Why Obama can’t save infrastructure

February 18, 2011, 1:44 AM UTC

Washington talks a good game about transportation infrastructure, but refuses to agree on how to fund it. So let’s stop waiting for Washington.

Here are two things we all can agree on about America’s transportation infrastructure: (1) It is in desperate need of costly repairs, and (2) Our political leaders cannot agree on how to pay for them.

President Obama dove into the conversation this week, proposing $556 billion in new infrastructure spending over the next six years. Not only would it include money for road and bridge repair, but also high-speed rail development and the formation of a National Infrastructure Bank that would (hopefully) prevent the next Bridge to Nowhere from being federally funded.

It is an important step, considering that the American Society of Civil Engineers estimates that the nation’s 5-year infrastructure investment need is approximately $2.2 trillion. Unfortunately, Obama didn’t explain how the new spending would be paid for.

Increases in transportation infrastructure spending traditionally have been paid for via gas tax increases, but today’s GOP orthodoxy is to oppose all new revenue generators (even if this particular one originated with Ronald Reagan). This isn’t to say that Republicans don’t believe the civil engineers – it’s just that they consider their version of fiscal discipline to be more vital.

In other words, America’s infrastructure needs are stuck in a holding pattern. That may be sustainable for a while longer, but at some point we need to land this plane or it’s going to crash.

Luckily, there is a solution: State and municipal governments should get off their collective butts, and begin to seriously move toward partial privatization of their infrastructure assets.

Remember, the federal government doesn’t actually own America’s roads, bridges or airports (well, save for Reagan National). Instead, it’s basically a piggy-bank for local governments and their quasi-independent transportation authorities. Washington is expected to provide strategic vision — like Eisenhower’s Interstate Highway System or Obama’s high-speed rail initiative — but actual implementation and maintenance decisions are made much further down the food chain.

Almost every state and municipal government will tell you that it doesn’t have enough money to adequately maintain its existing infrastructure, let alone build new infrastructure. And, in many cases, existing projects are over-leveraged from years of bond sales.

At the same time, private investment firms are clamoring to fill the void.

Nearly $80 billion has been raised by U.S.-based private equity infrastructure funds since 2003, and another $30 billion currently is being raised to focus on North American projects, according to market research firm Preqin. Each of one those dollars would be leveraged with bank debt, and none of that includes the billions more available from public pension systems and foreign infrastructure companies.

For example, Highstar Capital last year signed a 50-year lease and concession agreement to operate the Port of Baltimore’s Seagirt Marine Terminal. The prior year, private equity firm The Carlyle Group signed a 35-year lease to redevelop, operate and maintain Connecticut’s 23 highway service areas. And in 2005, an Australian and Spanish company teamed up to lease The Chicago Skyway for $1.83 billion. That same tandem later acquired rights to the Indiana toll road.

But those are exceptions to the America’s transportation infrastructure rule, which says that everything should be government-owned and operated. It’s a rule grounded in fears that private investors will put profits over safety, plus a hefty dose of inertia.

Well, it’s time for us to get over it.

First, we’ve already established that our current system isn’t working. Again, $2.2 trillion in infrastructure needs. And if you haven’t seen a crumbling or rusted out bridge somewhere, then you haven’t been looking.

Second, it’s counter-intuitive to think that a private investment firm wouldn’t do everything in its power to make its transportation assets safe and efficient. Toll roads, airports and the like are volume businesses. One giant accident, and the return on investment could be irreparably harmed. This isn’t to say that all of these projects will be successful — there have been fiascos, like with Chicago’s parking system — but this is no longer a choice between private and public funding. It’s a choice between private funding and woefully insufficient funding.

Third, local governments have the ability to structure these leases any way they see fit. For example, the Chicago Skyway deal includes an annual engineering checkup, and the private owners are obligated to make any recommended repairs. This also goes for pricing. In a failed privatization deal for the Pennsylvania Turnpike, prospective buyers agreed to certain parameters on future toll increases.

Most importantly, infrastructure privatization provides a solution to the current standoff between Obama and House Republicans — by providing for investment to repair and maintain existing infrastructure, without requiring tax increases or enabling parochial pork.

But the benefits go far beyond the obvious. Privatization also may mean up-front payments that local governments can use to pay down existing project debt, while thoughtful leaders could set aside part of the proceeds to fund other infrastructure needs. Moreover, taxpayers no longer are on the hook for infrastructure-related risk (maintenance costs, liabilities, etc.).

I’m obviously not saying that any of this is easy. There are big barriers to privatization, including objections from those who currently run our toll roads, bridges, etc. (just ask those who lost the fight to lease out the Pennsylvania Turnpike in 2008).

But it’s the best path forward for a nation that really could use more, and safer, paths.