Guest Op-Ed: Infrastructure – How to Make A Difference

April 12, 2019

Increased infrastructure spending seems to be the most popular promise of presidential candidates.  One trillion dollars is a common number, mentioned by President Trump and presidential candidates Senator Bernie Sanders (I-VT) and Senator Amy Klobochar (D-MN), among others.

These proposals have several things in common.  Proponents rely on the “America in Ruins”[1] definition of infrastructure problems, with an emphasis on general physical deterioration – structurally deficient bridges are a favorite example. The America in Ruins argument has been with us for a long time. By focusing on physical deterioration, this misses the value of investment in larger projects that generate long-term economic growth and economic productivity.

Our current infrastructure programs are not geared to these larger, multi-state types of investment.  The federal highway program, for example, uses a fixed formula to apportion funds on a state by state basis.  This stimulates an active debate over whether or not each state gets its fair share of funds (termed donor-donee debate – although less relevant now that the Highway Trust Fund has received more than $140 billion from the general fund).  In addition, the federal share of infrastructure spending is in a long-term decline, shifting financial responsibility to individual state and local governments.

The lack of focus on regional infrastructure misses significant potential economic gains.  The Interstate Highway System is the classic example, of course.  This project generated annual returns on investment of 50-60 percent over a couple of decades and stimulated new industries and new firms.[2]  The Interstate System accounted for fully one fourth of the nation’s economic productivity in the 1960s – and all from a four cents per gallon user charge.

What made the Interstate a national economic success?

  • Large scale – new roads linked every major city in the Continental United States;
  • Self-funding – the Highway Trust Fund dedicated highway user charges to the Interstate;
  • Financial incentives – the federal government covered 90 to 95 percent of construction costs (at a time when the rest of the federal highway program was set at a 50 percent match);
  • Obvious economic and social benefits – businesses began to expand markets and to relocate well before the system was complete since funding was in place and a map showed where the next road would be built.

A recent report by the US Treasury[3] examined the net economic impact on the US of large-scale infrastructure projects.  One surprise: the number of regional (multi-state) infrastructure projects was limited. One can debate possible reasons for this lack of ambitious projects: federal programs that no longer encourage regional projects is one possible answer, as are the political and environmental barriers to carrying out large projects.

One example of a large-scale regional project is the AIRnet-21 proposal that would rebuild the Northeast Corridor rail line and stimulate additional rail transportation between Boston, New York City, Philadelphia, Wilmington, Baltimore, and Washington DC.  This proposal would also upgrade federally owned track in Chicago and in parts of Michigan.

The plan builds on a concept developed by a Congressional blue-ribbon panel established some twenty years ago and also follows proven practice among European passenger rail lines.  Very simply, Amtrak’s infrastructure assets would be spun-off into a separate corporation, the National Railroad Infrastructure Corporation (NRIC).  The NRIC would assume ownership of the federal rail passenger assets[4] now operated by Amtrak.  These assets include 600 miles of track along the Northeast Corridor between Boston and Washington DC, Chicago Union Station and short stretches of track in Illinois and Michigan.  Amtrak would continue to provide rail passenger service across the nation – as was its original mandate in 1971.

The NRIC would be managed under a fifty-year lease by a private entity selected under a competitive procurement.  The selected Infrastructure Management Organization (IMO) would be required to make major investments along the corridor (most importantly the new tunnels under the Hudson River, Penn Station in NYC, a new Baltimore tunnel, and a new Susquehanna River bridge).  The IMO would be mandated to spend more than $1.4 billion a year on continued maintenance and capital investment (Amtrak currently receives annual appropriations of about $600 million for the Northeast Corridor).   One important side effect: Amtrak would no longer have infrastructure capital costs.  This would reduce allocations to Amtrak’s long-haul trains, moving them closer towards break-even.

In sum, just as with the Interstate Highway System, the IMO (and thus the NRIC) would be pre-funded with adequate capital to rebuild the Northeast Corridor.  Investments would be coordinated with plans developed by the Northeast Corridor Commission and the IMO would be subject to oversight by the Department of Transportation’s Inspector General.

Funding would be in the form of a public-private partnership.  In return for a large ($40 billion), fifty-year federal loan, the IMO would be required to provide  a third party, investment grade guarantee satisfactory to the US Treasury to repay the loan in fifty years and raise private equity equal to ten percent of the federal loan.  The cost of the loan guarantee is likely to require a significant investment.  The IMO would also provide Amtrak with a $1 billion grant and take over Amtrak’s existing infrastructure-related debt.

The IMO would not be allowed to operate trains.  Rather, the IMO would be paid by train operators for their use of the NRIC.  Thus, this provides a strong incentive to encourage additional traffic along the corridor – with clear economic benefits for the region.  A logical goal would be to reduce travel time between Washington DC and New York City to about two hours.  Amtrak would continue to provide rail service along the Corridor, but new carriers with different types of service would be expected as well.  Train service would be assigned under an open bidding process.

How does this plan rate against the impacts of large-scale investments such as the Interstate Highway System?

  • Large scale – the rail lines link major metro areas that include national financial, economic, and political centers;
  • Self-funding – the public-private partnership provides adequate capital to complete required capital investment, with no need for annual appropriations;
  • Financial incentives – the IMO (and its private sector investors) depend on increased train traffic. This in turn, provides economic value for the nation;
  • Obvious economic and social benefits – timely completion of the new Hudson River tunnel would remove a major single-point of failure to the nation’s transportation network.  Reliable transportation service along a congested highway and aviation corridor that connects major economic and financial centers provides broad benefits.

As a nation we need transportation investments on a large enough scale to stimulate broad economic growth.  One hopes that the continued debate over $1 trillion of infrastructure investment will stimulate other investment large enough to stimulate economic growth and gains in productivity.

The views expressed above are those of the author and do not necessarily reflect the views of the Eno Center for Transportation.

[1] America in Ruins: The Decaying Infrastructure, Pat Choate and Susan Walter, 1983, Duke Press.

[2] Richard Mudge, The Economic and Social Value of Autonomous Vehicles: Implications from Past Network-Scale Investments; prepared for Securing America’s Future Energy, (2018), describes these impacts.

[3] US Treasury, prepared by AECOM, Richard Mudge, Ray Ellis, and Ken Rubin, “40 Proposed US Transportation and Water Infrastructure Projects of Major Economic Significance” (2017).

[4] Several private entities own a minority share – a holdover from the days of railroad deregulation.

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