A Majority of Infrastructure Spending Is Private

by Veronique de Rugy

The New York Times had an article Friday warning us about the president’s plan to “lean heavily on private business in conjuring a trillion dollars’ worth of American infrastructure.” The case the article is trying to make is that time and time again we find examples of governments outsourcing public work to the private sector with terrible outcomes. Here is a tidbit:

Handing profit-making companies responsibility for public works can produce trouble.

In India, politically connected firms have captured contracts on the strength of relationships with officialdom, yielding defective engineering at bloated prices. When Britain handed control to private companies to upgrade London’s subway system more than a decade ago, the result was substandard, budget-busting work, prompting the government to step back in. Canada has suffered a string of excessive costs on public projects funneled through the private sector, like a landmark bridge in Vancouver and hospitals in Ontario.

Well yes, there are major problems with private contractors doing work everywhere in the world for the government. Cost overruns for government projects are the rule rather than the exception. Stories about corruption and waste are very easy to find.

But in the end this article is very anecdotal. The author unfortunately fails to mention the growing literature from the Brookings Institution to the Cato Institute to the OECD that details how vastly superior (while still less than perfect, because it remains government contracting) public-private partnerships are over straight-up government contracting in infrastructure. The primary reason, of course, is that the partnership transfers most of the risk to the private sector, which makes for better incentives and outcomes.

Th author also fails to recognize that the poor outcomes in his article have more to do with inherent features of the government (such as decision-making based on politics — e.g., favoring union workers and connected firms or treating the investment as a job program — rather than good economics) and the bad incentives created by easy government money and poor accountability on the private sector. The government is not known for making good hiring decisions, holding its employees accountable, or firing them when they don’t perform. On the other hand, it is known for being an employer that ties contractors’ hands with useless requirements and endless licensing processes.

In other words, cronyism sucks and federal-government intervention in most markets and industries create less than ideal results when not paired with good institutions, which rarely happens.

In fact, if you were wondering which of the two actors (government or the private sector) is likely the source of the problems described in the article, I have some data for you. I recently wrote about a new paper by Chris Edwards at the Cato Institute — called “Who Owns U.S. Infrastructure?” — which breaks the issue down in great detail. Edwards writes, “In 2015, private infrastructure assets of $40.7 trillion were four times larger than state and local assets of $10.1 trillion, and 27 times larger than federal assets of $1.5 trillion.” Read the whole thing here, it is excellent.

In the U.S., a vast majority of the infrastructure spending is actually done and financed by the private sector. And it’s not that there aren’t some problems there, but there are fewer cases of outrageous cost overruns and waste because the private clients paying for the work wouldn’t put up with it. Also, private investors, when not encouraged to invest in a particular place due to government incentives such as tax credits or interest-free loans, tend to be careful about the projects they pick. Besides, when private projects are wasteful and corrupt, they don’t waste taxpayers’ money.

Unfortunately, the author of the New York Times article totally ignores the prevalence of private investment and its success when he seems to imply that the blame for poorly performing private-public partnership projects falls squarely on “profit-making companies.” Absolutely, the marriage between the government and private companies often leads to undesirable outcomes, but in my opinion it is the government incentives that are to blame.

I should also add that I am not a fan of the Trump administration’s plan to extend tax credits to the private sector. During a recent discussion about infrastructure between economists Larry Summers and Ed Glaeser, Summers said the following in making the case for user fees:

“There is no reason why people who use infrastructure more heavily should not pay for it,” Mr. Summers noted. But providing private contractors undertaking infrastructure projects with tax credits, as advocated by Mr. Trump, “would enrich those who are the recipients of the credits, in many cases for projects that would have been undertaken anyway, rather than bring about a necessary infrastructure revival,” Mr. Summers said.

I agree, but that’s always the problem with government intervention. Government often hands out a benefit or privilege to companies that may not need it to do something that they would have done anyway. That’s why I would get the federal government out of the infrastructure-financing business entirely.

Finally, the New York Times article sends a very confusing message when it contrasts public-private partnership to the Chinese government’s heavy-handed investment in infrastructure — in order to praise the latter:

By contrast, China has engineered one of the most effective economic transformations in modern history in part through relentless investment in infrastructure, traditionally financed and overseen by an unabashedly powerful state. China illustrates both the benefits and perils of state domination. It has constructed projects strategically, as part of a highly successful effort to catalyze economic growth. Yet the state has wielded authoritarian powers, generating waste and corruption.

Which one is it: strategic and highly successful or wasteful and corrupted?

It’s also odd to use China as an example of “the benefits of the state guiding infrastructure spending,” since the author recognizes that “that process has been aided by features of the Chinese political system that are anathema in the democratic world.”

Also, there is this:

In many areas, China overbuilt infrastructure, helping bring government debt levels to alarming proportions. The construction industry has frequently conspired with state banks and local officials to unleash projects that can be justified only as opportunities to make money change hands, enabling well-connected fingers to extract a cut.

Atif Ansar, the co-author of a paper studying China’s infrastructure investments and a management scholar at the Saïd Business School at the University of Oxford, said he and his colleagues found many roads that “were almost empty” in parts of southwestern China.

“Had China focused on about a third of its most productive investments, it would have reaped lasting economic benefits without the debt overhang,” Dr. Ansar said.

So I guess it hasn’t worked that great after all.

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