Public Works Financing

Assessing the National Commission's Report

Report raises some important points, but misses the boat on large-scale programmatic changes

What can one say about a massive report on all modes of surface transportation over the next 50 years-in about 1,200 words? Not very much, alas. But let me start by commending the Commissioners for a number of good things in this landmark report. They have:

  • Dramatized the need for more capital investment in many parts of surface transportation;
  • Focused some attention on the inadequacies of the current federal funding system;
  • Pointed out its gradual morphing into a program of unfocused public works spending, unrelated to serious national priorities;
  • Recognized (though they under-stated it) the key role of tolling & pricing in future system funding and decision-making;
  • Recognized (but with danger signs) public-private partnerships (including toll concessions) as a key tool for state DOTs and Metropolitan Planning Organizations;
  • Identified the need to simplify and consolidate 108 current federal surface transportation programs;
  • Highlighted the need for process change, to get needed projects in place much sooner.

Those are not trivial accomplishments. It's important to have all these points on the table as we move toward next year's reauthorization of the federal surface program. But when it comes to large-scale programmatic changes, the majority's report suffers throughout from a major flaw. It reflects an engineering mind-set, when what 21st-century transportation needs is an economic mind-set. This is a long-standing concern of mine. I'm a graduate engineer, and have only ever had a handful of formal economics courses. Yet my views on public policy have been heavily shaped by what I've learned from economists over the past 30 years. I seem to have spent much of my transportation policy career trying to teach engineers to start thinking like economists.

Engineers think in terms of "needs"-long lists of "it would be good to do" projects. They can always think up external benefits to justify boatloads of tax funding on things they like-such as the idea that citizens and companies always need a multiplicity of "transportation choices," regardless of whether those make sense as wise investments of always-scarce tax resources. The report is chock-full of this, with major proposed expansions of federal funding for inter-city rail and much greater use of mass transit, let alone waterway (locks and dams) projects, most of which would likely have costs far in excess of benefits.

The piece de resistance of the report is its call to "depoliticize" federal transportation funding decisions. How? By creating a new, "independent" central planning agency called NASTRAC, to develop and implement a master plan for all federally supported transportation infrastructure. Besides its much-publicized proposal to double or triple the federal fuel tax, and use those revenues for all surface transportation modes (which destroys the user-pays principle), the report throws a bone to advocates of user fees, by proposing a miniscule federal passenger ticket tax on mass transit and passenger rail riders. But the yield from those new taxes is so trivial that they don't even bother to include the numbers in the report's funding totals.

Despite a lot of good rhetoric about performance-based investment, the best the majority could come up with was to recommend (as GAO has been doing for decades) that benefit/cost analysis be used when evaluating potential transportation investments. But as the minority report trenchantly notes, even if there were some way to enforce that goal, investing billions of scarce resources in projects with a B/C ratio just over 1.0 means wasting huge sums. Econ 101 teaches us the concept of "opportunity costs": the cost of investing $40 billion in a California high-speed rail project is $40 billion of potentially higher-productivity investments that cannot be made. But that concept is entirely absent from the majority report. The minority rightly calls for much greater use of return on investment (ROI) standards in transportation networks, as in our investor-owned network utilities-electricity, telecommunications, gas and oil pipelines, etc.

And the idea that the new NASTRAC would be a neutral, objective filter for directing other people's money to sound investments is incredibly naïve, to anyone who has spent much time observing how public policy actually gets made in Washington and state capitals. Prof. James Buchanan of George Mason University won a Nobel Prize in economics for developing the field of Public Choice Theory, which studies the incentives of interest groups to take advantage of public policy institutions for their own benefit-- and of those institutions to go along. Should Congress actually cede control of hundreds of billions in transportation funding decisions to NASTRAC, I confidently (but sorrowfully) predict this will lead to a massive expansion of poorly justified boondoggles.

What I'd hoped the commission would do is to think clearly and courageously about what is truly the federal role in surface transportation, starting with a clean sheet of paper, then try to map out how to get from here to there. For example, urban traffic congestion is a local/regional problem, not a national/federal one; likewise urban mass transit. By contrast, interstate goods movement is recognized in the U.S. Constitution as a federal interest, memorialized in the Interstate Commerce Clause. And we do need to significantly expand and modernize goods-movement infrastructure in this country, as we depend increasingly on being integrated into the global economy.

Instead of rethinking the federal role in this way, the majority's 10 new multi-modal programs represent a huge expansion of the federal role, starting from arbitrary baselines like a 40% federal share of total surface transportation capital investment (Why? It's traditional.) All ten of these programs (which include rebuilding all federal highways, even rural routes to nowhere; urban congestion relief; a huge intercity passenger rail program; a big expansion of environmental funding to an arbitrary 7% of all transportation spending; public access to federal lands; and a big program to develop "green" fuels, which is supposed to be the Energy Departments' territory) would get 80% federal funding, making it almost irresistible for states to do projects they would not do without (nearly) "free" federal money. There is no guarantee (and little likelihood) that Congress would cede control of these enormous new resources to an independent NASTRAC-or that states will match the feds on increasing their own fuel taxes (as assumed in the funding and spending projections), especially with 80% federal funding available for everything.

I've saved for last my serious concern about the proposed federal regulation of toll concessions. The majority proposes mostly innocuous provisions reflecting the kinds of best practices that are evolving anyway. But federal regulation would represent a new intrusion into PPP toll roads that is not applied to public toll agencies, as the minority report points out. And some of these regulations would be positively harmful. For example, by mandating inflation-caps on toll rates, the majority ignores the need for pure pricing freedom on HOT and Express Toll lane, if pricing is to perform its vital traffic-management function. And the prohibition on using toll revenues for roadways in other parts of a state flies in the face of the majority's broader recommendation to put all highway revenues into a common pot from which all modes could be funded at 80% federal share. This is mind-boggling inconsistency.

The regulatory proposal also reflects a misconception that PPP toll projects are enough alike that they can all match a federally imposed template. To be sure, the lease of a well-established toll road does not "need" a 75-year term--it's a policy choice for a state to make if it wants to raise more money by granting such a long term. But struggling new toll roads like the Pocahontas Parkway or the Northwest Parkway being rescued via private concessions well need 75 or 99-year terms in order to make their original bondholders whole. One size does not fit all.

I'm out of space, but let me close by looking forward to the interim report due out soon from the other commission-the Infrastructure Finance Commission. I hope we will see far more attention to sorting out a defensible federal role for 21st century highways, and the highway finance policies that should go along with that role.

Robert Poole is Searle Freedom Trust Transportation Fellow and Director of Transportation Policy





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