 2015 (Bureau of Economic Analysis 2016).

As net investment has declined, the average age of infrastructure continues to increase, requiring additional spending just to keep up with deterioration and to meet safety standards. For example, pipes laid for water systems dating to the late 1800s, 1920s, and post-War era have life expectancies of about 120, 100, and 75 years respectively; by one estimate, the average utility will have to spend three-and-a-half times as much on pipe replacement in 2030 as it did 30 years earlier (American Water Works Association 2001). To some extent, infrastructure aging reflects deferred maintenance that must eventually be addressed so that infrastructure will continue to function properly, facilitating economic growth. The American Society of Civil Engineers (2013) estimates that $3.6 trillion would be required just to bring U.S. infrastructure into a state of good repair, not counting any expansion to the stock of infrastructure.[1]

Because much of the nation’s infrastructure generates broadly shared benefits that are not limited to those who can pay, decisions about this infrastructure are an important public policy concern and not just a matter for private firms and investors. Of course, deciding precisely which infrastructure investments should be undertaken by the public sector is an important policy question that can be informed by careful analysis.

Having determined that particular infrastructure projects are worthwhile, it is also important to consider how the projects should be financed. With a number of approaches currently under discussion, including conventional debt finance and public-private partnerships (PPPs), deciding among the alternatives requires a clear exposition of their advantages and disadvantages.

Authors

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Greg Nantz

Senior Research Assistant & Publications Coordinator, The Hamilton Project

Footnotes

  1. This figure may be an overestimate. Some have argued that the American Society of Civil Engineers, by calculating infrastructure needs based only on the physical condition or age of infrastructure, and without reference to system performance, will tend to overstate investment requirements (Little 1999). In addition, the Congressional Budget Office (2016) finds that pavement and bridge quality have likely improved somewhat in recent years.
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