Policy Study

Ensuring Productive Investment in Transportation Infrastructure

Executive Summary

Although many are calling for increased federal investment in the nation’s transportation and municipal infrastructure as a means of promoting long-term productivity growth, the federal government cannot assume that its capital resources would be directed to high-return, productivity-enhancing improvements.

Investment leads to economic growth by improving productivity, i.e., by developing ways to provide greater output from a given input of resources. Research shows that some types of infrastructure investments (typically in selected airport and highway projects) have very large economic rates of return-i.e., their economic benefits are significantly larger than their costs (including the costs of adverse impacts). But there is little relationship between aggregate spending on infrastructure and economic growth. This should not be surprising, in that most infrastructure projects are promoted in terms of “distributional” effects – e.g., the number of jobs they will create in a specific locality. Research shows that this kind of “job creation” seldom involves real economic growth; it simply redistributes resources from one use or location to another use or location.

What is missing in public-sector investment policy is a functional relationship between the quantity of capital funds available for infrastructure and the investment-quality of resulting projects. What is needed is a causal link between the demand for capital to finance sensible, high-growth infrastructure opportunities on the one hand and the supply of public capital on the other. Economic rate of return, not the number of “jobs created,” should be the criterion for project selection.

If federal infrastructure spending programs were re-designed to incorporate appropriate incentives, national infrastructure investment would automatically find a level and mix that yields a strong, growth-inducing economic rate of return. One tool for accomplishing this is privatization: using private capital for selected infrastructure projects. Investors will normally only risk their funds on projects producing an acceptable economic rate of return. For the balance of public infrastructure, the key lies in prompting state and local governments to select appropriate objectives, decision criteria and appraisal methodologies in developing capital programs. The federal government should provide incentives for states to incorporate such criteria as a condition of making use of federal transportation funds.