Transportation Spending Won’t Stimulate Economy

Infrastructure projects aren't really ready-to-go and using private sector financing could save taxpayers hundreds of billions

In the midst of a sluggish economy, nearly every state is facing a significant budget crisis. California’s 2010 deficit is expected to be $25 billion to $41 billion. New York, New Jersey, Illinois, Ohio, Florida, and many other states expect at least $1 billion each in red ink next year. As state legislatures grapple with these deficits, it is no secret many are counting on money from federal stimulus package to fill their gaps.

Transportation is widely viewed as a key component for any stimulus, and the current House proposal doesn’t skimp when it comes to roads and transit. However, even with stimulus assistance, a paradigm shift towards private sector participation in transportation funding is needed if states want to solve the underlying problems that caused this mess and avoid additional trouble in the long-term.

The House democrats proposed an $825 billion stimulus package two weeks ago that included $550 in spending, of which $40 billion was for infrastructure:

  • $30 billion for highway construction;
  • $10 billion for transit and rail to reduce traffic congestion and gas consumption.

The proposed package plans to use existing models for sending the stimulus money to the states. For the states, several of which have construction project backlogs, this has come as welcome news.

But this is not good news for taxpayers. At the end of 2008, the Conference of Mayors presented Congress with a list of “ready-to-go” projects. State governors have requested money for highways, bridges, and other transportation infrastructure projects. However, most of projects were less than impressive, and few, if any projects on the list, will solve the transportation issues pressing in congested urban areas.

Yet, even if all the projects were good ones (which they are not), “ready-to-go” is a gross over statement for many of the state requests. A Congressional Budget Office (CBO) analysis released on January 26 predicts that just $3 billion of the $30 billion for highways is likely to be spent by the end of fiscal 2009; a total of $10.5 billion will be spent by the end of 2010; and just over half, $16.5 billion, will have been spent by the end of 2011.

The report states, “Historically, money appropriated for highways and transit is spent at a slow rate in the first year and has an extremely long ‘tail,’ in that funds provided in a particular year are frequently spent over a six-to-eight-year period. As a result, when those programs have seen previous significant increases in budgetary resources, outlays have increased more slowly….CBO consulted with transportation officials in nearly half of the states, accounting for roughly two-thirds of annual highway spending. CBO found that many states are anxious to receive additional funding and can probably begin some projects quickly, but that many states are also concerned about how quickly local governments can undertake new projects. In addition, concerns exist about how quickly state and local governments can adjust their contracting procedures to accommodate the significant increase in the amount of funding.”

State officials will get some relief from a stimulus plan, but it will be far from enough to put their transportation budgets back on track.

The simple fact is, even with federal stimulus aid, business as usual will not deliver the infrastructure needs of the 21st century. The proposed road projects were conceived years ago and reflect yesterday’s thinking about transportation. Instead of spending on short-term solutions, policy makers should embrace the private sector as a key player in financing transportation construction, operations and maintenance that significantly reduce traffic congestion, improve mobility and modernize our air traffic control system.

The success of existing private sector participation in transportation services highlights the potential benefits for many transportation projects needed on the state level. While not a panacea, public-private partnerships have proven successful when done properly with a strong contract that protects taxpayer interests, continual oversight, and strict accountability.

Indiana is sitting on a $1.4 billion surplus right now, thanks in part to its $3.8 billion lease of the Indiana Toll Road in 2006. The state has used that money to fund numerous infrastructure projects that wouldn’t have been built without the cash from the lease deal. And the state has earned over $300 million in interest from the upfront payment it received.

In addition to Indiana, global capital is invested in Illinois, Virginia, Texas, California and Georgia. Public-private partnerships (PPPs) in these states have offered three key benefits:

  1. Access to large, new sources of capital for various infrastructure projects;
  2. Quality improvements in construction, delivery, and, in the cases of toll roads and bridges, operations management; and
  3. Transferred capital risks from taxpayers to investors; and

At least 25 states have some legislation permitting public-private partnerships for transportation projects. Yet, only a few are making use of this opportunity. Even with the credit troubles worldwide, a substantial amount of private sector money is available for public-private partnership investment. Over the last few years several funds set aside as much as $180 billion waiting for the right infrastructure investment opportunities.

Given the unstable financial markets, infrastructure has become an attractive asset class for pension funds, private equity groups, and insurance companies which would not invest in traditional toll road bonds. This means even more money could be on the table for transportation projects.

State policymakers and legislators should review their public-private partnership statutes and see if adjustments are needed. States that currently only authorize a limited number of partnerships or pilot projects should move quickly to widely embrace the idea of private sector transportation project financing.

States that require legislative approval for a public-private partnership project should work to streamline the process. Going to the state legislature for every project creates an unnecessary, costly barrier that many private firms want to avoid. And, very importantly, states should ensure transparency in all public-private partnerships to avoid legal complications that could slow a project down.

Stimulus money is a short-term band-aid on a much bigger problem. Before adding to the nation’s debt and deficit, Congress and state governments should fully bring the private sector into transportation financing to deliver the congestion relief, mobility and travel safety that taxpayers deserve.