Commentary on Debate: How to Fix America’s Infrastructure

Monday night’s presidential debate included some instructive moments even for their repetitiveness; other moments were mere distracting distortions.

We have been writing about the need to upgrade America’s infrastructure it seems almost weekly. But only tangentially was the issue raised during the debate. Donald Trump, among his bill of particulars defining the trouble the Obama administration has ushered in over the past eight years, mentioned the sorry state of U.S. airports and compared them unfavorably to similar facilities in Asia.

“Our airports are like from a third-world country. You land at LaGuardia, you land at Kennedy, you land at LAX, you land at Newark and you come in from Dubai and Qatar and you see these incredible — you come in from China — you see these incredible airports and you land — we’ve become a third-world country,” Trump observed.

As Kim Day, the CEO of Denver International Airport, noted in an Op-Ed forThe Denver Post on the 20th anniversary of the local airport’s opening: “DIA is an economic powerhouse for Colorado, growing its initial annual economic impact of $3.1 billion to an estimated $26.3 billion in 2013. The airport supports nearly 190,000 jobs, and is on track to be even more impactful in the years to come.”

It’s not a perfect picture, of course, as cost overruns for project expansions, including a new train station and a hotel, well illustrate.

Nevertheless, a decision made 27 years ago to spend more than $2 billion on a new airport — the only major new one built in the U.S. since 1974 — has helped diversify Colorado’s economy and spurred broader growth.

Airports are certainly one area in which we can use an upgrade. We also need more and newer bridges, roads, and tunnels. And we need to upgrade the electrical grid. And we need to improve and update our port facilities.

The problem with the United States’ infrastructure is much broader than failing airports and bridges. The nation’s roads are congested and full of potholes. In 2014, the typical urban commuter spent 42 hours stuck in traffic, up from 20 hours in 1984. Americans consumed over three billion gallons of gas as they sat in grid­lock for almost seven billion hours, at a cost of $160 billion in wasted fuel and time.

Hydration is absolutely essential, and yet we continue to ignore the state of the infrastructure that delivers it to us. In its 2013 Report Card for America’s Infrastructure, the American Society of Civil Engineers gave our “drinking water” assets a “D.”

According to Professor Robert Glennon of the University of Arizona:

Our water infrastructure consists of approximately 54,000 drinking water systems, with more than 700,000 miles of pipes, and 17,000 wastewater treatment plants, with an additional 800,000 miles of pipes. A 2012 report of the American Water Works Association concluded that more than a million miles of these pipes need repair or replacement. That’s why communities across the nation suffer 240,000 water main breaks per year. The major cause of pipe failure is age.

Disease and death follow from poorly conceived and maintained water infrastructure.

The root of the crisis is clear: the United States has underinvested in its infrastructure. The federal gas tax is the main source of federal funding for roads, bridges, and subways. But Washington has not increased that tax, of 18.4 cents per gallon, since 1993; in real terms, its value has thus fallen by over 40 percent. Expert groups such as the American Society of Civil Engineers, business associations such as the U.S. Chamber of Commerce, and unions such as the AFL-CIO have all called for trillions of dollars of new investment. But Washington has failed to act.

The problems that plague American infrastructure are deep-seated and complex. Yet there is a way out. Washington and the public must recognize that world-class infrastructure does not come cheap. High-quality infrastructure is vital to global economic competitiveness, and the United States is falling behind. The United States invests less than two percent of its GDP in infrastructure; Europe, by contrast, invests five per­cent. Furthermore, the bureaucratic system that oversees public infrastructure spending has become hopelessly “siloed,” with separate agencies at each level of government dedicated to different modes of transport. Each has its own stakeholders, champions, and opponents. It’s a wasteful, inefficient system. Henry Petroski, a professor of civil engineering and history at Duke University in his book “The Road Taken”, claims reforming it will require several steps.

Firstly, governments should eliminate silos. A unified department should merge the federal highway, transit, aviation, maritime, and railroad administrations; the Army Corps of Engineers, which controls investment in ports; and the Environmental Protection Agency’s water programs, which provide federal funding for sewer systems and drinking water. This unified department of infrastructure should incentivize state and local authorities to make smarter choices with federal funding. For instance, it could coordinate the timing of different projects, such as a sewer-line expansion and a road repair, so that the government has to dig only once. It should also consider instituting a so-called corridor-based approach, similar to the one the United Kingdom uses, in which the government evaluates a set of projects designed to solve a particular problem and chooses the most cost effective among them. For example, to improve the flow of people between Washington, D.C., and New York City, policymakers should compare the costs and benefits of investing in highways, high-speed rail, increased airport capacity, and more efficient freight rail and shipping to decide how best to solve the problem, rather than doling out funds to each of the various transportation agencies without coordination.

