Earlier this week, President-elect Trump announced that Elaine Chao will be his pick to head the Department of Transportation, a move that was welcomed as a refreshingly ‘normal’ appointment. Ms. Chao served as President Bush’s Labor Secretary for all eight years and served in his father’s administration as an undersecretary in the DOT. Although she has strong conservative ties (she is married to Senate Majority Leader Mitch McConnell), she is seen by many in DC as a highly qualified, bi-partisan bridge (as it were) that could serve well in a traditionally bi-partisan position.
The appointment will certainly play well in the press, but it also appears to be distracting it from examining the Trump infrastructure plan. If the press did examine the plan, they would see that it would fail to address the infrastructure needs of our country, particularly our cities, and would also likely cost taxpayers more in the short and long run. It would also undermine the types of infrastructure policy that our economy and environment require.
The Trump plan, outlined in a report released casually before the election, boasts of a $1 trillion investment strategy that is budget neutral to taxpayers. Naturally, this statement is misleading. The thrust of the plan is to rely entirely on the private sector to invest in and build/rehabilitate our nation’s troubled infrastructure. The Trump plan would first offer any private entity a tax credit for 82% of its upfront equity cost and then rely on that private entity to borrow from the bond markets for the rest. So to get to their aspirational amount of $1 trillion, the US would give out $137 billion in tax credits.
There are two obvious problems with relying on the private sector to drive our infrastructure. First, governments (whether local or federal) can borrow money for a lot less than private companies, giving them a huge built-in advantage on projects while reducing the overall cost of a project to taxpayers. The Trump plan relies on magical thinking to assume that every private entity would be so efficient to offset that advantage prima facie. It also attempts to hide the full cost of a project as part of that assumption.
Second, private companies will only focus on projects that can return a profit. This is entirely rational, but it leaves a significant inventory of critical infrastructure projects out of contention. Unless a private company can predict a certain profit margin by extracting significant user fees (more on this later), they will focus on another project. Questions of equity and sustainability will defer to profit and immediacy. This will inevitably ignore the needs of poorer residents (rural or urban) who likely can’t pay for such projects while ignoring larger questions of environmental protection. (It will also clearly favor road construction over transit investment.)
This shows the contradiction at the heart of infrastructure spending and the problem with public-private partnerships. Investment in infrastructure is universally good for the economy; there is no debate about it. A reliable, robust infrastructure leads to more (and more productive) economic activity (and more tax revenue). However, individual projects (like operating the MTA or replacing the water pipes in Flint) are extremely capital-intensive and unlikely to create a direct or immediate return.
That’s why our transportation systems are publicly owned and operated – most were private originally but couldn’t turn a profit; public agencies (like the MTA) were created to absorb those companies and maintain vital public services. (And don’t expect Uber to save the day. That VC trickle-down effect has an expiration date for the same reason.)
Governments can take the long view on its infrastructure investment and reap the benefits holistically by creating more economic activity across the entire economy. They are also obligated (more or less) to meet certain basic needs of all of its citizens regardless of cost. They must provide clean water sources, they must provide public transportation; but they can capture the overall economic gains from those investments through tax revenue (and some regulated direct user-fees.)
Private companies can’t think in terms of the entire economy. They must seek returns on the capital they invest in a given project, regardless of its ancillary benefits (unless they can capture some of those as well.)
There are only two ways for private companies to profit from infrastructure. The first, as outlined in the Trump plan, is to have the government subsidize a significant portion of the cost. The Trump plan will cover 82% of upfront costs for private developers, which is a big chunk of change.
But let’s not overlook two other obvious assumptions – first, these projects will be too big to fail, and, second, President Trump will eliminate other costs related to labor and environmental review. If, in a Trump future, a private company runs into trouble rebuilding the George Washington Bridge, they can expect the US Taxpayer to bail them out. We have a lot of experience with this in our economy already. It’s also unlikely that these contractors will be required to pay union-wages or submit to extensive government oversight and regulations. (Something Ms. Chao was criticized for allowing at Labor.)
The second way is through user-fees. The Trump plan doesn’t spend much time talking about this (it shifts gears to talking about a one-time 10% repatriation corporate tax and hammering Obama/Clinton and bridges to nowhere) because the authors know it wouldn’t look very appealing upon honest review (just look at Chicago and their parking problem). Privatizing our infrastructure would cost you way more – your water bills would go up, your highway tolls would go up and your service access would probably decline – because a private company can’t run those systems at a loss like governments can.
There is also little evidence that this plan would treat these entities similarly to public utilities – requiring them to provide baseline universal service at a controlled cost. Not gonna happen under President Trump. As much as we will bitch about the MTA going up to $3 in 2017, that doesn’t begin to cover the actual per-ride cost today or what we would experience under a private system (and forget further subsidies for poor New Yorkers.)
There are of course significant flaws in how we finance our infrastructure currently, so I’m not idly defending our current system. Most public agencies’ procurement and RFP processes follow lowest-bid requirements that often get gamed by connected private entities and hide eventual total costs. And it’s not that public projects are subjected to too many requirements, it’s that they lack true ownership capable of pushing through them quickly. Too many agencies are political compromises in structure with limited/conflicting jurisdictions in practice.
There are less radical ways to fix these issues than to turn them over to the private sector entirely. Philadelphia has experimented with a radically simple alternative for projects – identify a problem and do an RFP for solutions, rather than identify a solution as well. This allows for more creativity from the private sector and more options for the public. We could also redesign our public agencies to capture more of the economic value they create – similar to what Hong Kong’s transit system does. Why not have the MTA take equity in high-worth residential or commercial development that benefits from access to public transit?
There is nothing wrong with public-private partnerships in the public sphere. Realistically, the term itself is redundant. Of course every project combines public and private agencies and interests. That dynamic is the basis of our entire society. What is wrong is to adopt a radical policy change that undermines that dynamic and turns over elements of our infrastructure entirely to private interests, while allowing others to be ignored.
How we think about our infrastructure, how we plan it, and how we engineer it must be approached with our entire society in mind. If we adopt a simplistic mindset about covering the dollar for dollar cost of specific projects without taking a comprehensive view, we might get the infrastructure certain private companies think are justified, but we won’t get the one our economy and environment will need.