[Joint House and Senate Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 113-73
AMERICA'S CRUMBLING INFRASTRUCTURE
AND HOW TO FIX IT
=======================================================================
HEARING
before the
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
JULY 24, 2013
__________
Printed for the use of the Joint Economic Committee
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JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
HOUSE OF REPRESENTATIVES SENATE
Kevin Brady, Texas, Chairman Amy Klobuchar, Minnesota, Vice
John Campbell, California Chair
Sean P. Duffy, Wisconsin Robert P. Casey, Jr., Pennsylvania
Justin Amash, Michigan Mark R. Warner, Virginia
Erik Paulsen, Minnesota Bernard Sanders, Vermont
Richard L. Hanna, New York Christopher Murphy, Connecticut
Carolyn B. Maloney, New York Martin Heinrich, New Mexico
Loretta Sanchez, California Dan Coats, Indiana
Elijah E. Cummings, Maryland Mike Lee, Utah
John Delaney, Maryland Roger F. Wicker, Mississippi
Pat Toomey, Pennsylvania
Robert P. O'Quinn, Executive Director
Niles Godes, Democratic Staff Director
C O N T E N T S
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Opening Statements of Members
Hon. Amy Klobuchar, Vice Chair, a U.S. Senator from Minnesota.... 1
Hon. John K. Delaney, a U.S. Representative from Maryland........ 2
Hon. Daniel Coats, a U.S. Senator from Indiana................... 3
Hon. Robert P. Casey, Jr., a U.S. Senator from Pennsylvania...... 5
Witnesses
Hon. Edward G. Rendell, Co-Chair, Building America's Future,
Washington, DC................................................. 6
Mr. Robert Poole, Searle Freedom Trust Transportation Fellow and
Director of Transportation Policy, Reason Foundation, Los
Angeles, CA.................................................... 10
Mr. Robert Puentes, Senior Fellow, Metropolitan Policy Program,
Brookings Institution, Washington, DC.......................... 12
Mr. Chris Edwards, Director of Tax Policy Studies, Editor,
www.DownsizingGovernment.org, Cato Institute, Washington, DC... 14
Submissions for the Record
Prepared statement of Vice Chair Klobuchar....................... 34
Prepared statement of Senator Dan Coats.......................... 35
Prepared statement of Hon. Edward G. Rendell..................... 37
Prepared statement of Mr. Robert Poole........................... 39
Prepared statement of Mr. Robert Puentes......................... 45
Prepared statement of Mr. Chris Edwards.......................... 50
AMERICA'S CRUMBLING INFRASTRUCTURE AND HOW TO FIX IT
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WEDNESDAY, JULY 24, 2013
Congress of the United States,
Joint Economic Committee,
Washington, DC.
The committee met, pursuant to call, at 9:55 a.m. in Room
628 of the Dirksen Senate Office Building, the Honorable Amy
Klobuchar, Vice Chair, presiding.
Representatives present: Hanna, Maloney, and Delaney.
Senators present: Klobuchar, Casey, Warner, Murphy, Coats,
and Wicker.
Staff present: Gabriel Adler, Corey Astill, Conor Carroll,
Gail Cohen, Christina King, Connie Foster, Niles Godes, Colleen
Healy, and Robert O'Quinn.
OPENING STATEMENT OF HON. AMY KLOBUCHAR, VICE CHAIR, A U.S.
SENATOR FROM MINNESOTA
Vice Chair Klobuchar. Okay, we will call this hearing to
order. We want to thank the Indian Affairs Committee. This is a
beautiful room, and we hope to be back here. I really like it.
And we also want to thank our witnesses for being here to
discuss the critical need to strengthen and improve our
Nation's infrastructure system.
I am going to introduce first our distinguished panel of
witnesses, and then say a few words.
We have Governor Ed Rendell, who was Governor of
Pennsylvania from 2003 to 2011, and he previously served two
terms as the Mayor of Philadelphia. He is Co-Chair and Co-
Founder of Building America's Future, which focuses on the need
for more significant investment in infrastructure in America.
Robert Poole is the Searle Freedom Trust Transportation
Fellow and Director of Transportation Policy at the Reason
Foundation. Mr. Poole, an MIT-trained engineer, has advised
both Democratic and Republican administrations.
We also have Robert Puentes. He is a Senior Fellow with the
Brookings Institution Metropolitan Policy Program where he also
directs the program's Metropolitan Infrastructure Initiative.
He is an expert on transportation and infrastructure, urban
planning, growth management, suburban issues, and housing.
Chris Edwards is the Director of Tax Policy Studies at the
Cato Institute. He is an expert on federal and state tax and
budget issues. Mr. Edwards previously served as a senior
economist with the Joint Economic Committee.
I think if we all look back at American history, we know
how important infrastructure investment has been to this
Nation.
We connected the East and the West Coasts by rail in 1869,
which ushered in the Second Industrial Revolution.
We began building the interstate highway system in the
1950s. We did it with a Democratic Congress, I will note, and a
Republican President.
And we are now at a state of need for infrastructure. I
know that, coming from the State of Minnesota, where in the
middle of a summer day, actually the anniversary coming up a
few weeks from now, a bridge collapsed in the middle of my
State. And as I said that day: A bridge shouldn't just fall
down in the middle of America, not a bridge six blocks from my
house, an eight-lane highway, a bridge that I drive my family
over every single day. But that's what happened.
And as many of you know, we rebuilt that bridge with the
help of the Federal Government in, literally in a year. I was
just out there with our new Transportation Secretary, Secretary
Foxx, out there on Monday, as one of his first visits. He also
went to Connecticut to see where the train derailment had
occurred just recently.
I think we all know this aging infrastructure does not suit
our country. It is not America. And mostly, as we look at how
we expand our economy so we become a country that makes stuff
and invents things and exports to the world again, and we are
in the course of doing that, to do that we need a
transportation system that matches our needs.
That means not just highways and bridges, it also means
rail; it also means, as a state that's on the Mississippi
River, a lock and dam system that works to transport our
agriculture products and other products.
So what we are going to talk about today are not just the
problems--and we know there are problems--but it is also how we
fix it. How do we get that funding mechanism that is going to
get Democrat and Republican support? We certainly need
bipartisan solutions to get this done.
The Senate has been acting. The Water Resources Development
Act is a great example of that, which was a combined work of
Senator Boxer, and Senator Vitter, and many others, including
some of my colleagues here, where we were able to come together
and reach an agreement. The bill is sitting over at the House
right now, and I know they are working on it, but was an
example of a piece of our infrastructure but certainly did not
get to the level that we need at to get at the problems that we
have.
Actually the idea for this hearing was Congressman
Delaney's. I am going to give him a few minutes here to speak,
and I would also note that my colleague, Senator Warner, is
here, who has also been a big leader in infrastructure and we
thank him for being here as well.
So I am going to give Congressman Delaney some of my time,
and then we will turn it over to Senator Coats.
[The prepared statement of Senator Klobuchar appears in the
Submissions for the Record on page 34.]
OPENING STATEMENT OF HON. JOHN K. DELANEY, A U.S.
REPRESENTATIVE FROM MARYLAND
Representative Delaney. Thank you, Vice Chair Klobuchar,
for organizing this hearing here today on this important topic.
I want to also thank all of our witnesses for carving out the
time to discuss this very important topic for our country and
for all of their insights and expertise and commitment to this
area.
As the Vice Chair said, we are all aware of the
infrastructure challenges that this country has. The American
Society of Civil Engineers estimates that we have almost a $4
trillion infrastructure hole as a country. And this is a very
significant challenge, but it is also a very significant
opportunity.
Because if we can in fact put in place smart infrastructure
policy and design a prudent and efficient and effective way of
funding the infrastructure in this country, we not only have an
opportunity to put Americans to work in the short term, which
should be a top priority of this Congress, but we also have an
opportunity to improve long-term U.S. competitiveness.
And that is, to some extent, where the dimension of this
infrastructure discussion is most important. As we think about
competing in a world that is increasingly informed and shaped
by globalization and technology, making sure we have an
adequate, modern, and forward-looking infrastructure that's
done in a smart way that allows U.S. corporations to compete is
one of our central and, in my judgment, our most important
domestic economic priority.
Because unless we compete successfully as a country, we
will never be able to create jobs that have a good standard of
living. And infrastructure is central to that discussion.
So I am very much looking forward to the panelists'
comments today, not only on the needs we have as it relates to
infrastructure but also talking about how we fund our
infrastructure. Because I think there's a rich vein of support
in this country for investing in our infrastructure, but there
is significant debate and discussion about how we pay for that.
If you look macro at what is going on in the world today,
you see this very significant infrastructure need which is
typically a need that is provided by government, yet we look
around and federal budgets, state budgets, local governments
are strained.
So thinking about creative ways to finance our
infrastructure that is fiscally appropriate in light of the
larger fiscal challenges we are facing as a country is also
part of the challenge. This is one of the reasons we have
introduced the Partnership To Build America Act, which is a
bipartisan bill in the House that invests in U.S.
infrastructure, and ties it to tax incentives for the
repatriation of overseas corporate earnings.
So with that, we'll get on with the hearing.
Vice Chair Klobuchar. Okay. Senator Coats.
OPENING STATEMENT OF HON. DANIEL COATS, A U.S. SENATOR FROM
INDIANA
Senator Coats. Well thank you, Madam Chairman. I am
standing in for Congressman Brady who could not be here, so it
gives me an opportunity to make an opening statement, which I
am going to ask unanimous consent to include in the record so
that we can get to our witnesses.
Let me just make a couple of quick points here.
Vice Chair Klobuchar. Okay.
Senator Coats. It is clear that there is a consensus that
infrastructure is crumbling all across America. Governor
Rendell, Pennsylvania is one of the original Colonies, so you
have some of the oldest infrastructure, but even as we work
across the Midwest and into the West, we see falling bridges.
We see crumbling infrastructure. We see pipes bursting
underground. So clearly there is a consensus that we need to go
forward and deal with this.
We all know that we are in this current fiscal dilemma of
what comes first, almost a chicken-and-egg type of situation,
where we know we need to spend upwards of a trillion and maybe
even more dollars to address, over a period of time, to address
this infrastructure problem.
We know that in doing so it potentially could provide some
stimulus to the economy. However, we also realize that we
simply are not liquid. We have to borrow funds in order to
accomplish this. And in doing so, we then just fuel more debt,
more deficit, which acquires more interest payments.
And when we put that together with the projected increase
in entitlement spending with the retirement of the Baby Boom
generation, we realize that the pot of money that falls into
the discretionary category, that which we have authority over
how to address, and where to spend it, and establish
priorities, that continues to squeezed.
In fact, the projections are that in 10 years from now 90
percent of our tax revenue will be eaten up through interest
and mandatory spending.
So no matter how earnest we are, and how committed we are
to address a whole number of issues that fall in that
discretionary category, not to mention health research, and not
to mention education, not to mention any number of things that
are priorities for Members of Congress, we have to understand
the realities of the fiscal situation we are in.
So just a comment here relative to the fact that we do need
to address this issue if we are going to go forward with a
number of the plans that have been proposed, which have some
real significance.
In my State of Indiana, we have had to, under a previous
governor, and I think carried on by this governor, we have had
to turn to public/private partnerships. That has been very
successful for us. By leasing our toll road for a 75-year
lease, we have been able to accomplish some very significant
improvements in our transportation infrastructure.
These so-called P3s, Public/Private Partnerships, may be
ways in which we can work around some of the fiscal limitations
that we have. I might note, just from entering into that in
just one area, through our toll road by the end of the year
2012 in Indiana we have completed 65 roadway projects; 19
others were accelerated.
We have completed 375 new centerline miles, 48 new or
reconstructed interchanges, 5,030 preservation center line
miles, accounting for 40 percent of the state's inventory, and
rehabilitated or replaced 720 bridges.
So this may point a way into which we can address more
immediately some of our infrastructure problems. I am anxious
to hear from the panel, Madam Chairman, as to what their
thoughts are on this and anything else they want to bring to
us. So thank you, very much, for chairing this Committee and we
look forward to the testimony of the witnesses.
[The prepared statement of Senator Coats appears in the
Submissions for the Record on page 35.]
Vice Chair Klobuchar. Well thank you, very much. Thank you
for being so brief. And I know that Senator Casey wanted to say
a few words about Governor Rendell from his home State before
we begin.
OPENING STATEMENT OF HON. ROBERT P. CASEY, JR., A U.S. SENATOR
FROM PENNSYLVANIA
Senator Casey. Governor, you will be happy to hear me say
that I am going to keep my comments brief.
[Laughter.]
But we have had a number of great governors of
Pennsylvania. One of them was my father, and I certainly put
him in certainly a special category, but we have had very few
in the history of the Commonwealth that got as much done in
four years, and then the second term for a total of eight
years, as Ed Rendell. Remarkably effective Governor.
I will just mention, in addition to the focus on
infrastructure and transportation and economic development, one
part of his record, which will be an enduring legacy, is
education--especially investment in early learning, which will
pay dividends for several generations.
So we are honored that he is here to talk today about
infrastructure, but I am especially grateful that my friend is
here to watch how the Senate works at these hearings, and once
in awhile we are all very brief, and today will be one of those
days, Governor.
We are grateful you are here, as well as the other
witnesses.
Vice Chair Klobuchar. And it looked like Senator Warner
wanted to add something, as a fellow governor.
Senator Warner. I will simply add two quick points.
One was, I hope when Senator Coats mentioned that Governor
Rendell was from one of the first Colonies that he didn't imply
that Governor Rendell was one of the early Colonists, as well.
[Laughter.]
Vice Chair Klobuchar. I was thinking the same thing, but I
didn't----
[Laughter.]
Senator Coats. Governor, that thought never crossed my
mind.
[Laughter.]
Senator Warner. I would simply say that one of the things a
number of us, and I really appreciate the Chair holding this
hearing, is not only how we find that permanent source of
funding, but how we also use tools--and this is something
Governor Rendell has been working on--on how we create at a
national level something that every other industrial nation in
the world has: an infrastructure financing authority that
allows us to centralize the financing, kind of intellectual
capacity, to be able to kind of partner with Wall Street in a
way the public sector gets protected to be able to put in place
long-term debt, and to be able to have some form of that
government backstop again that every other nation uses as a
tool.
My hope is that we can find some consensus around this
tool. It's not a full solution set, but it is clearly a tool we
need in our toolbox, and I particularly thank Governor
Rendell's work on that.
Thank you, Madam Chair.
Vice Chair Klobuchar. Okay. Well thank you very much,
everyone, and I think we are ready to begin with the testimony.
Governor Rendell.
STATEMENT OF HON. EDWARD G. RENDELL, CO-CHAIR, BUILDING
AMERICA'S FUTURE, WASHINGTON, DC
Governor Rendell. It's a pleasure to be here, Madam
Chairman, Senator Coats, Representative Delaney, of course
Senator Casey, my good friend Senator Warner, and all of the
Members of the Committee.
Thank you for holding this hearing. But I go to too many
hearings on the question of infrastructure and transportation,
and nothing significant gets done. Nothing significant gets
done.
And that is different from what is going on in state
capitals. It is different than the desires of the private
sector. We want to get stuff done. We need the Federal
Government to be a participant.
Congressman Delaney outlined the American Society of Civil
Engineers' report. They do it every four years. They found that
our infrastructure in general ranked at a D+. They found only
six areas of improvement. And they were slight improvement:
rail, roads, bridges, solid waste, drinking water and
wastewater.
What do three of those things have in common? Over the last
five years, states and the Stimulus bill invested significant
dollars in rail with the TIGER (Transportation Investment
Generating Economic Recovery) program, in bridges and roads,
and improvements were made because of those investments.
We cannot be any clearer. In 2012, Building America's
Future put out a report that was labeled ``Falling Apart and
Falling Behind,'' and we quoted the World Economic Forum which
ranks the infrastructures of the world.
In 2005, the U.S. ranked first in the world for the
economic competitiveness of our infrastructure. Now we rank
14th. We were 18th in rail, 19th in ports behind countries like
Estonia and Iceland, and 30th in air transport behind Malaysia
and Panama and many, many other countries.
It is a question of economic competitiveness. It is a
question of economic survival. If we want to continue to be a
first-rate economic power, if we want to protect our public, if
we want to improve the quality of life of our citizens and our
environment, if we want to create good, well-paying jobs that
cannot be outsourced, it is time to do something. It is time to
do something. What has been recommended? The American Society
of Engineers--actually, Congressman Delaney said $4 trillion,
over the next 8 years, the unaccounted for dollars come to $1.6
trillion. So they want to invest over $200 billion additional
money a year in our infrastructure. That is exactly the figure
that BAF in its report recommended, $200 billion in additional
spending over the next 10 years.
Your own Surface Transportation Reform Commission that the
Congress authorized reported in 2008 that, just for
transportation infrastructure you needed to spend at least $225
billion a year. And the CBO in 2010 said that an additional
$185 billion annually spent on infrastructure--I recommend you
read this report--would be justified by the economic and
societal benefits it would bring to the United States of
America.
If you look at these figures they are daunting and
obviously Senator Coats set the environment that you have to
deal with. My first suggestion is: Deal with it and find ways
to reduce spending and increase revenue to fund something that
is essential to this country's competitiveness going forward.
Deal with it.
If we are making all of these spending cuts, and we are
increasing revenue, let's find a way to fund something that
will invest in our future and do something for the country. You
cannot name me one American company that has grown successful
that did not invest in its own growth.
We have got to invest, and we have got to start doing it
now. And the good news is, you do not have to do it by
yourself. That $200 billion figure does not all have to come
from the Federal Government. It can come from the states. It
can come from the private sector. The private sector in the
U.S., and private sector abroad in places like China and Europe
that have tens of billions of dollars that they're waiting to
invest in a stable American infrastructure.
So let's look at where we are. Look at what the states have
done. I am going to read you just a quick synopsis of states
who in the last two years have passed revenue increases to deal
with their infrastructure problems.
And, Senator Coats, states have to have a balanced budget.
They have got more economic pressure than the Federal
Government has. Listen to this array of states, because it is
blue and it is red, it is Republican legislatures and
Democratic legislatures. It is Republican governors and
Democratic governors: Virginia, Maryland, Wyoming, Nebraska,
Arkansas, South Carolina, Massachusetts, Texas, and Oklahoma.
And in Pennsylvania and Michigan, in two of the biggest
states in the country, governors have proposed--Republican
governors have proposed significant spending increases for
transportation infrastructure. It is not blue or red, it is not
Republican/Democrat. You know it's not Republican/Democrat.
Senator Inhofe, arguably one of the most conservative Senators
in the United States Senate, has said that infrastructure
spending is the second most important thing we can do after
defense spending.
I testified before Congressman Shuster's first hearing as
Chairman in the House, and there were 50 of the 60 members
present, and virtually every one of them spoke--albeit
briefly--and almost every one of them pledged themselves to
find a way to invest in infrastructure. There were Tea Party
members, conservative Republicans who said I'm a Tea Party
member but I believe we've got to spend money on our
infrastructure. I'm a conservative Republican, but we've got to
find a way to invest in our infrastructure.
Well, we can find a way. And there is no excuse for not
doing it. Because the cost is high, Senator Coats? Of course is
it high. The cost figures I have given you are almost
astronomical, but one thing that Congress never computes is the
cost of doing nothing.
Let me submit to you that the cost of doing nothing to the
American economy and to the American consumer is greater than
the cost of spending money, even at the level that I have
recommended.
The United States Chamber of Commerce--not exactly a
radical leftist-leaning organization--has estimated that each
year business loses $1 trillion, the GDP loses $1 trillion that
would be produced by having a first-rate transportation
infrastructure. That is $1 trillion a year. Think of what a $10
trillion over the next 10 years increase in the GDP would do
for your debt problem. Just think about that.
