Your humble blogger may be reading more than is warranted into the synchronistic timing of stories in two different newspapers about financing highway construction. But it nevertheless looks sus.
On Wednesday, Politico warned of a “highway cliff,” that the Highway Trust Fund, which funds infrastructure, is projected to run out of dough at the end of August. That means that projects underway could be stopped or delayed. With this budget need coming so close to an election, grandstanding is even more likely than usual to prevail over common sense. From Politico:
There aren’t many good options for lawmakers — particularly Republicans, who are loath to approve big-money projects, don’t much like shifting money around and are sure to resist even a minimal hike in the gas tax.
Few things rile up voters more than political stumbles leaving them stuck in traffic. Just ask New Jersey Gov. Chris Christie. And the timing couldn’t be worse, with funding slated to run out just months before voters head to the ballot box to vote in a critical election — providing the electorate with a fresh example of congressional dysfunction.
Highway policy is pricey, complicated and fraught with regional tensions, and the process of rebuilding the trust fund could rattle the power hierarchies within the Capitol…
Multiple committees have jurisdiction, and even the most senior lawmakers charged with spearheading transportation policy say the decision-making process is parked in the posh leadership suites in the Capitol.
Senior House GOP leadership aides readily admit that this is one of the main hurdles standing between them and the 2014 elections. The looming debate illustrates that, regardless of their plan to keep this year drama free, Republicans will not be able to avoid some legislative battles that threaten to expose deep fissures in their party.
If you read the rest of the article, the situation is a mess, procedurally as well as practically. One assumes that Congresscritters will grope for a Euro-crisis style kick-the-can-down-the-road-past-the-midterms approach, but even getting to that is fraught.
What struck me as telling was a story the same night, in the Financial Times, on infrastructure deals. Now why would that have anything to do with highway funding gridlock in the Beltway? In fairness, the Financial Times article made nary a mention of the imminent financing shutdown. But in talking about infrastructure deals, it peculiarly spoke only about highway financing, and of financing new construction. As readers likely know, infrastructure deals more commonly involve mature government assets, and range well beyond highways. Airports, tunnels, parking meters and parking garages have also been popular infrastructure plays.
The other element that tripped my “something more is up” detector was the lack of an obvious news hook, yet the feel of the article of being a PR plant. It focuses almost entirely on highway construction deals (the only exception is an in-passing mention of failed efforts to privatize Pennsylvania Turnpike toll roads and some Virginia ports activities). And it is concerned strictly from the perspective of investors, presenting the transactions as if investors were taking on significant risk.
While it is true that some deals have been turkeys, that does not mean that the governmental agency on the other side of the table somehow got a great deal. As we’ll discuss in a bit more detail shortly, the investors typically get strong profit protections. For instance, if a highway lane is taken out of service for emergency reasons, the government entity has to make up the revenue loss. So a deal that went pear-shaped is likely to come at some cost to the government “seller” as well.
The Financial Times account starts by describing how Texas State Highway 130, near Austin, was expected to be a winner by virtue of letting drivers pay for, among other things, the right to drive legally at 85 miles an hour. Turns out most people prefer to drive a little slower for free. Here are some representative sections of the Financial Times story:
The accurate prediction of traffic levels is one of many challenges that confronts private investors in the nation’s infrastructure. They must also grapple with private investment laws that differ from state to state, competition from public sector bodies that can offer tax-free bonds and often political interference.
Such private investment was widely expected, when SH130 was planned in 2007, to square the circle of US infrastructure spending. Private capital, it was hoped, would fill the gap between the shrinking availability of public funds and the growing maintenance needs of ageing 20th century infrastructure.
As the problems of Texas SH130 illustrate, however, there is ample scope for investments to turn sour – and a number of investors have suffered.
“They wanted to bring private capital to bear to relieve congestion on I-35,” one person involved with the SH130 project says. “Between when the project was planned and now, the economy has gone in a different direction. Texas’s [economic activity] is nowhere near what an extension of a 2007 economic forecast would have suggested.” Nevertheless, Anthony Foxx, transportation secretary, insists private markets have a “very useful role” in the US’s infrastructure. Infrastructure investments can also provide steady, low-risk, long-term returns of the kind that most pension funds want…
The US public sector has a financial cost advantage because public bodies’ bonds are generally tax-free.
