Policy Study

Revitalizing State and Local Infrastructure

Empowering Cities and States to Tap Private Capital and Rebuild America

Executive Summary

America has large unmet infrastructure needs, but governments at all levels are strapped for funds and under voter pressure to downsize. State and local governments have begun to experiment with infrastructure privatization-both selling or leasing existing facilities to the private sector for expansion and modernization and issuing long-term franchises under which the private sector finances, designs, builds, and operates wholly new infrastructure projects (airports, toll roads, wastewater plants). Federal policy has been inconsistent toward this privatization trend, and in many cases poses significant barriers to it.

A number of government policies direct states and cities to favor government ownership of infrastructure enterprises. The identical airport terminal, toll bridge, water utility, or wastewater plant is treated in one way by federal law if it is government owned and in a radically different way if it is owned by investors. Tax laws exempt from taxation the interest on bonds issued by government enterprises-which translates into higher debt-service costs for investor-owned infrastructure (as well as reduced revenue for the federal government). Further, government-owned enterprises are generally exempt from local property taxes and both federal and state income taxes. Federal grant and regulatory policies also discriminate against a facility owned by investors, as compared with the identical facility owned by a state or city government.

These policies, many of them unique to the United States, are preventing this country from realizing the full benefits of the worldwide movement toward privatizing airports, highways, energy and environmental infrastructure. These benefits include the ability of cities and states to “mine their balance sheets” by selling or leasing infrastructure facilities to private operators, the potential of faster development of needed facilities thanks to streamlined private-sector methods, potential cost savings and efficiency gains from bottom-line-oriented management of infrastructure, and the benefits of introducing market pricing where it is now lacking.(Market pricing would provide incentives to conserve scarce resources like water supply and landfill capacity, and incentives to shift usage away from congested peak-use periods).

A number of short-term reforms would give cities and states greater freedom to privatize. These include modest tax-law changes, codifying the provisions of a 1992 Executive Order on infrastructure privatization, permitting tolls on Interstate highways, and changing the definition (in environmental regulations) of municipal wastewater plants to include those which are privately owned.

Longer-term reform would level the playing field for infrastructure finance, either by extending tax-exempt status to infrastructure revenue bonds regardless of the ownership status of the facility or by ending tax-exempt status for all new issues of revenue bonds for user-fee supported infrastructure. The former proposal might be found to be revenue-neutral to the Treasury, depending on the assumptions used. The latter would ultimately produce some $24 billion per year in net new federal revenue, once fully phased in.

An added benefit of encouraging investor-owned infrastructure would be the development of world-class U.S. infrastructure firms. Thanks to the experienced gained in the large U.S. home market, these firms would be more likely to succeed in capturing a share of the huge world market for privately owned and operated infrastructure.