The Texas Transportation Institute says that the average
consumer pays $818 a year in wasted time and additional fuel
costs because of congestion on our roads. $818 a year. If you
increase the federal gas tax by 20 cents a gallon, that would
only cost the average consumer around $400. $818 to the average
consumer.
So you are not alone in this fight. We can fund this
together. The beauty of TIGER was the states competed. And an
important part of TIGER grants was how much the states were
willing to put up. They asked for federal money for the
project, and often there was private money. Two of the most
successful TIGER projects went through Pennsylvania and six
other states. They were the National Gateway and the Crescent
Corridor. One for CSX and one for Norfolk Southern, to increase
our freight capacity in the Eastern half of the country.
The companies put up about 40 percent; the states put up
about 35 percent, and the Federal Government through TIGER put
up 25 percent. And because of that, our freight capacity in the
Eastern half of the country is infinitely improved. We are
going to be much more competitive because of that.
So you have got states willing to do it. You have got the
private sector willing to do it. You have the people willing to
do it. In every federal election, every election that's held on
an even year since 2000, transportation referendums have been
approved over 75 percent of the time, with the exception of
2010--arguably the most conservative election in our history or
at least in our recent history and 61 percent of transportation
referendums were approved even in 2010. And those referendums
all called for increased borrowing, increased tolling, or
increased taxes. And they were approved in blue states and in
red states.
In South Carolina, two increases in the sales tax to fund
transportation--one to rebuild the Port of Charleston because
the residents of South Carolina knew how important the Port of
Charleston was to their own economy.
So we can do this. BAF recommends that you take a number of
specific steps--and I will run through these real quickly:
Number one obviously is find a way to continue funding
TIGER. That competition for regional projects was--had a
sensationally beneficial effect.
Number two, we've got to find a way, either through the
TRIP (Transportation and Regional Infrastructure Project) Bond
Program that Senator Wyden has proposed, or by bringing back
Building America Bonds to aid the states in paying for their
own investments in building their own infrastructure. The BABs
program was an incredible catalyst for infrastructure
development during the Stimulus. It was overlooked, but it was
an incredible catalyst.
To generate private-sector involvement, we need to even
expand the TIFIA (Transportation Infrastructure Finance and
Innovation Act) Program more than you did in MAP-21 (Moving
Ahead for Progress in the 21st Century Act). That was a great
step in the right direction, but we would like to see it
expanded even more.
Secondly, we think that we would either raise or eliminate
the cap on Private Activity Bonds. That would generate a
significant level of private investment.
Third, we've got to let the states toll interstates. In
MAP-21, you allowed the states to toll interstates for
additional capacity, but you did not allow us to toll
interstates for existing roads.
If we are going to get the private sector involved, they
need a reasonable return on their investment. And to do that,
if we are going to maintain I-80 in Pennsylvania--Senator Casey
is well aware of it--I applied to the Transportation Department
for the authority to toll I-80. Right now, only the three pilot
projects can be granted for tolling of previously accredited
federal highways. I-80 cost us $200 million a year to maintain.
$200 million a year just to maintain. It goes through the
northern part of Pennsylvania which gets terrible weather.
We got turned down. We got turned down. But we were turned
down because, the theory was, well why pay for it twice? The
Federal Government paid to build the road. Why should we pay to
maintain it?
Well that is like telling someone you pay to buy a car, but
you don't have to pay to maintain the car. It makes absolutely
no sense. The restriction on tolling federal highways should be
lifted in the next transportation bill.
And last but not least, we need to create a national
infrastructure bank as a catalyst for leveraging private
investment, as it does in the very successful European
Infrastructure Bank.
Senator Warner has a bill soon to be introduced.
Congressman Delaney has a bill. Congresswoman DeLauro has a
bill. They are all good bills in concept. It is very important
that we get this bank moving, we get it funded with just a
little bit of funding to catalyze the efforts of the
infrastructure bank. It can be enormously successful, as the
European Infrastructure Bank has been. The European
Infrastructure Bank generates over $350 billion of investment
in the EU's transportation systems, and not just
transportation. And we can do the same.
I want to close by harking back to what Senator Klobuchar
said in her opening. Eighty years ago the Public Works
Administration bill was signed by President Roosevelt and
passed by the Congress. That bill led to the building of the
Triborough Bridge, the Lincoln Tunnel, the Grand Coulee Dam,
the Overseas Highway bridge that linked Key West to the
mainland of Florida. It sparked 34,000 transportation and
infrastructure projects in the United States of America. It
spent $6 billion, which would be the equivalent of $106 billion
today, and it did wonders for the country.
We can do it. We can--Brookings just hosted a policy forum
about the Can-Do States. If we had a Can-Do Federal Government
that harkens back to all of the great times in this country's
history when we faced challenges and met them by investing in
our future, we could create millions, literally, 4 million new
well-paying jobs that cannot be outsourced at the $200 billion
level of investment. We can create millions of jobs. We can
improve public safety, improve the quality of life, reduce the
cost of doing nothing for our citizens, and return America to
economic greatness.
So there are no excuses. The time to do it is now. The
Simpson-Bowles Commission recommended doing something even in
the midst of the debt restructuring. We can do this. We're
Americans. We've done it in the past. We can do it again.
[The prepared statement of Governor Rendell appears in the
Submissions for the Record on page 37.]
Vice Chair Klobuchar. Thank you very much, Governor. Mr.
Poole, if our remaining witnesses keep it to five minutes,
because I know there are a lot of people that want to ask
questions, and thank you, Governor Rendell, for that great
statement. Mr. Poole?
STATEMENT OF MR. ROBERT POOLE, SEARLE FREEDOM TRUST
TRANSPORTATION FELLOW AND DIRECTOR OF TRANSPORTATION POLICY,
REASON FOUNDATION, LOS ANGELES, CA
Mr. Poole. Thank you, Vice Chair Klobuchar and Members. I
appreciate being asked to speak today.
My testimony, like the Governor's, will be limited to
transportation infrastructure since that is my primary area of
expertise.
Our transportation infrastructure is falling behind our
global competitors in serious ways. Part of the reason is that
our competitors make much greater use of long-term public/
private partnerships for transportation infrastructure.
Today, nearly half of all air passengers in Europe are
being served by privatized airports. And that trend began in
1987. We have privatized only one airport, San Juan
International, and that was only just this year.
Over 50 countries have corporatized their air traffic
control systems, giving them a bondable user fee revenue stream
to make major capital investments, while our attempts to
implement NextGen through the FAA are struggling, held hostage
to federal budget problems.
In highways, much of Europe, Australia, Latin America, and
even China are using long-term toll concessions to build their
equivalent of our interstate highways, and we need to rebuild
and modernize ours and do not have the money to do it.
A large majority of the world's seaports are either
investor-owned outright or are using the landlord-port model in
which the private sector builds and operates all the terminals.
Most inland waterways are government-owned, but some charge
tolls, including the Panama Canal, which has issued toll
revenue bonds to finance the $5 billion expansion that is going
on. Meanwhile, our tax-funded waterways are plagued with
obsolete and undersized facilities.
Now there is now a global infrastructure industry in
transportation which can finance, build, operate, and maintain
airports, highways, seaports, et cetera, but none of the major
players are U.S. companies. We are missing out on this entire
industry as a participant.
And of the $300 billion that has been raised over the past
decade in infrastructure equity investment funds, while 30
percent of that money has come from U.S. investors, most of
that money is being spent overseas because that is where the
PPP opportunities are.
Now why does this matter? What are other countries getting
by enabling large use of long-term PPPs in infrastructure? I
see four major benefits.
First, as the Governor said, obviously more investment,
which we desperately need, is important.
But I think even more important is more-productive
investment. Because PPP projects, in order to be able to get
financing, have to meet a market test. They have to demonstrate
that the project's benefits will exceed the cost, and likely
produce a return on investments. So that is a very important
additional benefit.
Third, we can shift significant risks of infrastructure
megaprojects from taxpayers to investors for risks of cost
overruns, risk of late completion of the project, and risks of
over-optimistic traffic and revenue projections.
And fourth, we can get guaranteed maintenance of the
projects that are done by means of long-term PPPs, because the
same entity that builds it does not just walk away, but is
responsible for operating and maintaining it for a long period
of time, as a business, competing for customers.
Now I think it is time to take a hard look at rethinking
the 20th Century model the Federal Government has used for
infrastructure, which is user taxes, trust funds, and grants.
It is not working very well. First of all, user taxes are
now seen as just taxes, and any increase even though it would
go for productive uses is seen as a tax increase and therefore
very hard to get support for.
The model builds in a large amount of redistribution, and
cross subsidy, which is not only inefficient but it also
creates disaffection such as people believing the program is
all about bridges to nowhere in Alaska.
Congress has created many unfunded mandates which using
federal dollars increases the cost that states have to bear to
build their projects. And the model encourages states to fund
projects out of annual revenues rather than financing them over
the long term, as all investor-owned infrastructure does:
electric utilities, railroads, toll roads, and so forth.
The thrust of my written testimony is that it really is
time to rethink the federal policy for the 21st Century in
light of the government's ongoing stress. I think there are
three key points for doing so:
First, we need to sort out which functions are truly
federal in nature. Which transportation is truly federal?
Refocus the Federal Government on that and delegate the rest to
state and local governments where the need really is.
Second, shift from funding to financing, which means
federal policy needs to begin shifting much more from grants to
loans on a basis preferably that does not put federal taxpayers
at risk. And a good example of what I like is Representative
Delaney's American Infrastructure Fund, which would not put
taxpayers at risk.
Third, enable states to take on a larger share of
responsibility by removing tax and regulatory obstacles to
enable them to make better use of long-term PPP. I suggest in
my written testimony how this would play out for the different
modes of transportation.
And I also provide a near-term list of tax and regulatory
changes that could begin this transition, and a list of
organizational changes, including corporatization of the Air
Traffic Control System along the lines of the very successful
Nav Canada, and enabling the Army Corps of Engineers to enter
into long-term PPPs to replace obsolete locks and dams financed
by toll revenues paid by those using the new facilities.
This is an ambitious agenda. I will wrap up by making just
two points.
One, infrastructure is critically important to our economy.
We need to do a much better job of funding and managing it. And
the PPP approach could make a big difference in this.
The other is that, given the fiscal condition of the
Federal Government, the 20th Century User Tax/Trust Fund/
Federal Grant Money is unsustainable, and I think we really
need to think hard about that.
That is the end of my testimony. I would be happy to answer
questions when we get to that.
[The prepared statement of Mr. Poole appears in the
Submissions for the Record on page 39.]
Vice Chair Klobuchar. Thank you, Mr. Poole.
Mr. Puentes.
STATEMENT OF MR. ROBERT PUENTES, SENIOR FELLOW, METROPOLITAN
POLICY PROGRAM, BROOKINGS INSTITUTION, WASHINGTON, DC
Mr. Puentes. Thank you, Vice Chair Klobuchar, Members of
the Committee. I very much appreciate the invitation to talk
about this important topic.
I think the Governor and the members have already kind of
laid out the need, and made the case for why we need to invest
in infrastructure, so my remarks are going to focus on the ways
the Federal Government can engage in new partnerships with both
the private actors and the public sector to invest in
infrastructure. And, by so doing, put Americans back to work
and then rebalance the economy.
Today, low interest rates, coupled with the attention from
private firms and foreign funds are presenting growing
opportunities for a fresh set of focused, federal initiatives
to support pragmatic public and private sector leaders in
states and citizens and metropolitan areas as they collaborate
and innovate around infrastructure investments.
So, for example, Congress should revive the Build America
Bonds Program, as the Governor mentioned, to support state and
local investments. Established in 2009, the two-year program
authorized special taxable bonds with a direct federal subsidy
that decreased borrowing costs and stabilized the municipal
bond market.
Given the subsidy, they proved wildly popular, as the
Governor noted. During their short existence, BABs financed
one-third of new state and local long-term debt issuances. They
were used in every single state, and for a variety of
infrastructure, including educational facilities, and most
notably for water and sewer projects.
In reviving BABs, lowering the tax subsidy from 35 to 28
percent would make the program revenue neutral relative to the
estimated future federal tax expenditure for tax-exempt bonds.
Since states and municipalities do not really need the same
aggressive subsidy they did after the financial crisis, I think
that the lower rate really is appropriate for today's needs.
Next, while municipal bonds are geared toward
infrastructure projects with a public benefit, private activity
bonds are directed at those projects that primarily benefit
private entities and also serve some public purpose, such as
airports.
PABs are issued by state and local governments for projects
with more than 10 percent of the proceeds benefitting a
nongovernmental entity and are directly or indirectly paid back
by a private business.
However, not being exempt from the Alternative Minimum Tax
limits their ability to attract potential investors over time.
Based on estimates from the Joint Committee on Taxation,
eliminating the AMT on all PABs could potentially cost the
government about $49 million annually over the next 5 years.
Yet, the exemption would generate billions of dollars in
additional economic activity and lead to cost savings of almost
$750 million for airports alone over the next 10 years.
However, we know that Public/Private Partnerships are
complicated contractual arrangements and they vary widely from
project to project and from place to place. As the challenges
to infrastructure development throughout the U.S. become more
complex, there is a constant concern that public entities in
some states, cities, and metro areas are ill-equipped to
consider such deals and fully protect the public interest.
So one solution is the creation of a specialized
institutional entity to assist with those expanding
opportunities. These so-called PPP units would fill a variety
of functions, including quality control, policy formulation and
coordination, technical advice, and standardization.
These are voluntary and budget costs should be no more than
about $3 million annually.
But another way to provide technical assistance and
expertise to states and other public entities that cannot
develop internal capacity to deal with the projects themselves
is through the creation of a national infrastructure bank.
If designed and implemented appropriately, an
infrastructure bank has the potential to leverage billions of
dollars in private investment, as has been mentioned; provide a
streamlined selection process for projects; and apply a more
rigorous standard for evaluating critical investments.
A one-time repatriation tax holiday could be used to unlock
the billions of dollars of domestically untaxed capital and
finance the creation of the National Infrastructure Bank.
Today, American corporations hold over $1.5 trillion in
domestically untaxed deferred dividend payments overseas. While
similar repatriation holiday created for the 2004 American Jobs
Creation Act failed to generate significant domestic stimulus,
a targeted program focused on infrastructure has the potential
to deliver job creating and economy building projects for
decades to come.
By directing a percentage of the recovered taxes into the
infrastructure bank, or else compelling corporations to invest
a portion of repatriated funds into a special class of bonds
that support the institution, Congress could encourage
infrastructure investment here in this time of political
gridlock.
Depending on the specific goals for the infrastructure
bank, capitalizing it can occur in a flexible manner as well
with levels ranging from $10 to $50 billion. Of course there
are real costs, and there are real hazards associated with any
repatriation-based program. However, policymakers must also
weigh the concerns of those things against the strategic and
financial benefits of a well-functioning strategic
infrastructure bank.
Most of what I have described here will require legislative
action, possibly as part of a major tax reform bill, or through
budget negotiations, but I think we can do this.
Madam Vice Chairman, I know it will not be easy, but I
think the time is right to invest in infrastructure projects
that do put us on the path to a more productive and sustainable
economy.
Thank you very much for the opportunity to appear before
you today.
[The prepared statement of Mr. Puentes appears in the
Submissions for the Record on page 45.]
Vice Chair Klobuchar. Thank you very much, Mr. Puentes. Mr.
Edwards.
STATEMENT OF MR. CHRIS EDWARDS, DIRECTOR OF TAX POLICY STUDIES,
Editor, WWW.DOWNSIZINGGOVERNMENT.ORG, CATO INSTITUTE,
WASHINGTON, DC
Mr. Edwards. Thank you very much, Ms. Vice Chair, and
Members of the Committee. Thanks for having me testify today.
Infrastructure is extremely important to the economy. We
need to ensure that investments in infrastructure are as
efficient as possible, and we can do that in my view by
decentralizing the financing and ownership of infrastructure
out of Washington as much as we can.
State and local governments and the private sector are more
likely to make sound investment decisions without all the
federal intervention we have today.
The first thing that's interesting to note is that most
U.S. infrastructure is actually provided by the private sector.
The private sector actually provides more than five times as
much infrastructure to the U.S. economy as the federal, state,
and local governments combined: pipelines, cellphone towers,
you add it all up that is $2 trillion of private investment a
year in infrastructure. Again, five times the size of
government infrastructure.
So the policy upshot from my point of view, looking at
that, is we need to also focus on things to increase private
infrastructure investment such as doing tax reform.
That said, government infrastructure is of course very
important to the economy, but I think it should be done as much
as possible at the state and local level, not the federal
level.
Why do I say that? A number of reasons.
Federal infrastructure investment is often misallocated,
from my point of--from my opinion. Look at Amtrak investment,
for example. In my view, a lot of it is based on sort of
political demands and not based on actual customer marketplace
demands.
Federal infrastructure is often not operated efficiently,
is often not priced properly. So, for example, if you look at
the Bureau of Reclamation's vast water infrastructure in the
Western United States, it does not use market pricing. Water is
vastly under-priced, which causes inefficiency.
Federal infrastructure is often mismanaged and has large
cost overruns. The FAA has a very poor record in terms of
bureaucratic mismanagement and cost overruns. And the key
problem with federal intervention, it seems to me, in
infrastructure is that the Federal Government when it steps it,
it replicates mistakes across the country.
States and private companies make mistakes, but when the
Federal Government makes mistakes it replicates it everywhere.
The classic example of this is high-rise public housing, which
everyone agrees now was a disaster, and was replicated in
dozens of American cities in the mid-20th Century because of
federal subsidies to cities to do this very inefficient
infrastructure investment.
So those are the sorts of short-comings with government
infrastructure that are one reason why there is growing
interest in privatization in the United States and around the
world.
I fully support P3s and partial privatization of
infrastructure, and we should explore all those kinds of
opportunities. But we should also look at full privatization
where it is possible.
Airports can be fully privatized. London's Heathrow is a
good example of that. Bridges can be fully privatized. There's
a new $140 million Jordan bridge that was recently completed
near Norfolk, Virginia, completely privately financed, owned
and operated and constructed.
And Air Traffic Control, as Bob Poole has pointed out, has
been privatized in Canada and Britain and other places. Indeed,
I am really struck by the Canadian Air Traffic Control
privatization back in 1996.
The Canadian Air Traffic Control System is a nonprofit
corporation, separate from government. It does its own
operations. It funds its own capital investments separate from
government, and it has been an extremely successful model. It
is one of the safest systems in the world.
You compare that to the FAA, the FAA has this big demand
for funds. There's budget instability in Washington. The FAA
does not know where it is going to get the funding. We saw with
the sequester cuts that threatened to disrupt air traffic
control in this country.
The solution, it seems to me, is to set up air traffic
control as a separate nonprofit corporation like the Canadians
have. So privatization and P3s have swept around the world, but
not so much in the United States.
So why not? Well there have been a bunch of sort of built-
in hurdles that Congress needs to look at that are preventing
more privatization of P3s in the United States. A key one is
that the Municipal Bond Tax Exemption favors public facilities
over private facilities. That is a big barrier.
Canada, for example, does not have that barrier. Muni bonds
in Canada are not tax-exempt and so private and public are on a
more even keel.
Income and property taxation. If you want--if private
entrepreneurs wanted to set up an airport, they would be taxed
on their earnings. They would be--they would face property
taxes. Government facilities don't pay income or property
taxes.
And here is a key thing that people often overlook. Federal
aid, or federal subsidies are often viewed as a positive, but
there is a negative crowd-out effect of federal subsidies. And
here's what I mean:
Before the 1960s, the vast majority of urban transit bus
and rail in the United States was private. Bus systems and rail
systems in cities across America were private. Then Congress
passed the Urban Mass Transportation Act in 1964.
