Improve Infrastructure Projects with Financing and Regulatory Reform

Yesterday, the Cato Institute’s Randal O’Toole was kind enough to invite me to participate in a panel discussion on transportation infrastructure priorities in the Trump era. We were joined by Reason Foundation’s Baruch Feigenbaum and Maryland Public Policy Institute’s Ron Utt. Cato’s Chris Edwards moderated the panel. Video of the event can be found below.

My remarks focused on infrastructure financing and regulatory reform as a means to get the most bang for the buck out of these investments.

With respect to financing reform, I noted that infrastructure financing and public-private partnerships (P3s) can shift project costs and risk away from general taxpayers and toward the private sector. Currently, the public sector is able to utilize tax-free municipal bonds, while the private sector does usually not enjoy such a tax advantage when it finances infrastructure.

The ideal solution for leveling the infrastructure financing playing field would be to eliminate the muni bond tax exemption, but this is politically unrealistic for the foreseeable future. The second-best option is to expand tax-free debt financing for P3s.

The U.S. already has private activity bonds for surface transportation P3s, but they are limited by a lifetime national cap of $15 billion. As of January 23, 2017, $10.86 billion has been allocated according to the Federal Highway Administration. If the administration and Congress wish to significantly increase private investment in public-purpose infrastructure, this poses a serious hurdle. One possible solution would be lifting this cap and expanding asset class eligibility.

In 2015, the Obama administration proposed qualified public infrastructure bonds (QPIBs), which would have expanded eligible projects (including airports, ports, water and wastewater systems, and inland waterways), uncapped issuance, and imposed no expiration date. If the goal is increasing private-sector investment in public-purpose infrastructure in the near-term, a new QPIB-style bond should be created to help level the financing playing field between the public and private sectors.

But even if you’re not in favor of increasing private-sector involvement in public-purpose infrastructure, public-sector infrastructure financing could use some badly needed reforms. One example is the airport passenger facility charge (PFC). The PFC is an efficient and fair local user fee and can help to reduce the federal taxpayer burden.

Airports can currently charge a maximum PFC of $4.50 per enplanement, which has been unchanged since 2000. Inflation has eroded around half of its buying power since then. Further, many airports are approaching their debt limits, and PFC revenues can back bonds. Uncapping the PFC would allow airports to re-access the bond market to finance needed improvements. Large hubs have advocated for an uncapped PFC and have offered to return all of their Airport Improvement Program grant funding in exchange for this privilege. Fortunately, Reps. Peter DeFazio (D-OR) and Thomas Massie (R-KY) recently introduced legislation to do precisely that.

With respect to regulatory reform at the Department of Transportation (DOT), I noted that Executive Order 12866 signed by President Clinton in 1993 ordered regulatory agencies to, whenever possible, “specify performance objectives, rather than specifying the behavior or manner of compliance that regulated entities must adopt.”

Despite attempts to move away from more onerous prescriptive safety regulations, the DOT’s ability to reform in a performance-based direction has at best been uneven. To illustrate this, consider the following examples:

• The National Highway Traffic Safety Administration’s Federal Motor Vehicle Safety Standards are generally performance-based, particularly the crashworthiness standards. For instance, standard 208 (49 C.F.R. § 571.208) does not specify the means by which manufacturers must comply with the airbag mandate, only that the airbags installed are capable of meeting certain performance standards. The ultimate design of the airbag is up to them.
• The Federal Aviation Administration (FAA) in recent years has made an attempt to move away from rigid, prescriptive Part 23 (14 C.F.R. Part 23) airworthiness certification requirements. Small aircraft certification was reformed in a performance-based direction in late 2016 and more performance-based certification reforms are expected to be included in the FAA reauthorization bill in the coming months.
• The Federal Railroad Administration (FRA) has some performance-based rules (e.g., the development of bridge management programs at 49 C.F.R. Part 237), and proposed in late 2016 alternative passenger railcar crashworthiness standards based on performance-based principles. But the FRA also proposed a rule in early 2016 that would require a minimum two-person crew. This cuts against ongoing efforts to roll out a suite of communications and automation safety technologies mandated as positive train control and the potential future business benefits they could offer: namely, increased automation can replace human operators, thereby lowering labor costs and improving efficiency. This purely political rule was proposed at the request of labor unions, who have a long history of featherbedding in the railroad industry.

One way to resolve these issues would be for Congress to require DOT to complete a comprehensive regulatory review and for its agencies to develop performance-based alternatives to prescriptive rules, while also requiring that all new rules be outcome-based performance standards. This is especially important in the case of emerging transportation technologies such as automated road vehicles and unmanned aircraft systems, which are developing at a rapid pace. If regulators are unable to keep up with technological innovation, they risk preventing the realization of the many potential benefits of these new technologies. I discuss the need for broad performance-based safety regulatory reform at DOT in greater detail in a forthcoming CEI paper.