A time for renewal
http://www.economist.com/news/special-report/21573285-americas-infrastructure-dire-state-stimulating-search-creative-solutions
March 16, 2013
RAHM EMANUEL, THE mayor of Chicago, Illinois, lifts up a decayed
wooden tube and waves it for emphasis. Many of the city’s water pipes
are over 100 years old, he says. Some, it turned out when the Water
Department got round to replacing them, are made of wood. No wonder the
network sprang 3,800 leaks in 2011 alone. Yet at the pace of investment
that prevailed until last year it would have taken the local water
company until 2059 to refurbish all the mains, the mayor points out.
Everywhere Mr Emanuel looks, he sees the need for new or improved
infrastructure: pockmarked roads; century-old stations on the “L”,
Chicago’s elevated-train network; grand but draughty municipal
buildings; a congested airport; clapped-out schools and community
colleges. Over the next three years alone he plans to spend over $7
billion to start fixing all this. But finding the money has required
some creativity.
Cities like Chicago, with meagre investment budgets, generally rely
on grants from the state and federal governments, along with municipal
bonds, to pay for such improvements. However, the federal government’s
fiscal woes and the political impasse in Washington have been putting
the squeeze on infrastructure funding. Take the highway fund, which
Congress created to pay for its share (usually about a third) of
improvements to roads and public transport around the country. It is
supposed to be fed by receipts from the gas (petrol) tax of 18.4 cents
per gallon, but this is not linked to inflation and has not been raised
since 1993. Moreover, Americans are driving less, in more efficient
cars, or in ones that run on something other than petrol, all of which
leaves the transportation kitty increasingly bare. At the same time the
cost of building roads has risen faster than prices in general, further
sapping the fund’s value.
Fingers in the dyke
Politics has compounded the problem. The act under which Congress
doles out money from the highway fund expired in 2009. Unable to agree
on how much to spend, or how to top up the shrinking fund, lawmakers
passed nine short extensions of the old act before finally approving a
new, two-year bill last year. But this does nothing to strengthen the
fraying funding mechanism. Instead, Congress has frozen spending at the
current level and cobbled together a few one-off revenue-raisers to pay
for it. The Congressional Budget Office now expects the highway fund to
run dry in 2014, and the gap between receipts and the present level of
spending to reach $109 billion over the next eight years.
Worse, the current level of investment, even if Congress finds a way
to maintain it, is utterly
inadequate. More than five years after the
collapse of a bridge in Minnesota that claimed 13 lives and prompted
pledges to speed up repairs, almost 70,000 other bridges, or roughly 11%
of the total, are still rated as “structurally deficient” by the
Federal Highway Administration. The American Society of Civil Engineers
(ASCE) estimated in 2009 that Americans lost $78 billion a year to
traffic delays, in the form of wasted time and petrol. A further $67
billion goes on repairing the damage to cars caused by the shoddy
condition of many roads. Crashes, a good number of which are also
attributable to this neglect, cost a further $230 billion. The ASCE
reckoned that for the period from 2005 to 2020 the country was spending
only 54% of what was needed to prevent further deterioration, and just
29% of what it would take to set America’s roads to rights.
Falling to bits
Nor are the problems confined to roads. The ASCE thought that
America’s water and sewage systems, inland waterways and levees were
equally dilapidated, and that its schools, dams, airports, public
transport and hazardous-waste disposal were in only slightly better
shape. It blamed “delayed maintenance and chronic underfunding” and
argued that the country needed to double its spending on infrastructure
over five years, from a projected $1.1 trillion to $2.2 trillion. And
that was at a time when infrastructure spending was being boosted by a
one-off contribution from Mr Obama’s stimulus.
Civil engineers, naturally, are keen on civil-engineering projects.
But the Centre for American Progress, a think-tank, reached much the
same conclusion in a report that looked only at the federal share of
spending on essential projects. Congress, it concluded, was coughing up
barely half of the $262 billion a year that was needed.
Such big sums are daunting in austere times, but the potential
benefits outweigh the spending. In the short run, infrastructure
investments provide a boost to a feeble recovery. The CBO estimated in
2011 that for every dollar the federal government spent on
infrastructure through Mr Obama’s stimulus, the value of economic
activity increased by between $1 and $2.50—one of the biggest
multipliers of the main components of the programme. And a study by the
University of Massachusetts-Amherst in 2009 found that every $1 billion
spent on infrastructure creates 18,000 jobs, almost 30% more than if the
same amount were used to cut personal income taxes.
Every $1 billion spent on infrastructure creates
18,000 jobs, almost 30% more than if the same amount were used to cut
personal income taxes
In the long run, investment in infrastructure boosts productivity by
enabling people and goods to get to places faster, communicate more
easily, spend less time and money on repairs and so on. One recent study
found that the construction of a road typically led to an increase in
economic activity between three and eight times bigger than the initial
outlay within eight years after its completion. (The impact subsequently
fades, presumably because congestion returns.) And since the
government’s borrowing costs are currently low and the construction
industry is still in the doldrums, investment in infrastructure is
cheaper now than it will be when the economy is humming again.
Mr Emanuel is convinced of all this. Unfortunately for Chicagoans,
the politicians in Springfield, the state capital, are even less help
than those in Washington. The state and local authorities have
accumulated debts of about $10,000 per resident, which puts them among
the top quintile in the country. The pension plan for state workers has
assets to cover only 39% of its projected liabilities. In 2009 the
legislature approved a series of tax increases on things like sweets and
alcohol, as well as an expansion of gambling, with the proceeds
earmarked for infrastructure improvements. But so far these measures
have fallen well short of producing the hoped-for $1 billion a year. All
this has left Illinois with the worst credit rating of all 50 American
states—and little money to spare for an overhaul of Chicago’s
infrastructure.