That Act gave transit subsidies only to government-owned
systems at the local level. The effect by the end of the 1960s
was that virtually all transit systems in America became public
owned and we lost the competition and the innovation and
entrepreneurs that private transit brought to America because
of those federal subsidies.
So federal subsidies work against privatization at the
state and local level.
There are other issues the Governor mentioned: interstate
tolling requirements. I agree with him. We have to look at
that. And there are other federal regulations that stand in the
way of privatization.
So to sum up, you know there is widespread agreement
obviously that America needs top-notch infrastructure to
compete in the global economy. The way forward, in my view, is
for the Federal Government to reduce its control over the
Nation's infrastructure. State and local governments should be
encouraged to innovate with privatization P3s to the fullest
extent possible.
Let's get America's great entrepreneurs helping us solve
our infrastructure challenges.
Thank you, very much.
[The prepared statement of Mr. Edwards appears in the
Submissions for the Record on page 50.]
Vice Chair Klobuchar. Well thank you very much to all of
you. I will get started here.
I note, Governor Rendell, you talked about the investment
in Europe, the $350 billion that you mentioned, and you talked
about the fact that they have a history of investment with
public/private partnership. Could you describe what they are
doing there, and how they got started in this way that allowed
for more infrastructure, and what we can learn?
Governor Rendell. Well it got started similar to what
Senator Warner and Congresswoman DeLauro want to do. The EU
countries put money in to begin to capitalize the fund, and now
the fund makes loans. It's exclusively loans. They make enough
money on the repayment of those loans not only to cover their
entire administrative costs, but to add money to the fund
itself.
So it has been enormously successful.
Vice Chair Klobuchar. Is it an infrastructure bank, or is
it a private/public----
Governor Rendell. It's an infrastructure bank that only
loans monies to those projects where there's going to be a rate
of return.
One thing I wanted to say to my folks from the
CatoInstitute, I for a Democrat am probably the strongest
advocate for public/private partnerships in the country, but
let's not be deluded into thinking that private/public
partnerships or privatization are going to solve all of our
problems.
The country has 66,000 structurally deficient bridges, one
of which was----
Vice Chair Klobuchar. Yes.
Governor Rendell [continuing]. Regrettably in Minnesota. Of
those 66,000, my guess is no more than 1,500 could be tolled
where there would be a reasonable enough rate of return to do
the work necessary to rebuild or expand those bridges.
Some, yes. There is a bridge in Pennsylvania that is on I-
95 going from New Jersey to Pennsylvania. It's not tolled now.
If we tolled that bridge, we can expand from four lanes to six
lanes with a side avenue for cars to go off. It would cut
waiting time from 45 minutes in rush hour to 15 minutes in rush
hour.
Vice Chair Klobuchar. Right.
Governor Rendell. We can afford to toll that. But the vast
majority of bridges, the vast majority of roads, there's not
going to be a private sector return on investment. Airports,
yes. Locks and dams, perhaps. But there is some infrastructure
that the government, whether it be state, local, or federal, is
going to have to pay for.
Vice Chair Klobuchar. Right, and I appreciated your point
that even the Simpson-Bowles report and that group, and the
work that a lot of us have done in the middle on the budget,
like Senator Warner, and others, we truly believe that you have
to invest at the same time; that it is not exclusive. You can
make that investment in some key things at the same time you're
doing a long-term debt reduction by making some of the reforms
that were talked about, and also looking at closing some of the
loopholes and doing some other things.
Governor Rendell. And remember, when you're talking about
federal investment, one of the problems with the way Congress
scores is that there's never any offsets. That type of
investment produces significant federal, new federal tax
revenue by the jobs that are created, by the corporate profits,
et cetera.
Where you start offsetting that, and offsetting the
economic benefits, I again recommend your staffs to CBO 2010
report where the CBO--again, not exactly a leftist-leaning
organization--says we can afford $185 billion annual increase
in infrastructure investment because of the economic and
societal benefits to us.
Vice Chair Klobuchar. Okay. Mr. Poole, Mr. Puentes, the
infrastructure bank does actually include a version of it in
the Build American Jobs Act that also had some increase--
significant increase in investment on the government's side,
and we got some support. We got a majority of the Senators, but
I led that bill last year and we were not able to get it
through the filibuster.
But could you talk about the infrastructure bank, how you
see it working? And by the way, how would rural projects be
included? I get that question a lot at home.
Mr. Poole. Rural projects I have not really looked into.
That is a good question. I mean, you probably could not do the
same kind of things that you could do in terms of robust
revenues and things in more urbanized areas.
But infrastructure banks, I have been critical of most of
the infrastructure bank proposals that have come along because
I fear they do not have the same kind of protections that are
built into TIFIA to ensure, to make it likely that these will
be sound investments that have a dedicated revenue stream, and
investment-grade bond ratings, and things like that.
That is why I draw a distinction between those and
Congressman Delaney's new proposal that would not put the
federal taxpayers at risk by creating debts that might not be
repaid. And so I think we really need to be careful what we are
doing.
I mean, it was one thing during the Depression----
Vice Chair Klobuchar. And this is tying it in with
expatriation.
Mr. Poole. Yes. And that provides an initial capitalization
that comes basically from the private sector, not from the
Treasury.
Vice Chair Klobuchar. And I think, as Mr. Puentes pointed
out, we tried this once and I think people are open to looking
at it again, but the rate has to be right so it actually brings
in the funding that we would need. And I think that's--and I
know people in the Administration and others who are looking at
it, but the rate is what--I think that will have to be
determined to be the right point so we actually are bringing in
significant money.
Mr. Puentes, did you want to comment further on that?
Mr. Puentes. Yes, thank you, Senator. I think that the
members here are right. We have to be careful about this. An
infrastructure bank is not a silver bullet. It is certainly not
going to address all the challenges we have talked about here
today. It is certainly not going to address all the things the
Governor highlighted at the beginning, but we do see when we
look around the room we see what the needs are in the United
States.
And there is an omission right now, and we do not really
have a way to make decisions on projects that are truly of
national significance. So what we would like to see, what I
would like to see, is some kind of entity that is focused on
delivering the economic goals we have as a country.
So the President's goal to double exports in five years is
exactly the kind of far-reaching, ambitious goal connected to
the global economy that we have right now. An infrastructure
bank that would kind of actualize some of those goals, there's
obviously major freight projects that would come along with
that.
Mr. Puentes. In and around the United States ports so that
we are not investing in projects that are--are areas that are
competing with one another.
Vice Chair Klobuchar. Right.
Mr. Puentes. And they would also address the rural areas.
So freight moves all across this country. The country is very,
very large and freight moves from Los Angeles, through Chicago,
and elsewhere--obviously if you're a rural area, the rural
areas would benefit from that directly.
Vice Chair Klobuchar. Right.
Mr. Puentes. So the infrastructure bank is not going to
solve all challenges. I think that we are doing a good job on
the transportation side, but I think that we also need
something that is looking at clean energy; that is looking at
other areas of infrastructure, water infrastructure, and not
continuing the siloed nature in which we make infrastructure
investments today.
Vice Chair Klobuchar. Yes.
Mr. Puentes. It is not going to solve every problem, but it
is certainly going to fill a niche that we know that we need.
Vice Chair Klobuchar. Yes, and I think we have already seen
that Congress was willing to come together on that last two-
year transportation bill. Obviously a long-term bill is much
better, but they are the seeds to get this done.
And I love your point about the goals, because I thought
that was one of the best things the President put out there:
exports doubling in a number of years. Because we are working
to get to that goal, and it made a difference, and people
remember that.
And so that kind of a goal with infrastructure tied in with
some new ideas. And as the Governor pointed out, it is not a
one-thing-fits-all. There was a guy, I was telling
Representative Delaney, up in Moorhead and Fargo near Canada
that actually is a guy that somehow got permission to be in a
shack and charge 75 cents every time someone crosses the
bridge. This is not good public policy.
[Laughter.]
And so that is not the one way to solve everything. And so
I think it is a combination of things that you have talked
about today, and I know there are people yearning to get this
done, and I think it is one great thing we could do to bring
people together. And basing it a lot--people don't talk enough
about the freight issue, and the exports, and the industry
willing to pay more for locks and dams. There are a bunch of
people in the private sector that want to join in and be part
of this, and we have got to give them the vehicle to do it.
All right, with that I am going to turn it over to
Congressman Delaney while I go to Judiciary and hopefully come
back, and Senator Coats, thank you.
Representative Delaney [presiding]. Senator Coats.
Senator Coats. Well this is an interesting topic here. I am
enjoying the input that has been given us by the witnesses.
I want to go to an issue relative to what both Governor
Rendell and Mr. Edwards were talking about, and that is the
role of the Federal Government, the impact of keeping it within
a political process.
You used the example, Mr. Edwards, of Amtrak. When the
political process intervenes in the decisionmaking process, it
distorts the market. And while Amtrak running up the East Coast
is a demonstrated market, stops in your state, Governor, and
yet in order to continue to subsidize that program--I am not
going to name any particular states--but the line that runs
from A to B better stop in Timbuktu to pick up the two
passengers a month that get on there or I am not supporting
anything that is going to stop in Philadelphia, or going up the
Coast.
That is just a small example of what we run into. So I
wonder, how do we address that? How do we pull all this--how do
we define the federal role in a way that the politization
process does not distort the market in a way that discourages
investors from the private sector, in a way that misallocates
money out of the taxpayer's pocketbook.
Any comments? I'll start with you, Governor, and then Mr.
Edwards.
Governor Rendell. Let me start off with the fact that you
have dealt successfully with one of the problems, and that is
over-regulation of transportation infrastructure. MAP-21 did a
very good job in reducing some of the regulations and cutting
timelines.
The President, as you know, has issued an Executive Order
to cut those timelines by 50 percent. That would be enormously
helpful to us both on costs and in getting things done quickly.
So you have already done that. But the way to get politics
out of the major projects, you are still going to have to give
states basic grants to help them with their overall needs. But
to take a good hunk of what the federal commitment is, give it
to the infrastructure bank for projects of, as Mr. Puentes
said, national significance and let states or groups of states,
or private entities, come in and compete. And the
infrastructure bank makes those decisions based on cost/benefit
analysis, based on a review of the project to see whether
they're workable, whether there's a reasonable return on the
investment. That is one way of doing it.
A second way of doing it is through the TIGER grant
process. The best thing about TIGER, one, it allowed states to
combine an application. So we got regional projects.
Two, TIGER leveraged private investment.
And three, it was competitive. And the decision was made by
U.S. DOT, and most of TIGER's decisions were based on cost/
benefit, not on politics. Every state did not get a project out
of TIGER. TIGER funded the major projects.
So the more competitive you make it, and the more you give
the decisionmaking--I know Congress is always loathe to devolve
decisionmaking to someone else, but if you give decisionmaking
to people who are experts and who are somewhat insulated from
the political process, we can do this. We can absolutely do it.
It works in Europe, and it can work here.
Senator Coats. Mr. Edwards, did you want to respond to
that?
Mr. Edwards. You know, part of the idea with an
infrastructure bank is to get more private financing for
infrastructure, and that is great and I am all for that. But
the problem with having a federal national infrastructure bank
is that the decisionmaking on infrastructure projects becomes,
you know, national and ultimately political decisions.
I can name you agency after agency, Army Corps of
Engineers, on down the list, where politics intrudes decade
after decade and you just cannot get around it at the Federal
Government level.
We need to decentralize decisionmaking. The people spending
the money need to be raising the money and spending it so that
they can make the proper cost/benefit analysis. Highspeed rail
is a good example of this.
You know, if California wants to raise its own money, as it
has, with bonds, and go for highspeed rail, you know, good for
them. Let them experiment. The rest of the country, the other
49 states can watch how well the system works and decide
themselves whether they want to go down that road.
But the problem with federal intervention is it distorts
the decisionmaking by state and local governments. And one good
example of this, for example, is federal grants for urban
transit. A lot of money over the years has gone to lightrail.
Cities have gone for lightrail systems when bus systems would
probably be more efficient, because the Federal Government pays
the capital costs. The lightrail systems have high capital
costs. Cities figure, well, let's grab the federal money for
the capital costs for the lightrail, even though really in the
long term bus systems are usually always more efficient.
So I am really concerned about the problem when the Federal
Government intervenes. It distorts the more efficient state and
local decisionmaking.
Senator Coats. How do we get around the--when I talk to
mayors, governors, and others, they say, you know, so much of
our early cost, and so much of the decisionmaking and the
timelines are skewed simply because we continue to run into
lengthy, almost never-ending environmental impact statement
challenges to those, and so forth. We have that going on in our
state right now, as well as the permitting process.
I would like to have whoever wants to speak to that.
Governor Rendell. Well, again, you did a good job of that
in MAP-21, and the President's Executive Order cutting the
timelines for environmental impact statements. Some of them
take seven, eight years to complete.
Senator Coats. Right.
Governor Rendell. There is no reason under God's good earth
that it cannot be done in six months. You know, if you tell
people they have got unlimited time, they will use unlimited
time. If you tell----
Senator Coats. Sounds a lot like Congress.
[Laughter.]
Governor Rendell. Well, right. I always use the example, if
someone comes into a law firm and says I need an opinion letter
and I need it next Tuesday, and the head of the firm says: Oh,
well this is a respectable firm and we could never do it in
that short period of time.
He pulls out of his pocket a cashier's check for a million
dollars? They get it done. They get it done.
If you give six months for an EIS to be completed, with
only the most stringent waiver provision, it is amazing how it
would get done. When we prepared for stimulus, I wanted
Pennsylvania to spend our money quickly because I knew the
stimulative effect on roads and bridges.
I called my contractors in. I said, you usually get six
months to respond to an RFP. You have two months. You've told
me nobody is working, so you've got two months.
I said to my bureaucrats, you usually take six to nine
months to award. You've got two months. And we had people
working with stimulus dollars in three months. Congressman
Oberstar's committee ranked the states on how quickly they
spent the transportation stimulus money and we were tied for
first with three other states.
It can be done. It can be done. That is where Congress can
I think really do something terrific by insisting that it gets
done.
Senator Coats. I want Mr. Poole to respond, but I just want
to say, Governor, with your permission I want to take some of
those quotes that you just said. I'll make sure you have
attribution for those quotes, but I am going to be repeating
quotes of a Democrat Governor all over the State of Indiana.
Governor Rendell. No question.
Mr. Poole. I think the Governor's points about getting the
time for environmental reviews much shorter illustrates that we
made some progress with MAP-21, but it isn't really where we
need to go. It should be much shorter than that with time-
certain time periods.
But it is also the question that I raised briefly of the
higher cost of a federal dollar. Many states will not take
federal money--you know, they try very hard not to use federal
dollars on highway projects unless they absolutely need it
because, ``Buy America,'' Davis-Bacon, these other things that
Congress has imposed mean the cost is much higher.
And now, with Buy America, FHWA has administratively
decided that now it applies to utility relocations, as well,
that everything that is used in a utility relocation has to be
made in America. Utility companies have no idea where their
stuff is made. They do not have the inventory system to do
this. So it is threatening to hold up billions and billions of
dollars of transportation projects over a new administrative
interpretation.
Senator Coats. Thank you.
Mr. Delaney.
Representative Delaney. Thank you, Senator Coats.
I will use my time now, and then I will turn it over to my
friend from New York.
You know, as we listen to the conversation that we have
just had and we talk about the scale of the infrastructure
challenges we have in this country, which also symmetrically
indicates that we have a huge opportunity in this country to
make this investment and get Americans to work, it is clear
that this problem that we have is a multi-dimensional problem--
meaning, we have it for a variety of reasons.
We have it for political reasons. We have it for financial
reasons--in other words, there has not been sufficient money
allocated against some of these issues. And we have it, quite
frankly, because the world has moved very quickly. And the
infrastructure is a long lead, long tail business and there
have been rapid changes in the world particularly in the last
20 or 25 years that, particularly around logistics and
communications and energy, et cetera, have accelerated much
faster than people could reasonably have predicted. So there
are lots of reasons we have these problems, which to me means
we should have multiple solutions against this problem. The
classic, you know, we need many tools in the toolkit.
And in my opinion, this issue should be our central, and I
think, Governor, you said this very well in your testimony--
should be our central economic domestic priority. And all of
the solutions that we have heard: increasing privatization,
reducing regulatory burden, coming up with a variety of
infrastructure financing tools, should all be considered very
seriously because they are probably all needed.
As the Governor said, the cost of doing nothing is in fact
not nothing, and we are paying that price, and we should be
putting our shoulder against all of these things. Because in
fact they pencil out.
This is actually a really good investment for us to be
making in this country. As Mr. Edwards said, we should not be
making all this investment. A lot of it can be done by the
private sector, and we should be laying that groundwork. But at
the end of the day, there will be certain core governmental
investments that have to be made. There are certain core
financings that have to be made.
One of the things we have tried to work on with our
legislation is also thinking about the time horizon.
Because to some extent I think this notion of shovel-ready
projects, while it is catchy and it makes sense, does not
always correlate with good infrastructure policy.
Because in fact if you travel around the country and you
look at decisions that have been made around infrastructure,
even if they will take years to actually implement because of
the scale of the projects, create really good economic activity
immediately because people know they are going to happen.
In other words, if there is a commitment to widen a port
and it is going to take five or six years to do it, even with
an accelerated approval process, et cetera, everything will
start changing around that port, which is why we have tried to
come up with an entity that can operate in a disconnected way
from the normal political cycle.
So, maybe, Governor, I would be interested in your views on
how we should think about the timeframe for some of these
projects, and planning in general, and then maybe Mr. Edwards
maybe you would comment on that, as well.
Governor Rendell. Well in terms of the timeframe, right now
if you read the ASCE report we need to fix it first. Although
we do need new capacity--I mean, there is a stunning statistic
that since 1980 our percentage of vehicles on the road has
increased by 104 percent. Since 1980, our lane capacity has
increased by 4 percent.
So we need to expand our infrastructure. But first we need
to fix it. And the good thing about fix-it-first is it is very
stimulative because you do not have to go through EISes. The
reason I was able to get work done in three months is because
we were fixing bridges. We were fixing roads. There is very
little--there is no requirement for an EIS at all. So you can
get to those projects quickly.
Right now, the biggest challenge for America is to fix what
we have. I mean, again I hope you can get your staff to read
the full ASCE report. It is outright frightening, frightening
and disturbing. So if you fix it first, that is going to speed
up the timeline.
For projects, one thing I would differ with Mr. Edwards on
is there has to be an entity to help fund regional projects. So
it does no good for let's say the State of Pennsylvania to put
in a rail system that goes through to Ohio, and then all the
way up to Minnesota let's say, with one type of new technology.
If Ohio is going to have a new type of technology, that will
not work. The trains will not be able to run if we have a
MagLev system and they have a conventional highspeed system.
So there has got to be a vehicle for those projects. So
there has got to be long-term vision with good controls and
good speed mechanisms, but fix it first is going to solve a lot
of our problems.
Representative Delaney. Mr. Edwards, very quickly.
Mr. Edwards. You touched on something really important,
which is it is not the short-term jobs, which is often the
focus in Washington. It is long-term efficiency. With seaports,
we need to make them more efficient.
The issue is not the short-term Army Corps of Engineer jobs
dredging seaports, it is the long-term efficiency that our
manufacturers and producers can have more efficient seaports to
take the bigger ships that are coming with the bigger Panama
Canal. That is the issue.
And with seaports, for example, they can be fully
privatized. Britain has fully privatized most of its seaports.
The top seaports in the world--Hong Kong and Singapore--are
private. The advantage is, in a private company they see
customer demand rising, they see the shipping demand rising,
they go out to the market and they raise capital. They do the
work. They do not have to go to Washington to lobby. If you
have private ports, they can get things done quickly.
Representative Delaney. Right. Thank you.
