Private dollars for public works
This is the second in my series of posts on the recently released White House infrastructure plan.
We’re at a strange point in America’s fiscal history.
Cash on corporate ledgers is high, bond rates remain at historic lows, and investors at home and abroad continue to see the United States as an attractive place to invest. Yet public infrastructure crumbles for want of capital reinvestment. What’s needed is a way to channel all that idle financial capital into public infrastructure. There are basically three ways for the federal government to do that:
(a) tax capital accumulation and spend the tax revenue on infrastructure;
(b) incentivize local/state governments to tap private capital through the bond market; or
(c) encourage direct private investment in public infrastructure.
As noted in my earlier post, option (a) is probably unrealistic without seismic shifts in national politics. Such shifts happen on occasion, but they’re uncommon and unpredictable. The White House plan basically lays a course for a combination of options (b) and (c).
Understanding the ways in which the White House plan seeks to expand private investment in public infrastructure requires getting down in the weeds a bit. First, although the infrastructure matching grant programs in Sections I and II are aimed at state and local governments, those governments are invited to engage private capital in crafting their proposals. Second, it appears that private corporations would be eligible for the $20 billion Section III “Transformative Projects Program.”
The real eyebrow-raising provisions come in Section IV. The federal government already runs a series of programs to support public infrastructure investment, either through direct financial support (e.g., subsidized/simplified loans) or through the tax code (e.g., tax exempt municipal bonds). The White House proposal would relax eligibility for several of these programs so that privately-financed projects (or joint public-private projects) could qualify.
Finally, the White House plan would tweak the tax code to encourage expanded use of Private Activity Bonds (PABs). Without getting into the gory details, these changes would extend many of the tax advantages of municipal bonds to private infrastructure investment. Moreover, public debt assumed by private firms when they purchase public facilities would retain tax exempt. That provision would be most meaningful for large firms seeking to acquire public facilities, and so would make full privatization a more attractive alternative for many governments.
The expanded role for private capital in American infrastructure is perhaps the most controversial element of the president’s proposal. The White House infrastructure plan unabashedly seeks to expand private investment in public works; in response, critics have charged that the plan is a giveaway to corporations.
That critique is accurate but a bit misleading. Privately-owned infrastructure is already common in the United States (especially in energy and telecommunications), and an elaborate regulatory regime already governs pricing, profit, service, safety, and environmental protection for those firms. The shift of infrastructure ownership from public to private sector does not eliminate public governance; indeed, my recent research with David Konisky suggests that regulations are more effective with private than public utilities. Rather, increasing privatization of public works changes the venue of governance from state legislatures, city councils and special district boards to legalistic, technocratic regulatory authorities. The real concern with infrastructure privatization is not so much for rapacious corporations, but rather a loss of local democratic influence over critical infrastructure–David Switzer’s excellent dissertation advanced this idea.
The distributional impacts of infrastructure privatization are worth noting. That means some portion of toll, fee, and rate revenue from infrastructure investment flows to investors. Those investors tend to be relatively wealthy; poor and working-class Americans do not, by and large, own significant shares in utility corporations. Publicly-owned, democratically-governed facilities do not have this distributional effect.
The trouble is that, in too many cases, local democratic governance is a big part of why America faces an infrastructure funding crisis. State and local politicians have been too often unwilling to raise the taxes and fees necessary to maintain infrastructure adequately—even with municipal bond rates at historic lows. National political dynamics make it unlikely that Congress will produce a multi-trillion-dollar infrastructure bailout. Long-term shifts in national politics might eventually change that picture, but the roads, dams, plants, pipes, and ports don’t care. They’ll continue to degrade without reinvestment.
Private ownership of public works strikes many as counterintuitive, maybe even inherently wrong. But the investment capital available in the American economy today is in private coffers. For fans of public infrastructure, channeling that capital into public works through direct investment might be the best available route.