A Critique of “300 Million Engines of Growth”: Why More Spending Won’t Cure what Ails U.S. Infrastructure

Earlier this month, the Center for American Progress issued a  report in which it set out recommendations for growing the American economy. A significant priority in this bold agenda is the rebuilding of our nation’s infrastructure. CAP estimates that spending $262 billion annually is required to repair our roads, bridges, water, and sewer facilities over the next 10 years. However, federal, state, and local governments are annually apportioning only $132 billion.

After hearing these statistics, it is natural to conclude that the answer to infrastructure that is aging and breaking is simply a matter of increasing our spending to make up the difference in what we are currently spending and what we need to spend.  This is the conclusion CAP’s report comes to when it proposed: Increasing annual federal funds spent across all infrastructure sectors by $48 billion, along with $10 billion in new federal loan authority. This amount would incentivize an additional $11 billion in states and local matching funds.

But the government at all levels is not actually spending less than any other developed country on its physical foundations. As a share of gross domestic product, the U.S. spent 3.5 percent of GDP on infrastructure in 2010, slightly higher the average of countries within the Organization for Economic Development and Cooperation that spend on average 3.3 percent of GDP. As the graph below shows, the U.S. and other advanced countries have allocated roughly the same share of GDP to infrastructure investments going back to the 1980s:

The problem is not how much money is spent, but how it is spent. Other developed countries have developed reliable and technologically advanced infrastructure while the United States pays comparable prices for shoddy and second-class structures. What these countries do differently is form partnerships with the private sector to build, maintain, operate, and sometimes own infrastructure of all kinds. Under a public-private partnership, or P3, a for-profit company would assume the risk of building a road or sewage plant by issuing debt or shares. Since it assumes the risk, the company has an incentive to complete the project on time, contain costs, and deliver services to the greatest amount of users. Research has showed a dramatic difference in how P3s perform in providing public services relative to conventional public providers of services.

A study was conducted on Australia 21 P3s and 33 public projects. P3s finished on average 3.4 percent ahead of schedule and public projects were completed 23.5 percent behind schedule. Protracted and delayed dates of completion inflate construction costs of the final project. When this study compared a sample of $4.5 billion in P3 projects against public projects of similar value, they found that the public projects experienced cost overruns of $643 million while P3s  were completed with only $58 million in cost overruns. P3s have found similar records of successful performance in countries including, Canada, the United Kingdom, and others.

State and local governments in the U.S. have been slow to develop P3s to build and maintain infrastructure and consumers of government services have suffered as a result. Construction companies do not assume financial liabilities when handed taxpayer money, which creates little incentive to contain costs or finish projects on time. The builders of public projects are also rarely the ones that will be operating them, which makes projects more likely to have higher operation and maintenance costs. Costs in the United States are also inflated by procurement requirements that do not exist in other developed countries. Buy America provisions require that the materials used in public projects be made up of components that are 60 percent made in the United States. The Davis Bacon Act and project labor agreements also increase the labor costs of construction and maintenance.

The problem with U.S. infrastructure is not that too little is being spent. The problem is that the current regime of public infrastructure procurement is inefficient and expensive in comparison to the public-private model that has been embraced by other countries, and other possibilities such as David Levinson’s proposal to convert roads into public utilities. When the institutions are broken, more money won’t do any good.