Governor Rendell. But they can't dredge. And the most
difficult thing that the Atlantic ports have to do is dredge to
the depth that can accept those big ships coming through the
Panama Canal. Only 2 of our 12 Eastern ports are dredged
sufficiently to do that. We are going to lose a whole boatload
of business to Canada because of that.
Representative Delaney. It is a really important point.
I want to turn it over now to my good friend from New York
who actually happens to know a lot about transportation,
Congressman Hanna.
Representative Hanna. And you are right, we ought to use
the money that is in the Harbor Trust Fund. I mean, it is just
sitting there as an offset, as opposed to what it is intended
to do.
Explicit in this conversation is the notion that the
private sector is so much more efficient than the public
sector. We know the public sector does not pay taxes on its
property. We know that it can issue low-cost bonds, and we are
all agreed that, generally speaking, the Federal Government,
with all its rules and prescriptive things that it impugns on
local and state communities, really add to the overall cost.
Yet we also know that private businesses need an internal,
or just a basic rate of return. I want to ask you. If we go
forward with this, say take an airport, we are basically
creating mini-monopolies that have long-term projected income
streams and long-term projected debt streams, and all based on
the assumption that the government cannot do it as well--which
I believe.
I want to ask you, Mr. Edwards, what do you think the
marginal capacity for those rates of return is based on your
understanding, and anyone, about the general inefficiency of
government? And Davis-Bacon aside, and other things like that,
which I think are not something that, politically, we are not
going to change in my opinion.
So what do you think?
Mr. Edwards. I am not sure exactly what your question is,
but I mean private investors, there is absolutely no doubt that
it is absolutely crucial. They want to earn profits. The search
for profits induces efficiency. It makes companies try to
reduce costs and maximize the customer's----
Representative Hanna. Well, Mr. Rendell, Governor Rendell
has said that there are 1,500 private airports out of thousands
of airports, correct? Somebody must have looked at those and
said these are the viable ones for the private sector to take
over. The rest are not.
I guess what I am asking is, does anybody have an idea of
how inefficient government is vis-a-vis the private sector?
Mr. Edwards. There have been some comparison studies of the
P3s, for example, on traditional government contracting. I
mean, there is an Australian study, actually I think I've got
right here, that compared a couple dozen P3s to traditional
government contracting. And there is no doubt that private-
sector companies, they get stuff done on time and on budget.
The Capital Beltway P3, for example, was finished last year
on time and on budget because there was a strong incentive. If
private actors put in their own equity, they've got to keep the
costs low. They've got to make things finish on time.
Representative Hanna. So two possibilities exist here. We
have a, take 20 percent if you want an internal rate of 10, so
the public benefit arguably could be that difference, that 10
percent; it could be much wider. But we could enjoy both of
those benefits. We could clean up our own mess.
Because we run the risk of being too prescriptive going
forward even to private organizations, plus we run the risk of
creating these mini-monopolies over some local bridge that
maybe the math was wrong and these review boards that were done
locally were not adequate.
Governor Rendell. Well the key on private/public
partnerships, Congressman, and your point is well taken, but
the key is the eventual contract. We tried to lease the
Pennsylvania Turnpike, and my legislature, my Republican
Legislature, turned it down because they wanted to control the
patronage. They did not want to turn it over to a private
entity.
We got a $12.8 billion bid from Citibank and Albertus. When
the recession hit, they would have been holding the bag with
the risk, but the taxpayers of Pennsylvania would have gotten a
great deal. But the key there is the contract.
When you lease--you don't ``sell'' to a private entity, you
lease it. And then you have in the lease the same rights than
an owner who leases his house has. You have oversight. You put
in maintenance standards they have to meet.
So it depends on the level of government oversight. But the
real savings come on the operational side, because the private
sector can and almost always--almost always; there are some
exceptions--operates at a lower cost because of union costs,
and not necessarily it's going to be nonunion, but because of
existing contracts, because of the number of people who are in
a workforce, they can reduce that; because they've got money to
invest in technology faster than the government does.
So it is the operational nut. When they figure out what
their rate of return has to be, they are talking about revenue
but they are also figuring out how they--what percentage they
can cut costs, and those two things factor in together.
Representative Hanna. Airports in France, Mr. Poole, how do
they compare to ours? We know that there are a great many
private.
Mr. Poole. Well, actually in France the airports are still
largely government airports. Aeroports de Paris has sold about
a third of the equity to investors, but the government still
owns the majority share.
Airports in the UK are mostly privatized, but they do--the
largest ones, where there are monopoly problems, they do have
utility regulation on the prices they can charge. So it is
similar to what we do with electric utilities in this country
because, again, of monopoly issues, having some form of
government oversight.
Representative Hanna. Have there been studies done on the
differences between say how we do in our airports, what they
cost, and those elsewhere?
Mr. Poole. There have been a few. There is a very good
study out of the University of BC in Canada that looked at a
database of almost 200 airports worldwide and concluded that
the ones that were--that had either majority private, or 100
percent private ownership that could include a long-term lease,
were more productive, more efficient in terms of operating, and
that the least productive were full government ownership and
multi-function port authorities, unfortunately, for the New
York Port Authority.
Representative Hanna. Thank you. My time has expired.
Mr. Puentes. If I can just jump in, I think this
conversation is very important. I think what I would like to
take away from this is that we need to get away from just this
idea of either things being public or private, and this rigid
kind of notion of privatization.
What we see emerging throughout the country is an awful lot
of innovation that is happening outside the Beltway--the
states, metropolitan areas, cities, all working with the
private sector in cases where it may or may not fit.
I mean, so all projects, as you mentioned are not going to
be appropriate for private interest. They're not going to raise
revenue. They're just not interested in those kinds of
projects.
So what I would like to see happen is to kind of get to
where it is this mix, where it is not the Federal Government on
top kind of working with states and metropolitan areas, but it
is all mixed up with the private sector. And some projects are
going to make sense, and some are not.
So the BC example is a great model. There is something
called Partnerships BC in British Columbia where when they are
evaluating projects they have to decide whether or not a
private entity is going to make sense for this.
So they have to look all across the board. Sometimes it is
going to work, sometimes it is not. So I just want us to get
past the notion that it is either going to be private or it is
going to be public, and one is better than the other. It is
very complex. There are lots of different projects out there,
and it really depends on what we are trying to do.
Governor Rendell. And if you widen it beyond just
transportation--take drinking water, a big problem--EPA
estimates we are going to have to spend $335 billion in the
next 20 years to put our drinking water in decent condition to
preserve it.
There are some rich areas. You go into Lower Merion
Pennsylvania and there is not a private water company in the
world that would not want to provide the water to Lower Merion.
But you tell them they are going to provide the water to parts
of north Philadelphia and there would be no bidders. There
would be no bidders because there is no revenue to support
increased rates.
So again, there is no one size that fits all. But I think
the point we are all making, Democrats and Republicans, the
witnesses, we are all making that the private sector has to be
an option going forward--one of the arrows we have in our
quiver, there is no question about that.
Vice Chair Klobuchar [presiding]. Very good. I know
Representative Delaney had some additional questions.
Representative Delaney. Yes, I thought that was a very good
discussion. And I think we also should be thinking about
public/private partnerships both on a project level, which I
think is the historical kind of framing for how we think about
these things, but also to some extent on a more macro level.
One of the things we have tried to do with our legislation
is fund an infrastructure bank by effectively creating a giant
public/private partnership. In other words, it is funded by
private capital and provides a tax incentive by allowing
companies to repatriate earnings. But again, done in a very
market-based approach where we actually auction off the bonds,
and we actually get the best deal for the taxpayer by doing it
that way.
But the other--and, Mr. Poole, the other observation or
question I had for you is: We all need to think about
efficiencies in terms of how we finance these activities. One
of the things we have tried to focus on in our legislation is
having the infrastructure bank, for lack of a better term, be
more of a bond guarantor.
Because it seems to me, while it may make sense in other
countries to lend directly to the projects, in our country
local governments have the ability to issue debt on a tax-
exempt basis. And for as long as that exists, which I hope it
exists for a very long time, that is a very advantageous way
for local governments to borrow money. And to the extent we
have a larger financial support enterprise, it should be
actually guaranteeing their debt, as opposed to lending
directly because of the efficiencies.
I don't know if you have any views on that?
Mr. Poole. Yes, I agree, Congressman. I think that is a
very important point. We used to have bond insurance for
infrastructure kinds of projects in this country until the
financial crisis. And Ambac and others basically went out of
business at that point.
So there is a gap in the market right now that really would
be much better for infrastructure investment if there were the
kind of bond insurance, or analogous bond insurance that used
to exist before the financial crisis.
So that is another point that I like about your proposal,
is that that is a gap that needs to be filled and it would help
a lot.
Representative Delaney. And, Mr. Edwards, you talked about
how local governments should be driving a lot of these
decisions, which I agree with. I don't think they should be
driving all the decisions because some of these decisions are
inherently federal and multi-jurisdictional and of national
importance, but the model where local governments really have a
say in determining their own infrastructure. And when you think
about infrastructure banks proposals, or in our situation more
of a bond guarantor, which is more geared towards local
governments, do you see this being more of an enterprise that
operates against a national strategy? Or do you think these
enterprises would be better if they are focused on serving the
needs of local municipalities?
Mr. Edwards. I haven't looked at your legislation in
detail, but I mean for me the decisionmaking should be where
the money is raised and money is spent. If different people are
raising the money than spending it, you get bad decisionmaking.
So I just like to see decentralized decisionmaking, which to me
means decentralized financing and ownership.
Representative Delaney. Right. Well those are all my
questions. I just want to again add my thanks to Governor
Rendell, Mr. Poole, Mr. Puentes, and Mr. Edwards for their
thoughtful testimony and for carving out their time. It was a
terrific discussion.
Vice Chair Klobuchar. Thank you. And just one last question
I have is just how maintenance fits in with this.
I always think about when we do these ribbon-cuttings for a
new transit project, or a new bridge, and when you fix a
pothole there's not usually a bunch of people celebrating. And
so--or you fix a gusset under a bridge.
How do you think the road maintenance and the bridge
maintenance fits into all of this, Mr. Poole, and then Mr.
Rendell.
Mr. Poole. Two answers to that. One is that a growing
number of state DOTs are having great success with
competitively contracting for highway maintenance. Virginia is
one of the pioneers plus Texas and Florida. And so that is a
way in which you can often get more value, more maintenance per
dollar spent than doing it with state employees.
But the other is a point I made briefly, and you may have
been out of the room when this came up, is that if you do long-
term infrastructure PPPs where the entity created to finance,
build, and operate the project also maintains it over a life
that may be anywhere from 30 years to 75 or 99 years, so you
basically create a guaranteed source of maintenance funding in
those kinds of long-term arrangements.
So if you think of the overall highway responsibilities of
a state DOT, if 20 percent of that can be converted to long-
term P3s, that whole sector then is guaranteed for a long
period of time to be properly maintained. And the state in an
annual budget sense only has to come up with, you know, be
responsible for looking at the maintenance for the rest of it.
So I think that is an advantage of the long-term P3s that is
often not fully appreciated.
Vice Chair Klobuchar. Governor?
Governor Rendell. First I want to correct one thing Mr.
Poole said. Most states, I would say 95 percent, almost 100
percent of the maintenance as well as the building work is done
by private contractors. The state workers are usually doing
oversight or a little bit of painting, but we bid out
everything. Pennsylvania bids out everything, maintenance as
well as new construction.
Let me just give you an example of one area in response to
your question. I-95 runs through the City of Philadelphia for
18 miles. There are 14 bridges in those 18 miles that I-95 goes
over. It is estimated to put those bridges, most of which are
either structurally deficient or functionally obsolete, into
fair, decent, safe condition would cost $4.5 billion.
The City of Philadelphia's entire capital budget for
everything--police stations, fire stations, rec centers, road
paving--is $120 million a year.
Now there are two ways to do that. If we were allowed to
toll I-95--we can't because it is a previously accredited
federal highway--they grandfathered the states that already
tolled it, but we can't--we would have a chance to raise some
of that money.
Or, alternatively, we are going to need federal investment.
And that is just maintaining. But it is maintaining the
Nation's largest highway. It is a state and local
responsibility and we need help.
Vice Chair Klobuchar. Okay. Very good.
I see Representative Maloney is here. If you want to ask a
few questions, then we are going to end, I think.
Representative Maloney. Everything is happening at once. We
had votes in Financial Services, and then we had votes in
Government Reform and Oversight.
I just feel that infrastructure is so important, why are we
not investing more in infrastructure? It creates good jobs. In
the district that I am privileged to represent, I have two
major construction projects--the 2nd Avenue Subway and the
Eastside Connector--both of which have over $4 billion in
federal funds and are creating over 40,000 jobs.
My question really is on highspeed rail. Our country used
to lead the world in infrastructure, and now we are falling
apart. When you go to Europe, to China, to India, they all have
highspeed rail. And particularly on the Northeast Corridor, it
would be a corridor that makes money now for Amtrak, and it
would make money if we had highspeed rail between--I see
Governor Rendell--between Philadelphia and Washington and New
York, to Boston, all of this area.
Your thoughts on how to move this forward. Do you think it
would be possible to do a public/private match that would be
able to protect the union agreements, but would also give us
the money to move forward? It is obviously a financing deal.
And there has been a debate in Congress over an infrastructure
bank.
Some people support it as a financing mechanism. Others say
it is just another level of bureaucracy. If you want to fund
it, float your bonds. Float your financing system and just move
forward. What do you need an infrastructure bank for?
I would like to open it up for answers and questions. We
did get a highspeed rail downpayment of $300 million between
New York and Boston, which I find very exciting. But comments
on those?
Governor Rendell. Congresswoman, I think I can speak for
all four of us. We all endorsed the concept of the
infrastructure bank. We may have some differences about how it
should operate, et cetera, but we all endorsed the concept.
In terms of what you're saying, a Northeast Corridor
highspeed rail could not be a better example of a PPP. Let me
preface this by saying I am on the advisory board of Japanese
MagLev, which if it were instituted on the East Coast you could
get from New York to Washington in 59 minutes, Philadelphia to
New York in 23 minutes. They are opening up in Japan in
November a 310-mile-an-hour MagLev system, and they want to
construct it, and they are willing to put up part of the
funding.
It should be like the TIGER grant. The Federal Government
should put up part of the funding. The majority of the funding
should come from the private sector. But the states that
benefit from it should also put up part of the funding.
We wanted to expand the Philadelphia to Harrisburg Rail
Line. Amtrak, while I was Governor, wanted to put $75 million
in. I matched the $75 million. We cut the travel time from 120
minutes, 2 hours, to 90 minutes. We increased ridership from
900,000 to 1.2 million.
If we had highspeed rail in the Northeast Corridor, you
could end the shuttles, the air shuttles. It would do so much
for tarmac waiting time to get rid of those shuttles. We ought
to be doing this. It ought to be our first big infrastructure
bank PPP partnership.
You would have not only the Japanese MagLev people, but you
would have a lot of bidders from the private sector. I think we
all agree with that. The private sector would be happy to come
in and bid for that.
Mr. Edwards. I would just note, if I may, that most
highspeed rail lines in the world do not make money. And the
Northeast Corridor, you know absolutely passenger rail probably
would make sense.
The problem, if the Federal Government gets heavily
involved in funding highspeed rail on the Northeast Corridor,
every state in the Union is going to want federal money for
their own highspeed rail lines through areas that make--where
it makes a lot less sense.
So this is a problem with federal involvement, that there
is always the political problem that people want the money
shared around, and yet customer demand wise, highspeed rail may
only make sense in some areas like the Boston to Washington.
Governor Rendell. Well the Acela makes money, and Lord
knows how much money a highspeed rail line would make. But that
is the job of the infrastructure bank. You insulate the
infrastructure bank from political pressure, like the BRAC
Commission, which by and large works pretty well. Philadelphia
has been the unfortunate negative recipient of a lot of BRAC,
so I know it works pretty well.
[Laughter.]
You insulate it, and you have those decisions made on a
cost/benefit analysis. He is absolutely right. The Northeast
Corridor is the first project we should try. If that makes
money, then maybe we examine California to Oregon and see if
that would make money. And then we examine the Midwest and see
if that would make money.
But everyone knows that if the Acela makes money, and it
does as a standalone, you know highspeed rail would make money.
Vice Chair Klobuchar. All right, one last answer.
Mr. Puentes.
Mr. Puentes. We need to think differently about the
partnerships. I mean, the Japanese examples are great because
it is not just the rail line in which the company is investing,
it is real estate deals around the Tokyo train station, 3
million passengers a day, whatever it is. That is all a real
estate deal also owned by the railway company.
So we've got to get beyond just thinking about these as
individual structure projects and think about it more as
economy shaping type projects.
Vice Chair Klobuchar. Well thank you. That is a great way
to end. I want to thank our witnesses, excellent job. We had
great attendance, once again, at this hearing. And I know that
there is a lot of work that needs to be done.
We have people right up here, including Representative
Delaney, and Senator Warner, and others who are devoted to
getting something done on the infrastructure bank part of this.
But as we have discussed with Governor Rendell, there are
also other things we need to do with bonding and other things
that I think could be very positive.
So we are excited to move ahead with this, and I hope it
will be one of our top bipartisan efforts in the coming year.
It should be, and it will be. Thank you very much, and the
record will stay open for the next two weeks, and the hearing
is adjourned.
(Whereupon, at 11:03 a.m., Wednesday, July 24, 2013, the
hearing was adjourned.)
SUBMISSIONS FOR THE RECORD
Prepared Statement of Hon. Amy Klobuchar, Vice Chair, Joint Economic
Committee
I want to thank everyone for being here this morning to discuss the
critical need to strengthen and improve our nation's infrastructure
system.
I'd like to introduce our distinguished panel of witnesses, who
have a wealth of experience and insight in this area:
Edward Rendell was Governor of Pennsylvania from 2003 to 2011 and
previously served two terms as the Mayor of Philadelphia. He is a co-
founder and co-chair of Building America's Future, which focuses on the
need for more significant investment in infrastructure to ensure
America maintains its place as a global economic leader.
Robert Poole is the Searle Freedom Trust Transportation Fellow and
director of transportation policy at the Reason Foundation. Mr. Poole,
an MIT-trained engineer, has advised both Democratic and Republican
administrations.
Robert Puentes is a senior fellow with the Brookings Institution
Metropolitan Policy Program, where he also directs the program's
Metropolitan Infrastructure Initiative. He is an expert on
transportation and infrastructure, urban planning, growth management,
suburban issues and housing.
Chris Edwards is the director of tax policy studies at the Cato
Institute. He is an expert on federal and state tax and budget issues.
Mr. Edwards previously served as a senior economist with the Joint
Economic Committee.
If you look back through American history, many of the greatest
periods of growth and progress were made possible by historic
investments in infrastructure.
We connected the East and the West Coasts by rail in 1869, ushering
in the Second Industrial Revolution.
We began building the interstate highway system in the 1950s,
connecting our country and our economy in ways never before possible .
. . and we did it, by the way, with a Democratic Congress and
Republican President Dwight D. Eisenhower in the White House.
America is the country it is today because we've been willing to
invest in the foundations for growth, innovation and commerce. In
recent years, however, we've fallen behind. The World Economic Forum
ranked American infrastructure 6th in the world in its 2007-2008
report. Five years later, we have slipped to 25th place.
The cracks in our broken transportation system became tragically
clear in my home state on the afternoon of August 1, 2007, when the I-
35W bridge collapsed into the Mississippi River . . . taking the lives
of thirteen and injuring many more.
As I said that day, a bridge should not just fall down in the
middle of America . . . .especially not an eight-lane interstate
highway, which is one of the most heavily traveled bridges in the state
. . . especially not at rush hour in the heart of a major metropolitan
area . . . especially not a bridge six blocks from my house that I
drive over with my family every day.
