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China Can Build Infrastructure. Why Can’t We?

We have plenty of capital that could be tapped. Instead, we turn to P3s and other bromides.

My first visit to Shanghai was in 1980. The roads were clogged with bicyclists. I wondered at the gridlock the city would suffer if affluence moved all those bicyclists into private cars.

My next visit to Shanghai was this summer. People are off their bicycles but they haven't traded them in for cars. They ride the subway.

The Shanghai Metro didn't exist when I first visited the city, but today it transports more than 10 million passengers on an average workday. It's the largest metropolitan transit system in the world as measured by its length (over 350 miles) and second only to New York in the number of stations. Within 10 years, it is expected to grow to more than 600 miles of track.

My two visits to Shanghai bracketed my 32-year career financing infrastructure in the United States, both as an investment banker and as California's deputy state treasurer. Never during all of that time did the bemoaning of our infrastructure crisis stop.

During the nearly identical years that the Shanghai Metro went from nothing to the largest subway system in the world, California struggled just to replace a few miles of the San Francisco-Oakland Bay Bridge damaged by the 1989 Loma Prieta earthquake. It took 24 years for the new span to open.

Shanghai's accomplishment is a sharp reminder during this year's presidential race of our inability to build infrastructure. Both major parties' candidates support it, as have many in the past, but little comes of it. What's the problem?

The uncomfortable reality is that we can't agree on what to build -- transit or highways, dams or water conservation technology. And we don't want to pay for it. But rather than focus on solutions to these obstacles, we get sidetracked by bromides -- public-private partnerships and infrastructure banks -- that address a problem that doesn't exist.

The problem is not a lack of capital. With municipal-bond interest rates at record low levels (meaning there is a huge supply of capital waiting to be invested) and institutional investors such as pension funds allocating billions of dollars to infrastructure for which they can't find projects in which they want to invest, we have an abundance of capital.

But a bank only lends money if it can be repaid with interest. A private investor in an infrastructure project (investing either through a P3 or municipal bonds) expects the same. Without tax revenues or user fees to provide that return, no one is going to make that capital available. We don't need capital. What we need is a revenue source to provide a return on that capital. But for a quarter-century, we haven't been able to find the political courage to leverage that capital by taking such an obvious step as raising the federal gasoline tax.

This is not to suggest that we should do as the Chinese do. While the Shanghai Metro is a marvel in many ways, its uncertain financial sustainability, combined with questions about its safety and unreliability, suggest it might have benefited from more deliberate planning. And to facilitate such a large-scale project in an already densely populated city, the disruption to long-standing traditional communities has been immense. But the essentiality of the subway to Shanghai's success as a world financial center is undisputed.

Certainly a Shanghai-style approach -- decide what you're going to build, decide you're going to pay for it, and then build it -- gets the infrastructure built. It's a lesson we seem unwilling to face up to as we continue to pray for salvation from solutions not targeted at the real problem.

Former deputy state treasurer of California and investment banker
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