Yet, even given private investors’ higher financing costs, many observers say the benefits of tapping their management expertise and of shifting the risks of cost overruns to the private sector can make deals worthwhile.
Yves again. This is a remarkably one-sided account, given the history of infrastructure deals. And I wonder whether such a sanitized version is being road tested (pun intended) in the Financial Times in case the “highway cliff” negotiations give Obama and the Republicans the opportunity to revive one of Obama’s pet ideas, that of “public/private partnerships” to finance infrastructure. It was only a bit more than a year ago that we last had to rouse ourselves to explain what was really afoot. From a March 2013 post:
Apparently Obama’s idea of a Holy Week sacrifice is to feed American citizens to rapacious bankers, this time through the device of “public/private partnerships” to support infrastructure spending. Some NC readers were correctly alarmed by a speech by Obama on Friday on using public/private partnerships to fund infrastructure spending. This is not a new idea; Obama first unveiled it in his Statue of the Union address. But it is a singularly bad idea, that is, if you are anyone other than a promoter of or investor in these deals.
As we’ve discussed at length earlier, these schemes are simply exercises in extraction. Investors in mature infrastructure deals expect 15% to 20% returns on their investment. And that also includes the payment of all the (considerable) fees and costs of putting these transactions together. The result is tantamount to selling the family china and then renting it back in order to eat. There is no way that adding unnecessary middlemen with high return expectations improves the results to the public. In fact, the evidence is overwhelmingly the reverse: investors jack up usage fees and skimp on maintenance. And their deals are full of sneaky features to guarantee their returns. For instance, Truthout noted:
Infrastructure privatization contracts are full of “gotcha” terms that require state or local governments to pay the private contractors. For example, now when Chicago does street repairs or closes streets for a festival, it must pay the private parking meter contractor for lost meter fares. Those payments put the contractors in a much better position than the government. It gets payments, even though Chicago did not get fares when it had to close streets…..
Highway privatization contracts also often include terms that forbid building “competing” roads or mass transit. Some even require making an existing “competing” road worse. For example, the contract for SR-91 in Southern California prohibited the state from repairing an adjacent public road, creating conditions that put drivers’ safety at risk. A proposed private highway around the northwest part of Denver required that local governments reduce speeds and install speed humps and barriers and narrow lanes on “competing” roads to force drivers to use the privatized road….
Virginia decided to promote carpooling to cut down on pollution, slow highway deterioration and lessen highway and urban congestion. As a result, Virginia must reimburse the private contractor for lost revenues from carpoolers, even though not all of the people in a car would otherwise have driven individually….
Now there is some hope in this depressing news. First, the Republicans may overplay their hand. They insist they won’t allow Obama to get any funding for these deals unless they get corresponding tax cuts. Second, with Obama’s poll ratings flagging, he’s looking more and more like a lame duck. Infrastructure is not one of his top priorities, and he may well wind up concentrating his dwindling chips on other issues.
Nevertheless, some “pragmatists,” otherwise known as the Vichy Left, may insist it’s better to have some sort of infrastructure deal, even if it means enriching financiers, than none. That’s spurious. A new post at VoxEU addresses the issue of infrastructure spending in the European context, where austerity is the order of the day, which means a lack of funding for important needs. The authors considered and rejected the idea of having private investors fill the gap. They instead argued for smarter investing, focusing more on investing to improve the productivity of existing infrastructure than costly new projects (which are often construction boondogles).
So brace yourself for this “public/private partnership” idea being pulled out of the mothballs. The good news is that Obama failed the last time he tried getting this idea implemented and he has less political capital than he did a year ago. Moreover, a public/private partnership scheme would almost certainly have even more moving parts than other ways of dealing with the “highway cliff” which also reduces the odds of it getting done.
But never forget that the proponents of these scams are playing a long game. Even if they lose this round, the more opportunities they have to pitch these looting mechanisms as reasonable policy options, the greater the odds they have for pushing them over the line eventually. That’s why it remains important to keep focusing on who wins in these deals in practice, and it certainly isn’t ordinary citizens.