I was with Secretary of Transportation Anthony Foxx in Minnesota
last Monday, and pointed out that the I-35W bridge was rebuilt on-
budget and in just 9 months . . . well ahead of schedule. How were we
able to do it so quickly? Because we had a bipartisan group of leaders
working around the clock at the state, local and federal level.
But our infrastructure problems are by no means limited to just
bridges.
According to the American Society of Civil Engineers 2013 Report
Card, the U.S scores a D or worse in aviation, dams, drinking water,
levees, roads, schools and transit. Our bridges and rail system score a
C+, while our ports get a C. We cannot be satisfied with ``failing,''
or even ``average,'' and we need to improve our grades now.
We know this is a matter of public safety, but it is also a matter
of economic competitiveness.
The reason American businesses can operate anywhere, including in
rural areas, is because our past investments in transportation
infrastructure allow them to get their products to markets around the
world.
Compared to other countries, we're now underinvesting in these
networks: China and India are spending about 9% and 8%, respectively,
of their GDPs. Europe spends 5%, while we are spending only about 2%.
This strategy is penny-wise and pound-foolish, saving dollars in
the short term while undermining our global competitiveness in the long
term.
And in fact, faulty transportation infrastructure is expected to
drive up the cost of doing business in America by an estimated $430
billion in the next decade.
What we need now are smart, targeted solutions to ensure our
nation's infrastructure is safe, strong and efficient.
I introduced a bill last Congress called the Rebuild America Jobs
Act, which would have gotten the ball rolling on desperately needed
infrastructure investments, in part by creating a national
infrastructure bank--an idea that has historically won bipartisan
support as well as the backing of everyone from the AFL-CIO to the
Chamber of Commerce.
While we weren't able to bring that particular proposal across the
finish line, we have made good progress in other areas:
Over the last four years, we've improved over 350,000 miles of
roads and more than 6,000 miles of rail.
We've repaired or replaced over 20,000 bridges.
We passed a bipartisan highway bill last year that has paved the
way for critical infrastructure improvements across the county.
And back in May, the Senate passed the Water Resources Development
Act (WRDA), which would strengthen our nation's water infrastructure
and make crucial upgrades to our ports, harbors, locks and dams. WRDA
includes many provisions of the RIVER Act, which I introduced with
Senator Casey to improve our nation's inland waterways.
So we are moving in the right direction. But we're here today
because we still have more to do.
There are several good ideas out there, including a number of bond
proposals and efforts to establish an infrastructure bank. Senator
Warner and Representative Delaney, both members of this Committee, have
been leaders in putting new ideas forward and I know we'll be hearing
about some of those ideas today.
Ultimately, this is about strengthening our economy. America must
be a country that makes stuff again, that invents things, that exports
to the world. Whether it's roads, bridges, transit, airports or
waterways, the need to rebuild our infrastructure is critical to
reclaiming our country's competitive edge . . . to getting workers back
on the job . . . and to ensuring the safety of our people.
I'd like to thank our witnesses for being here, and I look forward
to hearing their testimony. Now I would like to yield 2 minutes to
Representative Delaney.
__________
Prepared Statement of Senator Daniel Coats
Thank you Senator Klobuchar, and I am pleased to be here today for
what is a very important hearing because, to use an infrastructure
term, we are at a crossroads.
As a nation, our infrastructure is in a deplorable state according
to many recent reports. Our funding mechanisms have broken down, and we
are failing to maintain what we have, let alone build the 21st Century
infrastructure that we need. The fact is that our current fiscal crisis
prevents us from having the ability to invest more federal dollars on
these vital projects, largely because of spiraling mandatory spending.
Meanwhile, several of our global competitors have turned to innovative
private financing options to cover their shortfalls. Australia, Canada,
the EU, and the United Kingdom already rely heavily on private
investment, with hundreds of privately financed infrastructure projects
already up and running or in the works. The U.S. is far behind the
curve on private investment in infrastructure, and unless this is
addressed it will only continue to impede our economic growth and
competitiveness.
The need to address our infrastructure crisis is urgent. The Panama
Canal widening will be completed in the next two years, and with it
will come container ships calling on America's ports that are almost
double the size of today's vessels. We expect to see freight movement
in this country double over the next 20 years. This explosion in
freight movement comes with additional jobs that grow communities. But
as we face this dynamic growth over the next 20 years, we as a nation
do not have a comprehensive strategy to address these expanded
infrastructure needs at our seaports, on our railways, and across our
highways, bridges and roads. Our user fee systems are broken. Our
permitting processes are costly, both in time and money. The cost of
our inaction is jobs and growth, as global competitors like China,
India, and Brazil make expensive and necessary investments across their
entire infrastructure.
I'm going to brag about my Hoosier State for a minute, where
freight movement is such a critical part of our economy. Seventy-five
percent of the United States and Canadian populations, over 261 million
people, live within one day's truck drive of Indiana. Each year, 724
million tons of freight travel through Indiana, making it the 5th
busiest state for commercial freight traffic.
We have a network of more than 680 commercial and general aviation
airports, including the 6th largest cargo airport in the nation at
Indianapolis International Airport.
Indiana ranks 15th in the nation in total foreign and domestic
waterborne shipping with 67.5 million tons, 4th in total freight
railroads, and 9th among all states for railroad mileage.
Indiana is 1st in the nation for interstate highway access with 14
interstates, 1st in the nation in pass-through interstates, and 10th in
the nation in rail tons originated with over 50 million tons. In short,
Indiana is America's crossroads.
As such, we recognized early on how important infrastructure is to
our economy, and how we had to continually maintain and expand our
infrastructure. Indiana was one of the early adapters in our country in
the use of innovative financing mechanisms for transportation and
infrastructure.
Indiana established itself early on as a national leader in
leveraging private sector capital and innovation to improve existing
infrastructure and build new infrastructure. The Indiana General
Assembly passed legislation over the last several years authorizing the
Indiana Finance Authority to enter into public-private partnerships, or
``P3s.'' Our first P3 was the 2006 lease of the Indiana Toll Road. The
second P3 project is the East End Crossing, which will link Indiana 265
in Utica, Indiana, with Kentucky 841 in Prospect, Kentucky. The East
End Crossing will complete the I-265 outer beltway around the
Louisville metro area and create economic development opportunities in
southern Indiana.
We're also working on another high profile P3, the Illiana
Corridor. Illiana is a bi-state expressway project in northwest Indiana
and northeastern Illinois. Given its central location in the nation,
the northwest Indiana and northeastern Illinois region is heavily
utilized by three sectors of travel: roadways, rail, and air. This
region is also experiencing substantial growth in population and
employment. Population in the Illiana study area is projected to grow
by 175%, and with it employment will increase 225%. As a national link
to transportation and commerce, we see heavy use of our highways. As a
commerce hub, our region is benefitting from the expansion of large
inland ports for logistics and intermodal transfer and logistics. I
fully support this effort and I commend Governor Mike Pence and
Governor Pat Quinn for their leadership on this critical infrastructure
project.
In 2005 our then-Governor, Mitch Daniels, launched an aggressive
10-year transportation plan called Major Moves. Major Moves
significantly improved and expanded Indiana's highway infrastructure. A
total of $2.6 billion was committed to Major Moves from the long-term
lease of the Indiana Toll Road and the plan called for 104 new roadways
by 2015 with 1,600 lane miles. No additional debt or increase in taxes
has been incurred to complete Major Moves projects.
By the end of calendar year 2012, we invested over $7.5 billion in
construction and, among other things, accomplished the following:
65 roadway projects were complete or substantially under
construction;
19 roadway projects were accelerated--when compared to
the original 2006 plan;
We completed 375 new centerline miles, 48 new or
reconstructed interchanges, and 5,030 preservation centerline miles
accounting for 40 percent of the state's inventory;
We rehabilitated or replaced 720 bridges, 13 percent of
the state's inventory, and anticipate by 2015 having completed
rehabilitation or replacement of 1,070 bridges comprising 20 percent of
the state's inventory.
Between 2001 and 2005, prior to Major Moves, the state averaged
nearly $750 million for construction per year. Of that $750 million, an
average of nearly $250 million per year was spent on new construction
while an average of approximately $500 million per year was spent on
preservation projects. Backed by Major Moves funding, INDOT averaged
more than $1 billion in construction dollars invested annually between
2005 and 2012.
Why did Indiana take these steps? Because Hoosiers were tired of
waiting for Congress to act. America is tired of waiting for Congress
to Act. And the longer Congress waits to act, the more jobs will go to
China, Mexico, India, Brazil, and our global competitors.
I recognize that, predominantly, the solution to this funding
problem in the Senate lies within the jurisdiction of the Finance and
Environment and Public Works Committees, but the fact of the matter is
we need to find a solution and we need to find it quickly.
We have a fundamental problem with regards to the depletion of the
highway trust fund as a result of a broken motor fuel user fee system.
We need smart, innovative out of the box solutions.
The Hoosier model works, and I believe it is a ``best practices''
example of what can happen when the legislative and executive branch
can come together in a bipartisan way with out of the box, innovative
proposals. I would encourage the members of the Senate to look to
Indiana as a blueprint for success in this area, and I look forward to
hearing from the witnesses.
__________
Prepared Statement of Hon. Edward G. Rendell, Former Governor,
Pennsylvania
Vice Chair Klobuchar and Members of the Committee, thank you for
the opportunity to testify before you on the urgent need for federal
infrastructure investment. This hearing could not be more important as
I believe this issue is one of the most urgent facing our country.
I am here today as a co-chair of Building America's Future, an
organization that I co-founded with Mayor Michael Bloomberg and former
Governor Arnold Schwarzenegger. Together, we represent a diverse and
bipartisan coalition of state and local officials working to advance
infrastructure investment to promote economic growth, global
competitiveness and better quality of life for all Americans.
Eighty years ago Congress passed and President Franklin Roosevelt
signed the National Industrial Recovery Act that was responsible for
creating the Public Works Administration (PWA). Between 1933 and 1939
the PWA funded and administered the construction of 34,508 large-scale
construction projects such as roads, dams, sewage treatment plants,
ports, airports, schools, hospitals and even major warships for the
Navy. Americans still rely on many of these projects to this very day
including the Triborough Bridge, the Lincoln Tunnel, the Grand Coulee
Dam and the Overseas Highway connecting Key West to the Florida
mainland. With an investment of $6 billion, the PWA funded needed
projects and employed thousands of skilled workers.
This era epitomized the American can-do spirit of building big
things. We need to recapture that spirit because if we don't, we will
continue to fall behind our economic competitors.
Late last year Building America's Future released Falling Apart and
Falling Behind--a comparative analysis of the transportation
infrastructure investments being made by the U.S. and our global
economic competitors. As the title suggests, other countries are racing
ahead of us by making smart, long-term investments in modern
transportation networks such as rail, ports and electric grids to meet
the demands of the 21st century global economy.
The fact that the World Economic Forum had ranked the
competitiveness of U.S. infrastructure number one in 2005 and number
fourteen in 2012 illustrates the challenges before us.
Take a look at some of the port investments being made by our
global competitors in anticipation of post-Panamax vessels becoming the
norm once the newly widened Panama Canal is completed. Since 2000,
China has invested over $3.5 trillion in its ports. Brazil has invested
over $250 billion since 2008. And as a result China is now home to six
of the world's ten busiest container ports while the U.S. has none in
the top ten. Shanghai's port now moves more container traffic in a year
than the top eight U.S. ports combined. Brazil's investment has gone
into its Acu Superport, larger than the island of Manhattan, with
state-of-the-art highway, pipeline and conveyor-belt capacity to ease
the transfer of raw materials onto ships heading to China.
Here at home, and despite a large surplus in the Harbor Maintenance
Trust Fund, the busiest U.S. harbors are under-maintained. The U.S.
Army Corps of Engineers estimates that full channel dimensions at the
nation's busiest 59 ports are available less than 35 percent of the
time. Only two of our ports on the East Coast are deep enough to
accommodate the post-Panamax ships.
The situation on our roads is not much better. The Texas
Transportation Institute's 2012 Urban Mobility Report stated that
traffic congestion had Americans wasting time and 2.9 billion gallons
of fuel at a cost of $121 billion--that equates to $818 per commuter.
And no wonder when one learns that the number of vehicles traveling on
American highways has increased by 37 percent from 1990 to 2010 yet the
miles of new highway lanes have grown by only four percent. This comes
at a time when the nation's population has increased by 25 percent.
The growing congestion on our railway system plagues the nation's
freight corridors, choking economic growth and development throughout
every region of the country. In Chicago alone, the nation's largest
rail center, congestion is so bad that it takes a freight train longer
to get through the city limits than it does to reach Los Angeles. The
cost to mine metallurgical coal in North America is the same as it is
in Australia, but the cost to ship it to the coasts so that it may be
exported to Asia is up to four times greater due to transportation and
logistical costs.
Earlier this year the American Society of Civil Engineers (ASCE)
released its 2013 Report Card for America's Infrastructure and awarded
America's infrastructure a grade of D+. In order to bring the nation's
infrastructure up to a state of good repair, the ASCE estimates that it
will take $3.6 trillion between now and 2020; $3.6 trillion--that is a
very big number. But for America to remain competitive we must have a
first class infrastructure. And that means all levels of government and
the private sector must make strategic investments in infrastructure.
Many at the state and local levels are weary of waiting for
Washington to act and have begun to take matters into their own hands.
This year alone, four governors have signed legislation to increase
revenue for transportation and several others had proposed similar
measures. And the success rate for local ballot initiatives remains
high. In 2012, the success rate of such initiatives was 79 percent.
The West Coast in particular has been a hotbed of innovation and
activity. Earlier this month, the Oregon legislature approved a bill to
allow drivers to pay a fee for each mile they drive instead of paying
the state gasoline tax. The current state gas tax is 30 cents per
gallon and would be replaced by a fee of 1.5 cents for every mile
driven. The program is limited to 5,000 volunteer drivers who will have
several options to report their mileage such as smartphone tracking,
reading mileage from their car's odometer, and even paying a flat fee
to address privacy concerns.
Late last year the states of Oregon, California, and Washington
joined with British Columbia to form the West Coast Infrastructure
Exchange. The intent of the Exchange is to combine expertise and
resources to build projects critical to the region's economic growth
and competitiveness. By combining several smaller projects that on
their own may not attract private sector investment, the Exchange seeks
to maximize investments of public and private sector dollars.
With regard to leveraging public investments with private dollars,
more states have approved legislation granting them authority to pursue
partnerships with the private sector. Currently 36 states and Puerto
Rico have such authority.
In Chicago, Mayor Rahm Emanuel fought for and got approval to
create the Chicago Infrastructure Exchange to leverage private capital
with public funds to fix rundown schools and upgrade water systems.
But we still need leadership in Washington to help prioritize and
fund large-scale projects of regional and national significance that
are too large for any one state or community to handle. Without an
overriding national vision and interconnected network, America's
transportation infrastructure would resemble a patchwork of
disconnected roads and rails; our aviation system would be untenable;
and goods movement would be greatly hindered.
The impending expiration of MAP-21 in September of next year gives
Congress an opportunity to continue to reform the nation's
transportation policy and to get creative in raising the revenue
necessary to keep America moving.
There is no way around it--more revenue is needed to keep the
Highway Trust Fund solvent. The Congressional Budget Office has
reported that ``the current trajectory of the Highway Trust Fund is
unsustainable.'' By 2015, the Highway Trust Fund will not have
sufficient revenues to meet its obligations in both the highway and
transit accounts. Without an increase in revenues or a reduction in
expenditures or further transfers from the general fund, the cumulative
shortfalls in the Highway Trust Fund will total $92 billion for the
highway account and $43 billion for the transit account by the end of
2023.
To regain our economic status as a world leader and to ensure the
quality of life that Americans have come to expect, Building America's
Future recommends:
Immediately creating a commission charged with producing
a ten-year critical infrastructure plan--covering transportation,
water, energy and broadband--that makes significant new investments.
The Congressional Budget Office has concluded that an annual additional
investment of $185 billion would be economically justified and the
American Society of Civil Engineers recommends an investment of $200
billion over the next eight years to rebuild the American
infrastructure;
Passing a long-term transportation bill;
Establishing a National Infrastructure Bank to, among
other things, target federal dollars to economically strategic freight
gateways and corridors and invest more strategically in projects of
national or regional significance that will deliver real economic
returns;
Further increasing the authorization level of TIFIA;
Making the TIGER program permanent;
Raising or lifting the cap on Private Activity Bonds;
Developing other ways to pay for building and maintaining
our roads such as:
--Incorporating congestion pricing and truck
tolling arrangements to more adequately cover
the costs imposed by highway use;
--Lifting the federal ban on tolling
interstates;
--Reinstating Build America Bonds;
--Fees based on miles traveled;
--Reserves built into capital budgets;
--Once the economy recovers, consider raising
the federal gas tax and indexing it to
inflation
The other option is to let the status quo prevail. We can continue
to underinvest in our critical infrastructure. We can continue to sit
on the sidelines and watch countries like Germany, Brazil and Canada
make the investments in 21st century transportation networks and
infrastructure. We can continue to ``fall apart and fall behind.''
Let me be clear. There is a cost associated with doing nothing. The
American Society of Civil Engineers has recently issued a series of
``Failure to Act'' reports that compared current and projected needs
for infrastructure investment against the current funding trends in
surface transportation; water and wastewater; electricity; and
airports, inland waterways and seaports. The final report, released
this January, documents that the total cumulative gap between projected
needs and likely investment in these important sectors will be $1.1
trillion by 2020. It further documents that aging and unreliable
infrastructure will increase the costs to businesses by $1.2 trillion
and to households by $611 billion by 2020.
Infrastructure is an economic driver and has the added benefit of
creating long-term quality jobs. It improves the quality of our lives
and it enhances our economic competitiveness. There is no better time
to invest in America's future. We have seen interest rates at record
lows thereby making it more attractive to build. But as the economy
continues to recover, those rates will begin to rise and so will the
costs to build and repair our nation's infrastructure. We must act now.
Thank you, Vice Chair Klobuchar for the opportunity to testify on
this very important issue. I look forward to answering the committee's
questions.
__________
Prepared Statement of Robert W. Poole, Jr., Director of Transportation
Policy, Reason Foundation
My name is Robert Poole, Director of Transportation Policy at the
Reason Foundation. For more than three decades I have been researching
privatization and public-private partnerships at local, state, and
federal levels of government. My book, Cutting Back City Hall (1980),
was the first book-length treatment of this subject at the city and
county government level. For the last 15 years or so, my full-time
focus has been on transportation infrastructure policy, both aviation
and surface transportation. I am a member of two standing committees of
the Transportation Research Board and am a member of the Government
Accountability Office's National Aviation Studies Advisory panel. I am
a member of the Air Traffic Control Association and serve on the board
of the Public Private Partnership division of the American Road &
Transportation Builders Association. I have advised the FAA, the FHWA,
the FTA, and the Office of the Secretary of Transportation, as well as
the White House Office of Policy Development and National Economic
Council. I have also advised or consulted for half a dozen state DOTs.
the united states lags in using public-private partnerships in
infrastructure
We Americans pride ourselves as having an economy that is largely
market-based with investor ownership of the means of production. Yet
when it comes to infrastructure, and transportation infrastructure in
particular, the United States is an outlier compared with our OECD
allies. A major trend in recent decades--first in Europe, then
Australia and New Zealand, and more recently Latin America--has been to
privatize state-owned enterprises that provide major transportation
infrastructure. By contrast, most U.S. transportation infrastructure
continues to be state-owned enterprises of various kinds, with many of
the limitations and disadvantages that we see in state-owned
enterprises in China, developing countries, and parts of Europe that
have not yet reformed such infrastructure.