The city has not always been a model of fiscal rectitude. The
previous administration papered over deficits with one-off measures,
prompting a downgrade in its credit rating the year before Mr Emanuel
took office. Although for the most part he has since cut costs enough to
match the city’s means, the state’s failure to amend the pension
system, in which Chicago participates, raises yet another threat to its
finances.
With the city, state and federal governments all strapped for cash,
Mr Emmanuel has had to turn to other sources of revenue. One obvious
step is to increase the charges to users of the city’s infrastructure.
At his urging, the city council raised water rates by 25% last year; by
2015 they will almost double. That has allowed the city to start
replacing leaking water mains at two-and-a-half times the previous rate.
Similarly, fares on the L are rising, which should help cover the costs
of refurbishing decrepit stations. Mr Emanuel also wants to encourage
more private investment in the city’s infrastructure, but its
left-leaning voters are touchy about anything that smacks of
privatisation. They noted that a consortium to which his predecessor
sold a 75-year lease on the city’s parking meters immediately quadrupled
the fees.
Mr Emanuel’s solution is called the Chicago Infrastructure Trust
(CIT). This will help pair investors with projects that will generate a
revenue stream to be hypothecated to cover the cost of the original
investment, plus a return. First on its list are some $100m-worth of
energy-saving measures in city buildings.
Lightbulb moment
At Newton Bateman Elementary School the principal asks a teacher how
she likes the new lighting in her classroom. She seems not to have
noticed any difference. That is the idea. Workmen have recently halved
the number of lights above her head, installed more efficient bulbs and
added automatic switches. Over the next ten months the city wants to
overhaul the lighting in another 241 schools. It estimates that these
retrofits will cost $14m and yield savings of $3m a year. In January it
put out a request for “financial partners” to stump up the cash, to be
repaid from the savings in the schools’ operating budgets.
From the mayor’s point of view this scheme has several advantages. It
enables him to raise money from investors such as foreigners, charities
and pension funds who are not interested in tax-exempt municipal bonds
because they have little tax liability in the first place. It means that
projects with clear benefits but low priority can go ahead sooner,
helping to stimulate the local economy. All the assets involved remain
not just the property of the city but under its management, so political
attacks on “privatisation” can easily be rebutted. The mayor’s
supporters in the unions are enthusiastic because the scheme will create
new jobs. And although initially Mr Emanuel expects the CIT to get
involved in only around $200m of the $7 billion-worth of infrastructure
investments he is looking for, he clearly hopes to expand its role if
the early projects prove successful.
Mr Emanuel is not the only local leader coming up with inventive ways
to pay for infrastructure improvements despite the fiscal squeeze. The
number of “public-private partnership” (PPP) projects under way around
the country, although still low by European standards, has jumped in
recent years. They include a tunnel under construction in Florida, a
commuter rail scheme in Colorado and road improvements in Texas and
Virginia. The Centre for American Progress, not normally a cheerleader
for red-blooded capitalism, reckons it should be possible to mobilise at
least $60 billion a year in private infrastructure investment. That
would be a huge step up from the paltry total of $10 billion raised
through such schemes between 1990 and 2006.
In Indiana a PPP is being used to boost public investment. In 2006
Mitch Daniels, a former governor, championed a 75-year lease of a busy
toll road in the state in order to create an investment fund for future
roadbuilding projects. The consortium that now runs the highway paid
$3.8 billion for the privilege (just before the recession caused asset
prices to plummet), as well as promising to invest $600m in upkeep over
the first nine years of the lease. Indiana has used the proceeds to
increase its roadbuilding budget by a third, to $1 billion a year.
Bob McDonnell, the governor of Virginia, is confronting the gradual
decline in revenue raised by the state’s gas tax, which is levied on top
of the federal one and suffers from the same problems. He recently
persuaded the state legislature to abolish it altogether and instead
raise the state’s sales tax from 5% to 5.3%. Along with some other
increases, this should provide a steadier revenue stream.
Antonio Villaraigosa, the mayor of Los Angeles, helped secure a
30-year increase in the local sales tax in 2008 to fund transport
projects. He then used the projected revenue as security for loans that
will allow the city to build the original 30-year roster of projects in
just ten years. The idea is to stimulate the local economy and take
advantage of low construction costs, just as economists have been urging
Congress to do.
Congress, however, is being unhelpful as usual, and not just by
scrimping on its own capital budget. Last year, for the first time, it
gave states free rein to charge tolls on new highways built with federal
help, or on new lanes added to existing ones. But it still bars them
from levying tolls on the unimproved portions of existing roads. It has
also allowed a law to lapse that encouraged private investment in
infrastructure by offering a tax break on bonds that finance it.
Meanwhile, the repeated brief extensions of the highway bill make it
difficult to plan for the long term or to embark confidently on projects
that might take many years to complete. Mr Obama has long called for a
federal infrastructure bank which could invest more strategically and
attract private capital relatively cheaply by subsidising or
guaranteeing commercial loans. But Congress wants nothing to do with it.
There are plenty of ways for Congress to boost investment in
infrastructure without massively inflating the public debt, but
America’s governors and mayors are not holding their breath. As Mr
Emanuel, a former congressman and White House chief of staff, says, “We
can’t allow dysfunction, whether in Washington or Springfield, to delay
our economic development.”
