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Infrastructure Costs

February 1, 2014

An article about Infrastructure Investment written by Chris Edwards
and posted on the Cato Institute website caught my eye.

A modern economy needs items that last a long time to form
– a foundation for other every day activities in society.
The private sector is quite often the heartbeat of these assets.

Infrastructure foundation

Infrastructure foundation

Some may claim it is governments role to fund infrastructure.
A matter concerning efficiency of investment rears its ugly head.
Corruption, politics, mis-management all lead to cost overruns.
A quote from the article
“Privatization of infrastructure promises to improve efficiency,
reduce burdens on taxpayers, and spur badly needed growth”

Chris Edwards research discovered that
private infrastructure investment in the United States
is five times larger than total nondefense government investment.
Federal infrastructure investment has been known to be misallocated.
Agencies have burdensome regulations and no incentives for efficiency.

The essay goes on to say many countries have partly
privatized infrastructure through public-private partnerships
(“PPPs” or “P3s”).

A number of U.S. states have moved ahead with P3s and privatization.
“When private businesses are taking the risks
and putting their profits on the line,
funding is more likely to get allocated
to high-return projects and completed
in the most efficient manner.”

Apparently the P3 approach, i.e. design-build contracting approach,
guarantees the construction price and project completion schedule.
P3 projects typically experience capital cost savings
of 15 to 20 percent compared to traditional government contracting.
A Brookings Institution study noted “Many advantages of PPP
stem from the fact that they bundle construction, operations,
and maintenance in a single contract.
This provides incentives to minimize life-cycle costs”

There are barriers to private infrastructure investment.

An excerpt from the article :

Tax exemption on municipal bond interest.
When state and local governments borrow funds to build infrastructure,
the interest on the debt is tax-free under the federal income tax.
That allows governments to finance infrastructure at a lower cost
than private businesses, which stacks the deck against the
private provision of infrastructure.
Policymakers should consider phasing-out the tax exemption on
state and local bond interest, perhaps in exchange for reducing
other tax rates on capital income.

Income and property taxation.
Government facilities don’t pay income taxes.
By privatizing infrastructure and thus subjecting it to taxation,
governments would broaden the tax base.
They would gain added revenues from base broadening,
which could be used to reduce tax rates and
spur greater overall investment.

Federal regulations.
Federal regulations have restricted efforts to
privatize state and local infrastructure.

Labor Unions.
Privatization would undermine the power of the
public-sector unions that often dominate government services,
and so unions actively lobby against reforms.

The article goes on to conclude that in order to meet demands
for new infrastructure capacity there needs to be innovation
with privatization and PPPs to the full extent possible.


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