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President Trump’s budget plan for his much-anticipated infrastructure initiative would provide $200 billion in tax credits and grants over the next 10 years to encourage private companies to invest into public-private partnerships (P3s). The overall goal is to create $1 trillion in funds to help rebuild the United States’ crumbling infrastructure, with that funding coming largely from the private sector. However, this plan has come under heavy criticism from many in the engineering sector, who say it’s inadequate.
According to Congressman John K. Delaney of Maryland’s Sixth District, P3s cannot be the sole answer to rebuilding the country’s infrastructure. “As someone who spent two decades as an entrepreneur before being elected to Congress,” he said, “I believe that the private sector is an incredible source of innovation and expertise…and should also be considered as a viable source of capital and financing.”
However, Delaney went on to criticize this approach. “It is increasingly apparent that the President’s infrastructure plan will be heavily reliant on public-private partnerships,” he noted. “If the White House’s plan is overly reliant upon private capital, it will ultimately be insufficient and inadequate.”
A recent article from The New York Times highlighted the dangers of P3s and how they can hurt a country. India has relied heavy on P3s to expand its highway network and to build their power stations. Build costs have exceeded initial bids, however, burdening state banks with high amounts of debt (as developers have been unable to collect enough in tolls and payments to repay loans).
The private market’s main concern is to maximize financial returns, while the government’s broader concern is to improve the infrastructure to benefit the public. In 1995, to ease the heavy traffic on California’s Route 91, a four-lane toll road was constructed by a private partnership formed by subsidiaries of Peter Kiewit Sons, Compagnie Financiere et Industrielle des Autoroutes (a French toll road company), and Granite Construction. Initially the results were good, providing a faster roadway that drivers had the option to pay for.
However, the state of California was locked into a 35-year lease agreement that barred it from making repairs or improvements that would lure drivers away from the toll. In the end, Orange County ended up buying the toll road in 2003 for a price tag of $203 million to gain control of their own highway.
In 2017, the American Society of Civil Engineers (ASCE) graded the United States’ infrastructure with a D+. The report covers the major aspects of the U.S. infrastructure, including bridges, dams, energy, rail, roads, wastewater, drinking water, schools, and even the aviation industry. The report originated in 1988 from the congressionally chartered National Council on Public Works Improvement Report the “Fragile Foundations: A Report on America’s Public Works.”
Since 1998, the ASCE has generated the report every four years. The GPA in 1988 was a C and is also the highest grade the U.S. has ever received. Since 1998, the U.S. has received a D or D+, and the cost to improve has increased dramatically. The current estimated cost to improve the nation’s infrastructure over the next 10 years is $4.59 trillion.
The current estimated cost for most infrastructure projects through 2025 is $2.53 trillion. The ASCE predicts that the actual funding need is closer to $4.59 trillion—a difference of $2.06 trillion. To close this gap, investment must come from all levels of government and the private sector from 2.5% to 3.5% of the U.S. Gross Domestic Product by 2025. The steps proposed by the ASCE are as follows:
Trust funds. Dedicated public funding sources on all levels (i.e., local, state, and federal) need to be consistent and sufficient. These user-generated funds should not be used to pay or offset other areas of government budgets.
Highway trust funds. Raise the federal motor fuel tax by at least 25 cents per gallon and tie it to inflation to restore its purchasing power. The tax is used to fund the federal surface transportation program. The current use fee as of 2017 is 18.4 cents per gallon on unleaded gasoline and 24.4 cents per gallon on diesel.
Prioritization. Authorize the fully funding of specific programs based on the deficiency of the infrastructure.
Realistic service costs. Owners and operators of infrastructure must charge rates and fees that reflect the true cost of use, maintenance, and improvements for all sectors of infrastructure.
Stanford News recently interviewed Francis Fukuyama, a senior fellow at the Freeman Spogli Institute for International Studies, and Raymond Levitt, professor of engineering and director of the Stanford Global Projects Center, on how P3 markets should be properly leveraged. Levitt highlights how the United Kingdom, Australia, and Canada use P3 markets for roughly 10 to 15% of all infrastructure projects. The focus has been primarily on district-wide schools, statewide bridge repairs, and water collection projects. They should only be used for significant sized projects whose estimated capital cost exceed $100 million.
If smaller projects can be bundled together to make them into a larger categorized project, they then become eligible for P3 concessions. Fukuyama argues that projects should be prioritized based on two major criteria: 1.) rigorous and nonpartisan evaluation from a professional commission that ranks economic and other benefits versus cost; and 2.) the minimum level of participation by local governments or private firms.
The funding of a project via user fees and local taxes ensure that the project receives strong local support versus just political support. Levitt and Fukuyama ultimately argue for a new federal agency, the “Department of Infrastructure,” to oversee the evaluation and prioritization of infrastructure projects.
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