In most developed countries, the primary model is the long-term
franchise (usually termed a ``concession'' overseas), similar to U.S.
practice for investor-owned electric utilities. A smaller number of
airports, toll road systems, and seaports have been sold outright to
investors. In either case, the transformation from government ownership
and operation to investor ownership or concession operation brings a
transition to direct charges (pricing) of the infrastructure, creating
bondable revenue streams that facilitate long-term financing of long-
lived capital investments. Revenue bond financing also ensures that the
capital markets scrutinize the soundness of the investment, which tends
to weed out poorly justified projects.
This model may sound familiar, because it is how U.S. toll roads
and our larger airports are financed, despite being owned by government
entities. But it is far removed from the way other U.S. transportation
infrastructure is financed and managed. What follows is a brief
overview contrasting the provision of five types of transportation
infrastructure in the United States versus other developed countries.
Airports
Airports Council International recently reported that 450
commercial airports worldwide have some degree of private-sector
participation in their management or ownership. In Europe alone, ACI-
Europe reports that 48% of all passengers are handled at airports with
either full or partial investor ownership as of 2010. There are 25
airport companies listed on stock exchanges, including two in Southeast
Asia, three in Mexico, five in China, and the rest in Europe and
Australasia. The United States has just one commercial airport that has
been long-term leased under the FAA Airport Privatization Pilot Program
(San Juan International), with a second one pending (Chicago Midway).
Air Traffic Control
Over 50 countries have corporatized their ATC providers since 1987.
This means separating the ATC provider from the government's aviation
safety regulator and from the government's budget, making it self-
supporting from fees paid to it by airspace users. Most of these air
navigation service providers (ANSPs) are government corporations, but
as self-supporting entities, they can issue revenue bonds to finance
capital modernization programs, unlike the unreformed FAA in this
country. The larger ANSPs all have investment-grade bond ratings. Two
of the ANSPs can be considered partially privatized: NATS in the UK,
which is 49% owned by the government with the balance owned by aviation
stakeholders (including employees) and Nav Canada, which is a not-for-
profit company with a stakeholder governing board.
Highways and Bridges
In the 1960s when European countries began building national
motorway systems, three of them--France, Italy, and Spain--chose to
finance these new highways via toll revenues, and used a mix of state-
owned and investor-owned companies to finance, build, own, and operate
the new toll roads. Portugal later adopted a similar system. In the
late 1990s and early 2000s, all four countries privatized their state-
owned toll road companies, shifting them to long-term concession
agreements. This long-term concession model was adopted by Australia in
the 1980s to build tolled urban expressways in Sydney, Melbourne, and
Brisbane. The model had spread to Latin America by the 1990s, with
long-term toll concessions awarded in Argentina, Brazil, Chile,
Colombia, Mexico, and Peru. It has also been used in China, Malaysia,
the Philippines, and elsewhere in Asia. The United States is a late
adopter of the concession model, with a handful of projects opened in
the 1990s and a small but growing number in the 2000s, mostly in
California, Florida, Texas, and Virginia.
Seaports
A global wave of port privatization begin with the sale in 1983 of
19 UK ports of the British Transport Docks Board as Associated British
Ports. Other UK ports were sold in subsequent years. By 1997 a World
Bank report found that a large majority of the 50 largest ports
worldwide had either mixed or private (investor) ownership, with mixed
ownership generally referring to the landlord port model in which the
government owns the land and retains regulatory control while various
private operators own and operate individual terminals. The United
States has mostly landlord ports, with only a few totally state-owned
and operated. Major U.S. seaports are largely self-supporting, but pay
a Harbor Maintenance tax whose proceeds are used for Army Corps of
Engineers harbor dredging projects.
Waterways
Most commercial waterways worldwide are government-owned and
operated, but some of the largest are operated on a corporatized basis,
including the Panama Canal and the Suez Canal. Both charge tolls for
passage, and in the case of the current Panama Canal widening and
modernization, this $5 billion project is being financed via revenue
bonds based on the toll revenue. France is exploring the development of
new inland canals and the refurbishment of existing ones as long-term
PPPs. In the United States, the entire inland waterways system is
managed by the Army Corps of Engineers. Less than 10% of the cost of
operating, maintaining, and improving the inland waterways system is
paid for by commercial users, via a tax on diesel fuel; the rest is
paid for by general federal revenues (i.e., all taxpayers). Waterways
thus represent the most highly subsidized of all modes of goods-
movement infrastructure in the United States.
Global Companies
Another difference between the United States and other OECD
countries is a dearth of U.S. companies experienced not just in
building but in owning, operating, and maintaining major transportation
infrastructure such as airports, toll roads, and seaports. Of the
world's 100 largest airport operators (as compiled by Airline
Business), 36 are either fully or partially investor-owned--but not a
single one is based in the United States. And in Public Works
Financing's annual listing of the world's 35 largest surface
transportation infrastructure providers, only one (Fluor) is a U.S.
company. Of the top five, three are from Spain, one from Australia, and
one from France. Investor-owned transportation infrastructure is a
large and growing global industry, but thus far US companies are at
best bit players.
Investment Capital
According to the 2012 tabulation by Infrastructure Investor, over
the last five years the 30 largest global infrastructure equity funds
have raised nearly $172 billion to invest in privatized and PPP
infrastructure. Over the decade ending in 2012, all such funds have
raised an estimated $291 billion. When leveraged with debt in a typical
project financing structure, this amount of equity could support nearly
$1.2 trillion worth of infrastructure projects. That investment will go
where it is welcome, and thus far the United States is seen as a
difficult, emerging market. At least in this segment of infrastructure,
US funds are playing a significant role, representing 37% of the
infrastructure investment firms and about 30% of the capital raised.
But since there are few opportunities so far to invest such funds
productively here in the USA, much of their investment is overseas.
why does it matter that the united states lags so far behind?
High quality infrastructure is essential for a healthy and
productive economy. In the decades after World War II, when the United
States was the only developed country not devastated by wartime
destruction, this country had the world's best infrastructure. Our
electricity, gas, telecommunications, pipelines, and water utilities
were mostly investor-owned. Our original superhighways were toll
financed turnpikes in the Northeast and Midwest, soon followed by the
nationwide Interstate highway system. Our airports developed revenue
bond financing and became major facilities. Our investor-owned freight
railroads struggled until deregulation in 1980 enabled them to begin to
make a realistic return on their investments, and they invested their
way to becoming the best in the world. Our seaports did reasonably
well, with revenue-bond financing much like that of airports.
Today, in the second decade of the 21st century, U.S.
infrastructure no longer compares so well. Many of our largest airports
suffer from chronic congestion and some still lack world-class
passenger amenities. Our air traffic control system no longer sets the
pace for advanced technology and streamlined procedures--and is
struggling to fund what it now estimates as a $42 billion NextGen
modernization program. Our Interstate highway system is nearing the end
of its original design life and lacks capacity in numerous key trucking
corridors, while urban expressways suffer chronic congestion in the
larger metro areas. Ports compete for limited--and agonizingly slow to
be approved--federal dredging projects in hopes of remaining
competitive after the Panama Canal expansion. And our inland waterways
are plagued by aging and undersized locks that constrain the flow of
bulk shipping.
One key benefit from a more robust embrace of PPP approaches would
be increased investment in upgrading existing transportation
infrastructure and adding needed capacity in strategic locations. But
as I see it, an even more important benefit of greater use of the
market mechanisms that are part of the PPP approach is more-productive
infrastructure investments. I distrust huge totals of alleged
infrastructure needs that are compiled by organizations whose members
hope to design and build more projects. For the most part, those totals
do not necessarily represent projects that meet a genuine market test--
such as having a positive return on the investment it would take to
build them. A project finance approach subjects proposed projects to a
critically important test: will the project generate enough revenues to
pay for itself, making it worthwhile for infrastructure funds to invest
equity and for bond buyers to purchase the revenue bonds?
Another benefit of the PPP approach--and I'm speaking here about
long-term concessions to either rebuild and modernize a facility or to
build an entirely new one--is to minimize the risk to taxpayers. Risk
transfer is one of the major benefits of the PPP approach to
transportation megaprojects. Megaprojects such as Boston's Big Dig or
the Los Angeles Red Line Subway have a terrible track record of cost
overruns, late completion, and significant traffic and revenue
shortfalls. A global database of 258 highway and rail megaprojects in
20 countries found that 90% experienced cost overruns, with rail
projects on average costing 45% more than estimated and highways
costing 20% more. Most rail projects also had ridership shortfalls,
averaging 39%. A properly structured long-term concession transfers
cost-overrun risk, late-completion risk, and traffic and revenue risk
from the government (i.e., the taxpayers) to the concession company,
which has strong incentives to build the project within the budget, get
it completed on time, and properly maintain it so it will attract and
keep customers. Modernizing US transportation infrastructure will
involve a very large number of megaprojects, costing upwards of several
trillion dollars over the next several decades. So it is critically
important to do this in ways that minimize risks to taxpayers.
An additional benefit of the long-term PPP approach is guaranteed
maintenance. Deferred maintenance is a significant problem in much of
our transportation infrastructure--bridges, some highways, and
especially waterways. Our institutions seem to be more focused on
building new things than on properly maintaining what we have already
built. But the long-term PPP concession creates a quasi-owner of the
facility for the duration of the concession agreement, and that entity
has every incentive to keep the facility well-maintained so that it
continues to attract paying customers. Moreover, maintenance standards
are generally included in the long-term agreement, and can be enforced
via financial penalties. So you can think of an infrastructure facility
that has been modernized via a long-term concession as having the
equivalent of a maintenance endowment built in.
underlying problems with the u.s. infrastructure funding model
The federal government's 20th-century model of funding
transportation infrastructure relied on a combination of user taxes and
general revenues, with the user taxes accounted for in four trust
funds: Airports & Airways, Highways, Harbor Maintenance, and Inland
Waterways. But that system is breaking down, for several reasons.
First, the user taxes are widely portrayed and perceived as just
``taxes,'' and any increase is criticized as a ``tax increase.'' By
contrast, when electric bills go up to pay for increased energy costs
or a new power plant, people may grumble but they understand that the
electric company has to pay the costs of producing and delivering the
electricity they want, need, and use.
Second, each of the above trust fund programs builds in significant
redistribution from one user group to another and from one region to
another, which is not only economically inefficient but also generates
political disaffection (and resistance to user tax increases).
Third, over time Congress has added numerous unfunded mandates
(such as Buy America and Davis-Bacon) to federal transportation
dollars, which increases the cost of building things with federal money
and leads to further disaffection with the program.
Fourth, since most federal grant money is for new capacity, the
lure of that money (despite its added cost) tends to bias state and
local spending decisions toward new construction at the expense, in
some cases, of maintenance.
The fifth and most important drawback of the current federal
approach, in my view, is that by making annual capital spending money
available, it encourages state and local governments to fund large
capital projects out of annual appropriations rather than financing
such long-lived assets. A basic principle of public finance is that
long-lived assets should be financed, so that their benefits become
available in the near term and are paid for by their users over the
useful life of the asset, while the users enjoy the benefits of the
improved facility. This is, of course, how the majority of people pay
for their housing. But it is also how electric, gas, and water
utilities pay for their capital projects, as well as railroads, toll
roads, air traffic control providers overseas, and, to a considerable
extent, U.S. airports and seaports (despite their also receiving some
federal support from their respective trust funds).
With the ongoing federal government fiscal crisis, general fund
money to supplement and subsidize the transportation trust funds will
become an undependable and unsustainable funding source for
transportation infrastructure. So it is time to fundamentally rethink
how we fund and manage U.S. transportation infrastructure.
rethinking infrastructure, sector by sector
Retooling the federal government's role in transportation
infrastructure should begin with the principles of federalism. One
major reason why federal transportation funds don't go far enough is
that they are spread too thin, trying to do too many things. This is
especially the case for the Highway Trust Fund, which originated as the
means to pay for creating a nationwide superhighway network and has
gradually evolved into an all-purpose transportation public works
program. So the first principle should be: figure out what is truly
federal and devolve state-level concerns to the states and urban/
regional concerns to cities and counties.
The second principle is to shift as much as possible from funding
to financing. That means two related things. First, shift from federal
grants to federal loans. And shift from user taxes paid to the US
Treasury to user fees paid to the actual infrastructure provider.
And the third principle is to give states and local governments
tools to do more, such as reducing unfunded mandates and removing
federal obstacles to increased use of long-term PPPs. One way to do
that would be to remove entirely any difference in the tax treatment of
bonds, whether for government infrastructure or PPP infrastructure.
In a January 2013 Reason Foundation policy brief, I sketched out
how these principles might apply to the major categories of federally
supported transportation infrastructure. A brief summary is as follows.
Airports
U.S. commercial airports are already largely user-funded, with
revenues from airlines (landing charges and space rentals), passengers
(passenger facility charges), and service providers (car rental firms,
parking, shops and restaurants) paying for operating costs and debt
service on airport bonds. Federal Airport Improvement Program (AIP)
grants are a relatively small portion of airport budgets at large and
medium hubs. As far back as 1987, a US DOT study demonstrated that
large, medium, small, and non-hub commercial airports could replace
their AIP funds with PFCs, and that could be done today. Self-
supporting airports need not be privatized, but those seeking better
management and lower-risk megaproject improvements should have the
freedom to opt for privatization, as their counterparts in the rest of
the developed world already do.
A separate question is whether there should be a continued federal
role in funding non-commercial airports. Small towns that have a
general aviation airport have some degree of competitive advantage as a
place to live and do business compared with those that don't. That
argument would support local funding as a choice to be made by such
communities. The politics of this question at the federal level may be
daunting, but this is exactly the kind of issue the entire federal
budget needs to confront in rethinking what functions are truly federal
and which are more appropriately left to state and local levels of
government.
Air traffic control
Nearly all developed countries have de-politicized their ATC
providers by converting them into self-supporting air navigation
service providers, regulated at arm's length by the national aviation
safety regulator. This course has been recommended repeatedly by think
tanks, the US DOT in 1994, and the Mineta Commission in 1997. This kind
of reform is now being talked about by aviation stakeholders concerned
over the FAA's poor track record in modernizing the system and the
uncertain future of federal aviation funding. Creating a U.S.
equivalent of the nonprofit, user-governed Nav Canada would be a good
solution, and is likely to be the best way to ensure that the portions
of the NextGen modernization that actually provide user benefits
exceeding their costs get implemented. With its own revenue stream paid
by aircraft operators, the corporation could issue investment-grade
revenue bonds to fund modernization investments, and the governing
board of aviation stakeholders would vet the plans to be sure their
user benefits exceeded their cost.
Highways and Bridges
Sorting out responsibilities among levels of government would have
the federal government responsible for a national network of limited-
access superhighways (the 21st century version of the Interstates),
states responsible for most other highways, and metro areas responsible
for their streets and roads. With fuel taxes as a declining revenue
source over the coming decades, states (as the largest owner of
highways) would take the lead in phasing in mileage-based user fees for
state and local roads to replace fuel taxes. For the limited access
system, tolling and PPPs would facilitate reconstruction and
modernization of the existing Interstates, urban expressways, and
portions of the National Highway System that should be upgraded to
Interstate status. Given the likely ability of toll finance to handle
most of the cost of Interstate reconstruction and modernization, the
federal government's funding role would likely shift from grants to
loans, primarily for states where traffic volume was insufficient to
generate enough toll revenue. The federal role would also be important
for ensuring nationwide inter-operability of all-electronic tolling on
the limited-access system and mileage-based user fees on state and
local roads.
Urban transit is an inherently local function of government,
despite its being included in the Highway Trust Fund since the early
1980s. This issue is analogous to small general aviation airports--
obviously good things for communities to have, but not obviously
federal in nature. The politics of devolving this are also analogous to
those of small airports, but are again part of the overall challenge of
rethinking the role of the federal government in our multi-tiered
governmental structure.
Seaports
Like airports, seaports are largely user-funded and bond-financed
today. The Harbor Maintenance Tax is unnecessary, and instead of being
reformed so that all the dollars collected each year are spent on port
projects, it should be abolished, for several reasons. First, all ports
are inherently in competition with other ports, so there are local
benefits but not national benefits from the improvements funded by this
trust fund. Second, the Corps of Engineers' feasibility studies can
take over a decade, which generally delays needed projects which could
proceed much sooner if judged bondable by the capital markets. Third,
there is a long history of critical assessment of the objectivity of
Corps feasibility studies, which provide a much less reliable guide to
sound investment than the capital markets. Fourth, the tax is based on
a percentage of the value of the cargo, not the draft of the ship
(which is the relevant measure for assessing benefits of the dredging
projects the tax ends up funding). This tax and trust fund are
counterproductive to a sound US ports industry, overcharging some ships
and undercharging others, cross-subsidizing ports that need dredging
with money taken from ports that don't, and favoring some ports at the
expense of their competitors. No national interest is served by
continuing this program.
Waterways
Unlike ports, waterways are inherently interstate in nature, so it
is not surprising that federal jurisdiction over inland waterways was
established in the 19th century, based on the interstate commerce
clause of the Constitution. However, because the federal government has
responsibility does not mean that the current federal funding system
makes sense or is sustainable. That system requires commercial users to
pay just 8% of the annual cost of operating, maintaining, and improving
the inland waterways system. The token tax on diesel fuel paid by those
carriers is almost insignificant, and the heavily subsidized barge
industry's reform proposals, though calling for an increase in that
user tax, would put an even larger share of waterways costs on the
general taxpayer. This is not merely unsustainable going forward; it is
also grossly unfair to other modes that compete with barge lines,
primarily railroads and, to a limited extent, trucks. Railroads pay
100% of the capital and operating cost of their infrastructure, while
heavy trucks pay a large fraction of theirs, according to DOT cost
responsibility studies.
In the last year or so, a few shipper groups and the Army Corps'
own Institute for Water Resources have begun to discuss ways of tapping
the capital markets to finance replacement of obsolete and undersized
locks and dams. PPP concessions, of course, would require a bondable
revenue stream, such as tolls to use modernized/replaced locks, as on
the Panama Canal. In addition, repealing the Jones Act would permit
barge operators to buy less-costly vessels, thereby offsetting part of
the cost of increased user fees. In addition, since the inland
waterways system is so extensive and the need to replace obsolete
facilities is so large, consideration should be given to using long-
term PPP concessions to modernize individual waterway segments, as
France is beginning to do. Several Senators introduced legislation in
March of this year to create a pilot program along these lines.
needed policy changes
What I have laid out in this testimony is an overview of how the
federal role in transportation infrastructure could be rethought to
better fit with the fiscal realities confronting the federal government
in the decades ahead. Business as usual is simply not a sustainable
option. This agenda could not be implemented overnight, but unless
these ideas begin to be discussed seriously, our vitally important
transportation infrastructure will continue to be short of investment
capital, make sub-optimal investments with the capital it has, and
create artificial winners and losers via cross-subsidies.
The key reform principles are (1) to sort out what functions are
properly federal, state and local, (2) switch from funding to financing
large capital improvements in infrastructure, (3) shift from user taxes
paid to government to user fees paid directly to infrastructure
providers, (4) empower all levels of government to make use of long-
term PPP concessions, and (5) remove federal regulatory and tax
obstacles to states and local governments taking on more infrastructure
responsibilities.
Near-term federal regulatory and tax changes should include the
following:
Remove the federal cap on airport passenger facility
charges (PFCs) and phase out AIP grants for commercial airports,
reducing aviation excise tax rates accordingly.
Remove the 10-airport limit on participating in the FAA's
Airport Privatization Pilot Program.
Remove the $15 billion cap on tax-exempt Private Activity
Bonds for surface transportation PPP projects.
Authorize states to implement all-electronic tolling on
Interstate highways for the specific purpose of reconstructing and
modernizing those highways.
