Federal Inefficiencies that Stifle Innovation in Infrastructure
There's a lot of capital out there waiting to be deployed, but outdated regulations are standing in the way.
President-elect Donald Trump and incoming Senate Minority Leader Chuck Schumer share a common goal of fixing our nation's infrastructure. That's a welcome note of bipartisanship, given the obvious state of disrepair of our public works: roads and bridges deteriorating, water and wastewater systems requiring billions of dollars in new investments, and ports, waterways and schools in need of major capital infusions.
What Trump, Schumer and other federal elected officials will need to understand is that the only way to truly fix our infrastructure will be to combine any new appropriations with reforms of federal regulations that retard investment, penalize efficiency in construction and operation, mute innovation, inflate overhead costs and neglect project maintenance. Current procedures built in large part around tax-exempt borrowing favor a uniquely inefficient method of governmental construction involving sequential RFPs for design and build, often ignoring maintenance costs and obstructing the efficiencies of private management.
By some estimates, there is over $100 billion in private capital waiting to be deployed to fix our crumbling public works. If access to tax-exempt financing were driven by whether a project is a public good and not by how much private activity goes into producing or operating it, that $100 billion could produce five to 10 times that much value.
Federal regulations penalize private-sector involvement and solidify outdated and inefficient practices by limiting the circumstances in which private project management can be combined with tax-exempt, lower-cost capital. Modifying these regulations would allow local and state governments to reform their procurement practices, moving to ones that simply ask for a result -- a road or water plant -- and that force the bidders to combine design, construction, operation and financing, aligning incentives across all phases of a project to create a low-cost, high-quality asset. If we want jobs anytime soon from infrastructure, these kinds of projects are quicker to get off the ground, have dramatically accelerated construction schedules and transfer risk to the private sector, away from taxpayers.
Similarly, removing the many obstacles in the way of private management contracts would not only improve the quality of an operation but also would unlock value now diverted into operating subsidies that could instead be invested in infrastructure. Currently, private acquisition can trigger repayment of federal grants and force the immediate and costly retirement of existing tax-exempt debt, thus reducing dollars a city or state could plow back into its infrastructure.
When a public official can work around these rules, the results are dramatic. As a mayor, a deputy mayor, a professor and a consultant, I have worked on or studied dozens of public-private partnerships over the last 25 years, and most share a common result with the country's first large wastewater privatization that we completed in Indianapolis.
In that case, private management reduced operating costs by 40 percent, savings that we then used to service the debt on several hundred million dollars of new capital investments. The new private managers continued to work with the city's public-employee union, serving as further proof that P3 savings come from innovation, technology and management know-how, not necessarily from reductions in blue-collar salaries. P3s, often viewed as hostile to public workers, can in fact be structured to incorporate that labor even while achieving productivity gains.
Private risk-taking and expertise can unlock critical funds latent in infrastructure assets. Then-Indiana Gov. Mitch Daniels demonstrated this in 2006 when he leased out the Indiana Toll Road for an astounding $3.8 billion. He deployed those funds to accelerate repairs to other elements of Indiana's aging infrastructure. Similarly, then-Maryland Gov. Martin O'Malley negotiated a long-term operating lease at the Port of Baltimore in 2010 that required the concessionaire to deepen the port to accommodate larger ships, all funded from the resulting increased capacity of the facility.
Despite these successes, federal laws, regulations and heavy-handed procedures make P3 innovation difficult. Transit agencies, for example, face a blizzard of rules that freeze in place outdated labor policies and slow conversion to more responsive and flexible vehicles. Federal infrastructure faces even more complex obstacles since the federal government operates without a capital budget and with arcane budget-scoring rules that harm taxpayers and users by allowing infrastructure to deteriorate past a prudent moment to intervene. The Treasury generally requires potential project user fees to be sent to it, thus preventing a private operator from proposing a fee-based solution like the one that worked so well in Baltimore.
Congress and the White House should broadly review all of the current impediments to private innovation in funding and management, removing obsolete labor and capital requirements and giving authority to local and state governments, which will unlock much more value than we could ever produce in appropriated dollars alone.