The United States has reached a fork in the road. It can let its infrastructure crumble, its bridges collapse, and its roads grow ever more congested. While Government at all levels has a tenuous debt-and-deficit situation, government entities can nevertheless also borrow at historically low rates. It makes sense accordingly to lock in cheap money to pay for infrastructure investments with long economic tails. Finally, policymakers should not fear the private sector. Good ideas frequently come from sources outside the government. Cities and states should allow both the public and the private sectors to submit unsolicited proposals for innovative infrastructure projects. Of course, these projects would have to be rigorously and publicly evaluated. But the fact that private companies are motivated by profit is no reason for the government to ignore them.

Sticking Points for Congressional Energy Conferees.

Thursday revealed major sticking points on Energy legislation during the opening meeting of the conference committee to reconcile the House and Senate versions of the Energy Bill.

Those include: funding for infrastructure, drought and wildfire language, and the Land and Water Conservation Fund.

Senate Energy and Natural Resources Committee Chairwoman Lisa Murkowski (R-Alaska), who co-authored the Senate bill and serves as chair of the conference committee, urged conferees to “prove the skeptics wrong,” adding that her efforts to pass a bill had been “written off by every trade journal three or four times.”

The Senate passed its bill 85-12 in April, and the House passed an amended version 241-178. The House’s more partisan version included much of the House’s own language on energy efficiency, and it added provisions on contentious issues like the California drought and wildfire management.

The drought language would loosen some requirements of the Endangered Species Act, and the wildfire provision would expedite forest management projects. The provision on drought attracted a veto threat from the White House. The Obama administration also criticized the provision on wildfire but stopped short of a veto threat.

The Senate bill avoided those controversial topics because supporters knew that it would threaten their ability to pass the first update to the country’s energy policy since 2007.

Murkowski’s co-author, committee ranking member Sen. Maria Cantwell (D-Wash.), and House Energy and Commerce Committee Chairman Fred Upton (R-Mich.) also gave optimistic opening statements, praising some of the less controversial provisions rather than pushing on the controversial ones.

But the meeting, which allowed most of the 47 conferees to give brief statements, quickly shifted toward a few key issues where members have dug in their heels.

Rep. Frank Pallone (D-N.J.), who had previously expressed his displeasure with both the House and Senate bills, reiterated that he wants to check off three boxes in the final conference report. Pallone wants the final legislation to invest in energy infrastructure, to focus on “direct benefits for consumers,” and to include action on climate change.

Pallone didn’t go into detail on the second and third demands, but he is already dissatisfied with the lack of infrastructure funds in both the House and Senate bills.

After the meeting, Murkowski made no promises, saying conferees would work through the infrastructure issues along with other disagreements.

A few natural resources and land management issues also present challenges. House Natural Resources Committee Chairman Rob Bishop (R-Utah) continued to call for measures addressing the California drought and wildfire management. Cantwell has said that those issues are important, but they should be left out of the energy bill because they’re too contentious to handle now.

The wildfire provision has some bipartisan support on the conference committee. Rep. Peter DeFazio (D-Ore.), who is a conferee, voted for the measure as a standalone bill, and he briefly praised it in his statement on Thursday. Sen. Ron Wyden (D-Ore.) also encouraged members to include language on wildfire management, but he did not mention the House’s measure specifically. Rep. Bruce Westerman (R-Ark.), the bill’s sponsor, is also a conferee.

The Land and Water Conservation Fund is also a sticking point. The Senate bill would permanently reauthorize the fund, but Bishop has said that’s a non-starter without some changes that shift control from the federal government to states. Rep. Cynthia Lummis (R-Wyo.) emphasized her support for similar changes to the conservation fund. Wyden, meanwhile, called permanent reauthorization “a particularly valuable part of the Senate bill.”

Upton has already said he doesn’t think lawmakers will reach a deal before the election. At Thursday’s meeting, Sen. John Barrasso (R-Wy.) accused some House and Senate Democrats, without naming anyone in particular, of dragging their feet.

After the meeting, Murkowski said Barrasso is simply warning members and stakeholders that a new Congress means there will be a full reset on the bill. It would be a waste of the past year’s efforts not to pass something by December.