Return the maximum size of TIFIA loans to 33% of project
budgets (rather than MAP-21's 49%), consistent with TIFIA's role as
provider of gap, rather than primary, financing.
Add TIFIA-like taxpayer protections to all other federal
infrastructure credit programs, such as the Railroad Rehabilitation and
Improvement Financing (RRIF) program to (a) limit loan amounts to 33%
of total project cost, (b) require a dedicated revenue source for such
projects, and (c) require an investment-grade rating on the project's
primary financing.
Eliminate the alternative minimum tax (AMT) on all PABs
used for transportation infrastructure.
Exempt harbor and waterway dredging projects from the
Jones Act.
Exempt highway and transit projects from the Davis-Bacon
Act and Buy America Act.
Medium-term changes are mostly structural and organizational in
nature, and should include the following:
Separate the Air Traffic Organization (ATO) from the FAA,
corporatize the ATO, and enable it to create its own bondable revenue
stream from fees paid by aircraft operators; reduce aviation excise
taxes accordingly.
Eliminate the Harbor Maintenance Tax and wind down the
Harbor Maintenance Trust Fund, allowing ports to be self-supporting.
Refocus the Highway Trust Fund on interstate commerce,
devolving its other responsibilities to state and local governments.
Significantly increase user tax on diesel fuel on
commercial inland waterway operators, as a step toward making the
federal waterways program self-supporting.
Authorize the Army Corps of Engineers to enter into long-
term PPP agreements to rehabilitate and replace lock and dam
facilities, financed by tolls on the new and refurbished facilities.
This is an ambitious agenda, affecting just a small part of the
federal government's operations. But the status-quo federal role in
transportation infrastructure is unsustainable. As part of putting the
federal government's fiscal house in order, while ensuring robust and
productive transportation infrastructure, rethinking the federal role
along these lines is essential.
This concludes my testimony. I would be happy to answer questions
or provide further details on any of the points I have made here.
__________
Prepared Statement of Robert Puentes, Senior Fellow and Director,
Metropolitan Infrastructure Initiative, Brookings Institution
Metropolitan Policy Program
Good morning Vice Chair Klobuchar and Members of the Committee. I
very much appreciate the invitation to appear before you today. The
purpose of my testimony is to discuss ways the federal government can
engage in new partnerships with public and private investors to
investment in infrastructure and, by so doing, put Americans back to
work and rebalance the economy.
Of course, our challenge today is that the nation's economic
recession and tense new focus on austerity means public resources for
infrastructure are strained. As financial markets have contracted, all
actors are suffering under tightened credit supplies. While state and
local balance sheets are improving, overstretched budgets have led to a
larger gap between infrastructure costs and revenues. As a result,
meeting the nation's great needs for financing infrastructure requires
an ``all of the above'' strategy.
Today, record low interest rates, coupled with attention from
private firms and foreign funds, present growing opportunities for
pragmatic public- and private-sector leaders to collaborate and
innovate around infrastructure investments at the metropolitan scale,
which can motivate state and federal officials to support these
efforts. Indeed, leaders in many metros are already driving the
development of new and innovative ways to deliver economically
important infrastructure projects.
Modern freight and logistics projects in Los Angeles and Miami,
state-of-the-art transit investments in Denver and Salt Lake City,
advanced stormwater treatment upgrades in Washington and Philadelphia,
broadband installations in Kansas City and Chattanooga are emblematic
of the growing role states and cities are taking to build the
infrastructure that will both support and enable the next American
economy.
And so an enormous opportunity exists for Washington to adopt a
fresh set of focused initiatives that can drive the nation toward
economic renewal and support regional and state empowerment.
revive build america bonds to support state and local investments
Congress created the Build America Bonds (BABs) program in response
to the Great Recession's dramatic effect on state, local, and other
public entities' ability to issue debt. According to the U.S. Treasury,
this credit crunch eventually led to a 68 percent drop in monthly
municipal bond issuances and a doubling of borrowing costs.\1\
Established through the American Recovery and Reinvestment Act (ARRA)
of 2009, the two-year program authorized state and local governments to
issue special taxable bonds that received either a 35 percent direct
federal subsidy to the borrower (Direct Payment BABs) or a federal tax
credit worth 35 percent of the interest owed to the investors (Tax-
Credit BABs).
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\1\ U.S. Department of the Treasury, ``Analysis of Build America
Bond Issuance and Savings,'' 2011.
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By harnessing the efficiencies of the taxable debt market, this
unique structure decreased average borrowing costs for states and
localities by 54 to 84 basis points compared to standard municipal
bonds.\2\ These lower costs, in turn, allowed borrowers to save an
estimated $20 billion. The taxable nature of the bonds also
incentivized a much broader group of investors to participate in the
program, including pension funds and institutional investors. This
expanded the traditional infrastructure investment base beyond the $2.8
trillion market for tax-exempt municipal bonds and made BABs appealing
alternatives in the $30 trillion taxable bond market.
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\2\ U.S. Department of the Treasury and Council of Economic
Advisors, ``A New Economic Analysis of Infrastructure Investment,''
2012.
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BABs proved wildly popular. From 2009 through the program's
expiration in 2010, BABs financed one-third of all new state and local
long-term debt issuances. In total, more than 2,275 separate bonds were
issued to finance $182 billion in new infrastructure investment, driven
by participation by all 50 states, Washington, DC, and two
territories.\3\ The greatest share of BAB funding (30 percent) went
toward educational facilities. Water/sewer projects (13.8 percent),
road/bridge projects (13.7 percent), and transit projects (8.7 percent)
accounted for the next highest totals.\4\ The use of BABs accelerated
many of these major projects, which not only tended to have longer
maturities, but also had a $6.2 million higher issuance value on
average than tax-exempt municipal bonds.\5\
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\3\ U.S. Congress, Joint Committee on Taxation and the U.S.
Department of the Treasury, ``The Federal Revenue Effects of Tax-Exempt
and Direct-Pay Credit Bond Provisions,'' 2011.
\4\ Robert Puentes and Istrate, Emilia, ``Whither Go the BABs?''
The New Republic, 2010.
\5\ Andrew Ang and others, ``Build America Bonds,'' Cambridge:
National Bureau of Economic Research, 2010.
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Despite initial skepticism, the BABs program successfully spurred
investment in job intensive and economically important infrastructure
projects across the country, while also stabilizing the municipal bond
market. Importantly, it proved that bond issuers and investors were
extremely receptive to the tax-credit and subsidy model.\6\ Concerns
about high origination costs for these unique structures also proved to
be a minor issue, as prices fell drastically over the life of the
program.
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\6\ Lily Batchelder and others, ``Efficiency and Tax Incentives:
The Case for Refundable Tax Credits,'' Stanford Law Review 59 (23)
2006.
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Recently, Congressional budget sequestration put a damper on the
market as across-the-board spending cuts reduced the federal BABs
subsidy by 8.7 percent. Smaller localities, in particular, now face
pressure to call their BABs for a full redemption to cut costs and to
take advantage of historically low interest rates in the municipal bond
market. Some large BABs have been called as well, including a nearly
$500 million refinancing in Columbus, Ohio.
However, long maturities, large issuances, and contractual
provisions against par-value calls, are likely to limit the number of
BAB redemptions. Even in the face of these challenges, BABs still
outperform both treasuries and tax-exempt municipal bonds in U.S.
markets.
Relative to the cost-savings for borrowers, the costs of
administering a BABs program are quite low for the federal government.
Based on initial government estimates, the annual cost of subsidizing
the program under ARRA was approximately $340 million. Since the bonds
were taxable, the government also expected to recoup some of these
costs through the additional tax revenue produced. More recent
estimates from the Joint Committee on Taxation put the annual net cost
of a new BABs program at under $100 million.
The U.S. Treasury, furthermore, has indicated that lowering the tax
subsidy from 35 to 28 percent would make the program revenue neutral
``relative to the estimated future federal tax expenditure for tax-
exempt bonds.'' \7\ States and municipalities do not need the same
aggressive subsidy they did after the 2008 financial crisis when
borrowing costs spiked and the monthly issuance of bonds dropped by
nearly one-third. It is important to note, however, that a significant
drop in maturities would probably accompany the lower subsidy rate. At
the same time, the true costs of the program to the federal government
would not be known with complete precision, given the need to measure
the amount of revenue currently being collected from tax-exempt debt.
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\7\ U.S. Department of the Treasury, 2011.
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exempt private activity bonds from the alternative minimum tax
While municipal bonds are geared toward infrastructure projects
with a public benefit, Private Activity Bonds (PABs) are directed at
those projects that primarily benefit private entities but also serve
some public purpose. PABs are issued by state and local governments for
projects where more than 10 percent of the proceeds benefit a
nongovernmental entity and are directly or indirectly paid back by a
private business. In many cases, PABs are not tax-exempt and mainly
cover privately owned and operated facilities. Depending on the
specific project, however, there are a range of qualified private
activities that can be financed by tax-exempt PABs, including sewage
facilities and high-speed intercity rail facilities.
Federal tax policy, however, has undercut the potential of PABs to
pull sorely needed private financing into critical infrastructure
projects. The Alternative Minimum Tax (AMT), in particular, has limited
their ability to attract potential investors over time. As a tax on
individuals and corporations, the AMT is enforced beyond the regular
income tax and takes into account the taxpayers' alternative minimum
taxable income, which includes interest earned on PABs. PABs are also
not necessarily tax-exempt for certain airport facilities and are
further burdened by the AMT.
Lacking an AMT exemption, then, PABs hold less appeal for investors
in many cases, thereby driving down demand for future investment and
hindering the development of new infrastructure. State and local
governments, as a result, must pay higher interest rates on PABs--more
than 25 basis points on average compared to other tax-exempt bonds--to
compensate investors for their tax liability, which in turn leads to
higher infrastructure costs.\8\
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\8\ Government Finance Officers Association, ``Issue Brief: AMT and
Tax-Exempt Bonds,'' Washington, 2010.
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To address these challenges, ARRA included provisions that exempted
new PABs from the AMT in 2009 and 2010 and allowed refinancing of PABs
issued from 2004 to 2008, which has helped promote increased
infrastructure investment. Still, if private investors are continually
dissuaded from PABs as a result of the AMT, necessary infrastructure
upgrades may be delayed or put off altogether. Without the proper
incentives in place, as they appeared under ARRA, project delivery will
remain slow, innovation will be stifled, and users will be subjected to
rapidly outdated and increasingly inefficient facilities. Ongoing
financial and regulatory uncertainty, moreover, will continue to impede
the competitiveness of metropolitan areas.
Based on estimates from the Joint Committee on Taxation,
eliminating the AMT on all PABs (including airports) could potentially
cost the government about $49 million annually from 2012 to 2017.\9\ At
the same time, the exemption would generate billions of dollars in
additional economic activity and lead to cost savings of almost $748
million for airports alone over the next ten years. Policymakers should
be encouraged by these factors when considering a possible AMT
exemption.
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\9\ U.S. Department of Transportation, ``Final Report: The Future
of Aviation Advisory Committee,'' 2011.
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PABs play a large role in financing infrastructure projects across
the country. Although many PABs are subject to a statewide volume cap
(which creates a ceiling on the aggregate amount of qualified tax-
exempt PABs that can be used in states each year), they help promote
several short-term and long-term projects annually, ranging from
highways to freight transfer facilities. Roughly $15 billion of
qualified tax-exempt PABs have been issued annually in each of the past
two years, with a notable increase following the AMT exemption in 2009.
For example, the number of qualified tax-exempt PABs issued in 2010
marked the first increase in over three years. In contrast, when the
exemption expired in 2011, the number of qualified tax-exempt PABs
issued saw a marked decline (13 percent) across these projects
nationwide.\10\
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\10\ Council of Development Finance Agencies, ``2011 National
Volume Cap Report,'' Columbus, 2012.
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While some may emphasize the cost of an AMT exemption for PABs, the
return on such an exemption far outweighs the expenditure. By making
PABs more attractive to private investors, an AMT exemption can promote
private and public sector involvement, which helps draw from a larger
pool of investors and spread the financial risk involved in projects.
This increased investment can consequently drive the construction of
new infrastructure, improve public safety, fuel economic output, and
create numerous jobs in the short and long term--all of which have
stood as clear benefits in different proposals.
establish a national ppp unit to support bottom-up infrastructure
investment
Leveraging private financial resources and expertise to design,
build, operate, maintain, and/or finance infrastructure has growing
appeal. Whether repairing, upgrading, or augmenting an existing asset
or constructing new infrastructure, the intent is to improve project
delivery, and better share responsibilities and costs between the
public and private sectors. The evidence from other countries--
including some with less friendly business environments than in the
U.S.--shows that these arrangements, if designed and implemented
correctly, have the potential to improve on infrastructure delivery.
However, public/private partnerships (PPPs) are complicated
contractual arrangements that can vary widely from project to project
and from place to place. As the challenges to infrastructure
development throughout the U.S. become more complex, there is a
constant concern that public entities in some states, cities, and
metropolitan areas are ill equipped to consider such deals and fully
protect the public interest.
The U.S. Government Accountability Office recently noted that while
the U.S. has done much to promote the benefits of PPPs, it needs to do
more to assist states and metro areas in thinking through potential
costs and trade-offs, as well as assessing national interests.\11\
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\11\ U.S. Government Accountability Office, ``Highway Public-
Private Partnerships: More Rigorous Up-front Analysis Could Better
Secure Potential Benefits and Protect the Public Interest,'' GAO-08-44,
2008.
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A possible solution is the creation of a specialized institutional
entity to assist with the expanding opportunities for PPPs. These so-
called ``PPP units'' fulfill a variety of functions, including quality
control, policy formulation and coordination, technical advice,
standardization and dissemination, and promotion of PPPs.
Creating a federal PPP unit would provide states, cities, and
metropolitan actors with the support and technical assistance needed
from the procurement stage through long-term management of the projects
by helping public actors determine the best Value for Money investment,
assess long-term economic benefits of projects, and increase capacity
to deal with contract changes over the life of the PPP. It would also
create a more attractive, open, and robust environment that encourages
private investment by creating predictability in the procurement
process and demonstrating that the government actors involved want to
``do business.''
Looking around the world, PPP units are often located in a central
government ministry (such as the Treasury Department) or in a line
ministry that is closely related to infrastructure policy (such as the
Department of Transportation). In the U.S., the Office of Management
and Budget (OMB) is the most appropriate agency to house a PPP
unit.\12\
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\12\ Emilia Istrate and Robert Puentes, ``Moving Forward on Public
Private Partnerships: U.S. and International Experience with PPP
Units,'' Washington: Brookings Institution, 2011.
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Budget costs for a federal PPP Unit should be no more that $3
million annually. The PPP unit will be roughly the size of the Council
on Environmental Quality (CEQ), located within the Executive Office of
the President, which has a similar annual budget that covers support
and administrative staff, as well as salaries and office and
communications expenses.
There is no one-size-fits-all design of a PPP unit, but U.S. public
entities could learn from experiences of other countries and from the
growing track record in several U.S. states. A PPP unit reflects not
only the needs of a particular PPP program, but also the administrative
capacity and political structure of a specific government. Ultimately,
the success of an American PPP unit will depend on a clear and
consistent national plan and strategy for infrastructure development.
create a repatriation tax holiday to capitalize a national
infrastructure bank
Another way to provide technical assistance and expertise to states
and other public entities that cannot develop internal capacity to deal
with the projects themselves is through the creation of a national
infrastructure bank (NIB).
If designed and implemented appropriately, an NIB has the potential
to leverage billions of dollars of private investment in important
projects across the country. An NIB can not only provide a streamlined
selection process for projects, but also apply a more rigorous standard
for evaluating critical investments in energy, transportation, water,
telecommunications, and other infrastructure assets attractive to
private investors. Beyond bridges, roads, and other conventional
projects, the NIB could spur cutting-edge investments in clean
technologies, efficient energy distribution, and new resilient
infrastructure assets.
The establishment of an NIB will send a strong signal to the
private sector: the federal government is committed and open to private
involvement in infrastructure financing and delivery. Today, private-
sector financiers and investors are understandably frustrated with the
lack of clarity concerning the rules of engagement when working with
the federal government. This confusion hinders the development of
robust public-private partnership markets in many states and
localities.
Among the possible ways to capitalize an NIB, a one-time
repatriation tax holiday could be used to unlock billions of dollars of
domestically untaxed capital to fund the creation of a national
infrastructure bank. In total, American corporations hold over $1.5
trillion in domestically untaxed deferred dividend payments that are
routed through foreign countries including Ireland, the Netherlands,
the Cayman Islands, Barbados, and other so-called ``tax-havens.''
Because of the complexity and risk of these tax structures, the
majority of firms that take advantage of these shelters are large and
well-established corporations.
While a similar repatriation holiday created through the 2004
American Jobs Creation Act failed to generate significant domestic
stimulus, a targeted program focused on infrastructure has the
potential to deliver job creating and economy building projects for
decades to come.
By directing a percentage of the recovered taxes into the NIB or
compelling corporations to invest a portion of the repatriated funds
into a special class of bonds that supports this institution, Congress
can encourage infrastructure investment in a time of political
gridlock. Depending on the specific goals of the NIB, capitalizing it
can occur in a flexible manner as well, with levels ranging from $10
billion to $50 billion.
Of course, there are real costs associated with any repatriation
based program. Firm behavior after 2004, for instance, illustrated how
a new repatriation holiday can reduce government revenues in following
years. The Joint Committee on Taxation estimates that a one year
seventy percent deduction on repatriated profits capped at $500 million
per firm would cost the Treasury $41.7 billion over the next
decade.\13\
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\13\ U.S. Congress Joint Committee on Taxation, ``Revenue Estimates
for Two Dividends-Received Deductions Proposals,'' 2011.
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The overall cost of the holiday is driven both by the direct loss
of revenue on regularly repatriated funds that are taxed at standard
rates, but also by the long-term consequences of corporate behavior
change. A repatriation holiday may incentivize corporations to
restructure their foreign subsidiaries to hold more funds overseas, and
they may relocate workers to tax-haven countries, hoping to reap the
benefits of future tax breaks. Among other effects, the holiday can
further complicate an already byzantine tax-code and increase
horizontal tax inequality by giving special privileges to firms that
chose to hold funds overseas, which in effect rewards tax-evading
behavior. However, policymakers must also weigh the long- and short-
term tax consequences of a repatriation holiday against the strategic
and financial benefits of an NIB.
Madam Vice Chairman, in this era of fiscal constraint I firmly
believe the federal government will need to optimize the workings of
the emerging federal-state-metro order. The urgency and complexity of
the challenges facing the nation today suggest the need to devise new
ways to increase impact and do more with less. At every turn, then,
Washington should consider how to enhance the performance of the coming
wave of co-developed, bottom-up problem-solving and then how to scale
it up.\14\ Most of what I have described would require legislative
action, possibly as part of a major tax reform bill or through budget
negotiations. It won't be easy but the time is ripe to invest in
infrastructure projects that put us on the path to a more productive
and sustainable economy.
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\14\ Bruce Katz and Mark Muro, ``Remaking Federalism, Renewing the
Economy: Resetting Federal Policy to Recharge the Economy, Stabilize
the Budget, and Unleash State and Metropolitan Innovation,''
Washington: Brookings Institution, 2012.
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The views expressed in this testimony are those of the author alone
and do not necessarily represent those of the staff, officers, or
trustees of The Brookings Institution.
__________
Prepared Statement of Chris Edwards, Director of Tax Policy Studies and
Editor of www.DownsizingGovernment.org, Cato Institute
Mr. Chairman and members of the committee, thank you for inviting
me to testify today. My comments will examine the federal role in
infrastructure and discuss opportunities for greater private
investment.
The importance of infrastructure investment for U.S. economic
growth is widely appreciated. But policy discussions often get
sidetracked by a debate regarding the level of federal spending. To
spur growth, it is more important to ensure that investment is as
efficient as possible and that investment responsibilities are
optimally allocated between the federal government, the states, and the
private sector.
Federal infrastructure spending often gets bogged down in
mismanagement and cost overruns. And decades of experience show that
many federal investments get misallocated to low-value activities
because of politics. That's why we should tackle the nation's
infrastructure challenges by decentralizing the financing, management,
and ownership of investments as much as possible. State and local
governments and the private sector are more likely to make sound
investments without the federal subsidies and regulations that distort
their decisionmaking.
My testimony will discuss the growing private sector involvement in
financing, constructing, and operating infrastructure such as highways,
bridges, and aviation facilities around the world. Privatization of
infrastructure promises to improve economic efficiency, spur growth,
and reduce financial burdens on governments and taxpayers. As such,
policymakers should focus on removing federal barriers to
privatization.
federal infrastructure in perspective
Most of America's infrastructure is provided by the private sector,
not governments. Indeed, private infrastructure spending--on factories,
freight rail, pipelines, refineries, and other items--is much larger
than federal, state, and local government infrastructure spending
combined.
A broad measure of infrastructure spending is gross fixed
investment, as measured in the national income accounts.\1\ In 2012
private investment was $2 trillion, compared to federal, state, and
local government investment of $472 billion. Excluding defense,
government investment was $367 billion. Thus, private infrastructure
investment in the United States is five times larger than total
nondefense government investment.
One implication of the data is that if policymakers want to boost
infrastructure spending, they should make policy reforms to spur
private investment. Cutting the federal corporate income tax rate, for
example, would increase the net returns to a broad range of private
infrastructure, and thus spur greater investment.
Nonetheless, government infrastructure is certainly important to
the economy. But I am skeptical of claims that the United States has an
infrastructure crisis because governments are not spending enough. For
one thing, government investment as a share of gross domestic product
(GDP) in the United States is in line with the other nations of the
Organization for Economic Cooperation and Development (OECD). In 2010
government gross fixed investment in the United States was 3.5 percent
of GDP, which was a little higher than the OECD average of 3.3
percent.\2\
Another reason for skepticism that governments are underinvesting
is that some measures of infrastructure quality have shown steady
improvement. For example, Federal Highway Administration (FHWA) data
show that the nation's bridges have steadily improved in quality.\3\ Of
the roughly 600,000 bridges in the country, the share that are
``structurally deficient'' has fallen from 22 percent in 1992 to 11
percent in 2012, while the share that are ``functionally obsolete'' has
fallen from 16 percent to 14 percent.
The surface quality of our interstate highways has also steadily
improved. A study by Federal Reserve economists examining FHWA data
found that ``since the mid-1990s, our nation's interstate highways have
become indisputably smoother and less deteriorated.'' \4\ And the
economists concluded that the interstate system is ``in good shape
relative to its past condition.''
problems with federal infrastructure spending
There are frequent calls for increased federal spending on
infrastructure, but advocates usually ignore the problems and failures
of past federal efforts. There is a history of pork-barrel politics and
bureaucratic mismanagement of many types of federal investment. Here
are some of the problems:
Investment is misallocated. Federal investments are often
not based on actual marketplace demands. Amtrak investment, for
example, has long been spread around to low-population areas where
passenger rail makes little economic sense. Most of Amtrak's financial
losses come from long-distance routes through rural areas that account
for only a small fraction of all riders.\5\ Every lawmaker wants an
Amtrak route through their state, so investment gets misallocated away
from where it is really needed, such as the Northeast corridor.
Investments are utilized inefficiently. Government
infrastructure is often utilized inefficiently because supply and
demand are not balanced by market prices. The vast water infrastructure
operated by the Bureau of Reclamation, for example, greatly underprices
irrigation water in western United States. The result has been wasted
resources, harm to the environment, and a looming water crisis in many
areas in the West.\6\
Investment is mismanaged. Federal agencies don't have the
strong incentives that private businesses do to ensure that
infrastructure projects are completed and operated efficiently. Federal
highway, energy, airport, and air traffic control projects, for
example, have often suffered large cost overruns.\7\ The Big Dig in
Boston--which was two-thirds funded by the federal government--exploded
in cost to five times the original estimate.\8\ U.S. and foreign
studies have found that privately financed infrastructure projects are
less likely to have cost overruns than traditional government
projects.\9\
Mistakes are replicated across the nation. Perhaps the
biggest problem with federal intervention in infrastructure is that
when Washington makes mistakes it replicates them across the nation.
High-rise public housing projects, for example, were a terrible idea
that federal funding helped spread nationwide. Federal subsidies for
light-rail projects have biased cities to opt for these expensive
systems, even though they are generally less efficient and flexible
than bus systems.\10\ High-speed rail represents another federal effort
to induce the states to spend money on uneconomical infrastructure.\11\
Burdensome Regulations. A final problem with federal
infrastructure spending is that it usually comes part and parcel with
piles of regulations. Federal Davis-Bacon labor rules, for example,
raise the cost of building state and local infrastructure. In general,
federal regulations impose one-size-fits-all solutions on the states
even though the states may have diverse infrastructure needs.
global trend toward privatization
The answer to America's infrastructure challenges is not greater
federal intervention, but greater involvement by the private sector.
There has been a worldwide trend toward infrastructure privatization.
Since 1990 about $900 billion of state-owned assets have been sold in
OECD countries, about 63 percent of which has been infrastructure
assets.\12\ What spurred the trend? The OECD says that ``public
provision of infrastructure has sometimes failed to deliver efficient
investment with misallocation across sectors, regions, or time, often
due to political considerations. Constraints on public finance and
recognized limitations on the public sector's effectiveness in managing
projects have led to a reconsideration of the role of the state in
infrastructure provision.'' \13\
Short of full privatization, many countries have partly privatized
infrastructure through public-private partnerships (``PPPs'' or
``P3s''). P3s differ from traditional government contracting by
shifting various elements of financing, management, operations, and
project risks to the private sector. In a 2011 report, the OECD found a
``widespread recognition'' around the world of ``the need for greater
recourse to private sector finance'' in infrastructure.\14\
Unfortunately, the United States ``has lagged behind Australia and
Europe in privatization of infrastructure such as roads, bridges and
tunnels,'' notes the OECD.\15\ About one fifth of public infrastructure
spending in Britain is now through the P3 process, and in Canada P3s
account for between 10 to 20 percent of public infrastructure
spending.\16\
According to Public Works Financing, only 1 of the top 38 firms
doing transportation P3s around the world are American.\17\ Of more
than 700 transportation projects listed in the newsletter, only 28 are
in the United States. Canada--a country with one-tenth of our
population--has about the same number of P3 deals as we do.
Nonetheless, a number of U.S. states have moved ahead with P3s and
privatization. Some projects in Virginia illustrate the
opportunities:\18\
Capital Beltway. Transurban and Fluor have built and are
now operating new toll lanes along 14 miles of I-495. The firms used
debt and equity to finance most of the project's $2 billion cost.\19\
The lanes were completed on time and on budget in 2012.
Dulles Greenway. The Greenway is a privately owned toll
highway in Northern Virginia completed in the mid-1990s with $350
million of private debt and equity.\20\
Jordan Bridge. FIGG Engineering Group and partners
financed and constructed a $142 million highway bridge over the
Elizabeth River between Chesapeake and Portsmouth. The bridge opened in
2012, and its cost will be paid back to investors over time with toll
revenues.\21\
There are many advantages of infrastructure P3s and privatization.
Most fundamentally, when private businesses are taking the risks and
putting their profits on the line, funding is more likely to get
allocated to high-return projects and completed in the most efficient
manner.
U.S. and foreign experience indicate that P3s are more likely to be
completed on time and on budget than traditional government contracts.
An Australian study compared 21 P3 (or PPP) projects with 33
traditional projects and found: ``PPPs demonstrate clearly superior
cost efficiency over traditional procurement . . . PPPs provide
superior performance in both the cost and time dimensions, and . . .
the PPP advantage increases (in absolute terms) with the size and
complexity of projects.'' \22\ A government official overseeing the
Capital Beltway P3 lauded the private firms in charge for their rapid
and nonbureaucratic way of solving problems that arose during
construction, which is ``not the way government works typically,'' he
said.\23\
The publisher of Public Works Financing, William Reinhardt, notes
that ``the design-build contracting approach used in a P3 guarantees
the construction price and project completion schedule of large,
complex infrastructure projects that often befuddle state and local
governments, as was the case with Boston's Big Dig.'' \24\ Reinhardt
says that P3 projects typically experience capital cost savings of 15
to 20 percent compared to traditional government contracting.
A Brookings Institution study noted that the usual process of
government investing decouples the construction from the future
management of facilities, which results in contractors having little
incentive to build projects that will minimize long-term costs.\25\ P3s
solve this problem because the same company both builds and operates
new facilities. ``Many advantages of PPP stem from the fact that they
bundle construction, operations, and maintenance in a single contract.
This provides incentives to minimize life-cycle costs,'' notes the
study.
Another reason privatized infrastructure is efficient is that
businesses can tap capital markets to build capacity and meet market
demands, without having to rely on the instability of government
budgeting. Our air traffic control (ATC) system, for example, needs
major upgrades, but the Federal Aviation Administration (FAA) cannot
count on a stable federal funding stream. The recent threatened
disruptions to ATC from federal budget sequester cuts illustrate the
hazards of having infrastructure depend on federal funding.
The solution in this case is to privatize the U.S. air traffic
control system, as Canada did with its system in 1996 with very
favorable results.\26\ Canada's ATC is run by the nonprofit corporation
Nav Canada separate from the government. It raises revenues from its
customers to cover its operational and capital costs. Nav Canada is a
``global leader in delivering top class performance,'' says the
International Air Transport Association, which has given the company
multiple awards.
hurdles to private infrastructure investment
Despite the benefits of private infrastructure investment, federal
policies have long created hurdles for the states in pursuing
privatization. Federal policymakers should free states from regulations
and subsidies so that they can become ``laboratories of democracy'' for
infrastructure. Here are some barriers to private infrastructure that
policymakers should examine:
Tax exemption on municipal bond interest. When state and
local governments borrow funds to build infrastructure, the interest on
the debt is tax-free under the federal income tax. That allows
governments to finance infrastructure at a lower cost than private
businesses, which stacks the deck against the private provision of
infrastructure. Policymakers should consider phasing-out the tax
exemption on state and local bond interest, perhaps in exchange for
reducing overall tax rates on capital income.
Income and Property Taxation. Government facilities don't
pay income taxes. While state-owned airports are tax-exempt, for
example, a for-profit airport would have its net earnings taxed at both
the state and federal levels.\27\ Similarly, government-owned
facilities are exempt from property taxes almost everywhere in the
United States, while for-profit businesses often bear a heavy burden of
property taxes on their land, structures, and machinery and
equipment.\28\ Note that by privatizing infrastructure and thus
subjecting it to taxation, governments would be broadening the tax
base. They could use the added revenues from base broadening to reduce
overall tax rates, which would spur greater investment of all types in
the economy.
Crowding Out. The existence of government
infrastructure--which is often provided at artificially low prices to
the public--deters potential private investments. Private highways, for
example, face an uneven playing field because drivers on a private
highway would have to pay the private tolls plus the gasoline taxes
that fund the government's ``free'' highways.
Federal subsidies. The crowding out problem is
exacerbated when federal subsidies tilt state and local decisionmakers
in favor of government provision. Potential private airports, for
example, are not eligible for most federal airport subsidies. Or
consider that before the 1960s most urban bus and rail services in
America were privately owned and operated. But that ended with the
passage of the Urban Mass Transportation Act of 1964. The Act provided
subsidies only to government-owned bus and rail systems, not private
systems.\29\ That prompted state and local governments across the
country to take over private systems, swiftly ending more than a
century of private transit investment in America's cities.
Federal regulations. Federal regulations have restricted
efforts to privatize state and local infrastructure. One issue has been
that states receiving federal aid for their facilities have been
required to repay the aid if the facilities are privatized. These rules
have been liberalized over the years, but they may still create a
disincentive to privatize in some cases.\30\ Another issue is that
tolling has been generally prohibited on interstate highways, which
prevented P3-style projects. However, the 2012 highway bill (MAP-21)
allowed for the tolling of new capacity on the interstates, which is a
step forward.\31\ Federal policymakers should work to eliminate
remaining regulations that stand in the way of infrastructure
privatization.\32\
Labor Unions. Privatization would undermine the power of
the public-sector unions that often dominate government services, and
so unions actively lobby against reforms. Unions lobby against
contracting-out airport security screening operations.\33\ The National
Air Traffic Controllers Association lobbies against ATC privatization.
And in the District of Columbia, unions are trying to block a proposal
to allow private operation of some bus services.\34\ One solution to
the problem is to ban monopoly unions (``collective bargaining'') in
the public sector, which is the rule in a number of states.\35\
Social Security. The structuring of Social Security as a
pay-as-you-go system is a negative for privatized infrastructure. One
of the fuels for the rise in P3s in other countries has been growing
investment by pension funds. Infrastructure investment is a good fit
for pension funds because it provides a return over a very long period
of time, which matches the pattern of long-term liabilities of these
funds. In Canada and Australia, the growth in P3s has been partly
driven by the pools of savings created by reformed government
retirement programs. In the United States, reforms to create Social
Security private accounts would create a large pool of long-term
savings to help fuel private infrastructure investment.
Policymakers should reduce the hurdles to private investment so
that we can attract more entrepreneurs to tackle the nation's
infrastructure challenges. After all, private infrastructure is not a
new or untried idea. Urban transit services used to be virtually all
private.\36\ And before the 20th century, private turnpike companies in
America built thousands of miles of toll roads.\37\ The takeover of
much infrastructure by governments in the 20th century was a mistake,
and policymakers here and abroad are now working to correct the
overreach.
In sum, there is widespread agreement that America should have top-
notch infrastructure to spur growth and compete in the global economy.
The way forward is for the federal government to cut subsidies and
reduce its control over the nation's infrastructure. State and local
governments should be encouraged to innovate with privatization and P3s
to the fullest extent possible.
Thank you for holding these important hearings.
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\1\ U.S. Bureau of Economic Analysis, National Income and Product
Accounts, Table 1.5.5, www.bea.gov.
\2\ This is OECD data for government gross fixed capital spending.
The data underlies Figure 2.1 in OECD, ``Pension Funds Investment in
Infrastructure: A Survey,'' September 2011.
\3\ Federal Highway Administration data is available at
www.fhwa.dot.gov/bridge/deficient.cfm.
\4\ Jeffrey R. Campbell and Thomas N. Hubbard, ``The State of Our
Interstates,'' Federal Reserve Bank of Chicago, July 2009.
\5\ Tad DeHaven, ``Privatizing Amtrak,'' Cato Institute, June 2010,
www.downsizinggovernment.org/transportation/privatizing-amtrak.
\6\ Chris Edwards and Peter J. Hill, ``Cutting the Bureau of
Reclamation and Reforming Water Markets,'' Cato Institute, February
2012, www.downsizinggovernment.org/interior/cutting-bureau-reclamation.
\7\ Chris Edwards, ``Government Cost Overruns,'' Cato Institute,
March 2009, www.downsizinggovernment.org/government-cost-overruns.
\8\ For background, see the Boston Globe's ``Easy Pass'' series of
reports by Raphael Lewis and Sean Murphy, www.boston.com/globe/metro/
packages/bechtel.
\9\ For example, see Allen Consulting Group and the University of
Melbourne, ``Performance of PPPs and Traditional Procurement in
Australia,'' November 30, 2007. And see Richard Kerrigan, ``P3 Study:
Over 80% of U.S. Highway P3s Were On-Time and On-Budget,'' Public Works
Financing, November 2012, p. 16.
\10\ Randal O'Toole, ``Urban Transit,'' Cato Institute, June 2010,
www.downsizinggovernment.org/transportation/urban-transit.
\11\ Randal O'Toole, ``High-Speed Rail,'' Cato Institute, June,
2010, www.downsizinggovernment.org/transportation/high-speed-rail.
\12\ Organization for Economic Cooperation and Development,
``Pension Funds Investment in Infrastructure: A Survey,'' September
2011.
\13\ Organization for Economic Cooperation and Development,
``Pension Funds Investment in Infrastructure: A Survey,'' September
2011, p. 34.
\14\ Organization for Economic Cooperation and Development,
``Pension Funds Investment in Infrastructure: A Survey,'' September
2011, p. 27.
\15\ Organization for Economic Cooperation and Development,
``Pension Funds Investment in Infrastructure: A Survey,'' September
2011, p. 107.
\16\ Public Works Financing, October 2011, p. 18,
www.pwfinance.net.
\17\ Public Works Financing, October 2011, p. 3, www.pwfinance.net.
\18\ Details on Virginia's PPPs are available at www.vappta.org/
projects.asp.
\19\ www.495expresslanes.com/project-background.
\20\ http://dullesgreenway.com.
\21\ www.figgbridge.com/jordan--bridge.html.
\22\ Allen Consulting Group and the University of Melbourne,
``Performance of PPPs and Traditional Procurement in Australia,''
November 30, 2007.
\23\ Comments of Ron Kirby, Washington Council of Governments,
Public Works Financing, December 2012, p. 21.
\24\ William G. Reinhardt, ``The Case For P3s in America,'' Public
Works Financing, January 2012.
\25\ Eduardo Engel, Ronald Fischer, and Alexander Galetovic,
``Public-Private Partnerships to Revamp U.S. Infrastructure,''
Brookings Institution, February 2011.
\26\ Chris Edwards and Robert W. Poole, Jr., ``Airports and Air
Traffic Control,'' Cato Institute, June 2010,
www.downsizinggovernment.org/transportation/airports-atc. And see Chris
Edwards, ``Privatize the FAA!'' Daily Caller, April 24, 2013.
\27\ There appears to be just one private for-profit commercial
airport in the United States. The Branson Airport in Branson, Missouri,
opened in 2009. See www.flybransom.com.
\28\ For background on the tax exemption on government land, see H.
Woods Bowman, ``Reexamining the Property Tax Exemption,'' Lincoln
Institute of Land Policy, July 2003. For information on property tax
payments by businesses, see Council on State Taxation and Ernst and
Young, ``Total State and Local Business Taxes,'' July 2012.
\29\ National Research Council, ``Contracting for Bus and Demand-
Responsive Transit Services,'' Special Report 258, 2001, Chapter 2.
\30\ President George H.W. Bush's 1992 Executive Order 12803 was
designed to encourage federal approvals of state privatizations, and it
liberalized the grant repayment requirements.
\31\ Robert S. Kirk, ``Tolling of Interstate Highways,''
Congressional Research Service, February 13, 2013.
\32\ For a discussion of the regulatory barriers to privatizing
airports, see National Academy of Sciences, Transportation Research
Board, ``Considering and Evaluating Airport Privatization,'' Airport
Cooperative Research Program report no. 66, 2012, pp. 45-46. See also
Jerry Ellig, The $7.7 Billion Mistake: Federal Barriers to State and
Local Privatization, Joint Economic Committee Staff Report, February
1996.
\33\ Joe Davidson, ``Decision to Keep Federal Screeners at Calif.
Airport Buoys Labor,'' Washington Post, January 10, 2013.
\34\ Dana Hedgpeth, ``Union Aims To Block D.C. Bus Plan,''
Washington Post, July 20, 2013.
\35\ Chris Edwards, ``Public-Sector Unions,'' Cato Institute Tax
and Budget Bulletin no. 61, March 2010.
\36\ Randal O'Toole, ``Urban Transit,'' Cato Institute, June 2010,
www.downsizinggovernment.org/transportation/urban-transit.
\37\ Gabriel Roth, ``Federal Highway Funding,'' Cato Institute,
June 2010, www.downsizinggovernment.org/transportation/highway-funding.
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