 

 

City Should Consider Using P3s to Bolster Pension Plan and Water System, Observer Says

Last week we wrote that Municipalities’ should Consider Using P3s to Bolster Pension Plans and Water Systems. Lewis Solomon, a professor emeritus at George Washington University Law School in an Aug. 8 Herald Tribune op-ed. says P3s can produce revenues that could keep municipal pension plans solvent.

A solid pension plan should be 80 percent to 90 percent funded but Sarasota Florida’s general plan is only 71 percent funded and is projected to incur a $54 million unfunded liability in the years ahead, wrote Solomon.

To keep its underfunded pension plan afloat, the city is reducing cost-of-living adjustments and other plan benefits and limiting the number of workers who can enroll. The city should instead consider investing the plan’s funds in a P3 project that can serve the dual purpose of producing good returns for the plan while rehabilitating Sarasota’s struggling water and wastewater system, Solomon suggested.

“Rather than these palliatives, Sarasota could monetize its water and sewer system by entering into a public-private partnership for these assets. By providing access to private capital, this approach would quickly help the municipality achieve the general plan’s 80 percent funding target and substantially lessen the millions in current, annual contributions to pay down the plan’s unfunded liabilities,” he wrote.

Robert Poole of the Reason Foundation recently made a similar suggestion, pointing out that pension funds looking for relatively safe investments would do well to consider buying into existing or “brownfield” infrastructure P3 projects than in new “greenfield” ones.

By leasing its water system — representing more than $100 million in water and sewer projects — to a private developer for 20 to 30 years, Sarasota could obtain private financing for and rehabilitation of 175 miles of water pipes and its deteriorating lift stations, Solomon estimated.

More than 2,000 communities use P3s to fund and conduct vital water-related infrastructure projects, Michael Deane, executive director of the National Association of Water Companies has noted.

One example is the Bayonne (N.J.) Municipal Utilities Authority, which leased its ailing water and wastewater system to Kohlberg Kravis Roberts and United Water in 2012 for 40 years, Solomon pointed out. Through the deal, the authority received $150 million from the developer, which also agreed to invest $107 million in the city’s water system and provide technical expertise to rehabilitate it.

“This infusion of capital was critically important to the city because it eliminated $130 million of existing debt and improved both the authority’s finances and Bayonne’s credit rating,” according to a June 10, 2015, article on two successful municipal water P3s published by the Wharton School at the University of Pennsylvania.

Although it is not yet common for pension plans in this country to invest in public infrastructure projects, interest is growing. For instance, the California Public Employees Retirement System announced recently its purchase of a 10 percent share — at least $330 million — of the company that operates and maintains the Indiana Toll Road.

Pension fund managers in Canada have figured this out. Several are invested in such projects internationally and the Trudeau government is encouraging them to do so domestically.

Increased Private Ownership of Public Water Systems On Horizon?

According to Bluefield Research, a dearth of public funding coupled with municipalities’ growing needs to repair or replace aging water and wastewater systems militates in favor of substantial private investment.

Although an investment of more than $532 billion will be needed over the next decade to meet the nation’s water infrastructure needs, federal funding for municipal water projects has dwindled steadily over the past four decades forcing municipalities to foot the bill to an increasing extent.(See: Bluefield Research) . For example, the Congressional Budget Office estimates federal spending on water utilities has dropped by 75 percent since 1977, reported Politico.

Only 15 percent of the 49,000 water systems in the United States are privately owned. Most P3s in the sector have involved operation and management agreements. However, recent merger and acquisitions (M&A) activity presages a growing role for private ownership. More than 19 pending or finalized deals worth $384 million were recorded during the first half of 2016, and, the number of water system M&As in Illinois, North Carolina and Virginia are increasing as well.

Pending projects in California, Florida, Indiana and Texas involving desalination, water treatment and wastewater plants also reveal growing public interest in these types of agreements. Meanwhile, the highest level of growth in this area is likely to occur in New Jersey, California and Pennsylvania, predicted Bluefield.

Despite these promising developments, obstacles to increased private investment in the sector, “including public pushback, asset bankability and debt financing remain, however, the broader, national focus on infrastructure upgrades is opening the door to more private participation,” said Keith Hays, Bluefield Research’s vice president. “There is no silver bullet to solving the infrastructure challenge. Stakeholders must deploy a range of solutions including alternative financing, operations management and innovative technologies,” he added.