Lower Manhattan’s Fulton Center subway hub and its high-tech “oculus,” conceived in the wake of September 11 and opened in 2014, won numerous awards. Applauding critics were less loquacious about the construction itself: The project ran seven years late, paralyzing a downtown retail district; it was budgeted for $750 million but cost $1.4 billion; and, as the budget exploded, crucial features, such as a sufficient number of functional down escalators, were omitted, while the labyrinthine subway-line connections remained almost untouched.
As the New York Post’s Steve Cuozzo observed, the $7 billion combined cost of the Fulton Center, the soon-to-open Santiago Calatrava Ground Zero PATH station, and the proposed Moynihan Amtrak station (none of which adds mass-transit capacity) would have been enough to build a new Hudson River rail tunnel and make repairs to century-old tunnels that have dangerously deteriorated.
New York’s infrastructure disasters are representative. Economist Bent Flyvbjerg has called the infrastructure process “survival of the unfittest.” While developers and politicians demand more government spending, their real goal is ribbon-cutting photo ops and payoffs for politically connected groups, funded by hidden debt. Money is no object, overruns are routine, and the value of the project is irrelevant.
We can improve infrastructure with three simple principles: Maximize existing infrastructure, stop political payoffs, and privatize.
Infrastructure that adds value to a community is inherently hard to build. Developers must project demand for decades; new technologies require an “if we build it, they will come” belief. Construction takes years and often encounters unforeseen conditions, and a project, once started, usually can’t be stopped without a dead loss.
Flyvbjerg has found that, because of the players’ incentives, nearly all infrastructure projects have huge cost overruns. In order to get a shovel in the ground, proponents such as construction unions lowball costs and highball benefits. Government has particularly perverse incentives because politicians and infrastructure development operate on different time scales. To win the next election, politicians need to cut ribbons now, while the poorly conceived infrastructure they launch will burden the public for years after they leave office.
Politicians go pharaonic to leave a “legacy,” while architects and engineers win media plaudits based on glamour photos when the project opens, not on functionality or sticking to a budget. After a 1989 earthquake, California politicians chose an iconic single-tower suspension span, rather than a simpler viaduct, to replace a collapsed segment of San Francisco’s Bay Bridge. It opened ten years late, nearly a quarter century after the earthquake. The $6.4 billion cost — a 355 percent overrun — does not include the repeated fixes the structure is expected to require over the next 150 years because of its design flaws.
Publicity for big new projects encourages politicians to forgo more cost-effective upgrades to existing infrastructure. With a $1 billion capital cost (not adjusted for inflation), South Florida’s new Tri-Rail carried only 14,800 weekday riders as of 2013. Yet, as the Reason Foundation has noted, bus-rapid-transit and high-occupancy-vehicle lanes can cheaply and more intensively increase the capacity of roads.
Maintenance of existing infrastructure costs a fraction of what building new infrastructure does, and it maximizes existing use patterns, but there are no ribbon-cuttings for painting a bridge to prevent rust. While maintenance offers a big bang for the buck, every maintenance dollar deferred permits a dollar of higher-profile spending. Even worse, with every new infrastructure project, the government adds future maintenance obligations for that project. New Orleans saw a century of lavish spending on new water-control projects (whose definition expanded to include marinas), even as deferred maintenance contributed to the levee failure and flooding during Hurricane Katrina.
User fees, if applied to cover costs to repair wear and tear, can fund maintenance and capital replacement and discourage inefficient use. But user fees are almost always set too low. The interstate-highway system was originally supposed to be funded by gasoline taxes, but nothing fully replaced the revenue lost when automobile engines that were more fuel-efficient whittled down gas taxes. The gas-tax rate has remained unchanged since 1993.
Infrastructure construction was once rapid. In 1904, New York’s first subway line was completed after only four years. But starting with the Davis-Bacon Act of 1931, infrastructure construction became a year-round Christmas tree for interest groups. The act requires federal contractors to pay local prevailing (i.e., above-market) wages. The act further mandates that a “prevailing wage” be established before work may begin on a federally funded project. This can be a very slow process: During the Obama administration’s 2009 stimulus push, it often took a year, despite Obama’s promise of “shovel-ready” jobs.
Over the decades, infrastructure spending became a form of crony capitalism. The number of favored groups for government contracts expanded to include small businesses, domestic firms (through “buy American” requirements), and women- and minority-controlled businesses. The last is particularly ironic, given that one of the original purposes of Davis-Bacon was to exclude blacks, who, because of discrimination, were available to work for less than the prevailing wage. The scale and complexity of the preferences generate work for lawyers and bureaucrats. Bidders create sham firms to take advantage of the preferences, which discourages market-rate bidders and leads to repeated scandals.
Interest-group NIMBYism piles on still more requirements. The Port Authority of New York and New Jersey, which must elevate the Bayonne Bridge to accommodate the next generation of cargo ships, attempted to fast-track reviews for environmental impact, historic preservation, and Native American artifacts. (Raising an existing bridge will affect neither historic buildings nor Native American artifacts.) Five years later, construction has yet to begin.
The Port Authority and other state-owned public-benefit corporations combine the progressive love for unaccountable “expert” agencies with politicians’ zest for evading legal-borrowing limits. Public authorities are empowered to build infrastructure funded by bonds that are backed by the projected revenue of a project. Because authorities are technically independent entities, their debt does not show up on state books, although, as with the Puerto Rico Electric Power Authority, creditors expect the government to bail out any defaults.
Authority bonds usually have a maturity of at least 30 years, reflecting the initial useful life of infrastructure projects. Because the bonds pay interest that is triple-tax-exempt (exempt from federal, state, and local income taxes), high-income taxpayers see them as irresistible investments — and politicians see them as a seemingly unlimited source of funds. The debt of triple-tax-exempt authorities underwrites mission creep: the reframing of “infrastructure” to include projects for purported economic development. Many public authorities, for instance, are still paying for professional-sports stadiums long after the teams have departed. As with 30-year home mortgages, annual debt-service payments are small relative to the size of the debt, making it easy to overlook the ever-growing principal amount that must someday be paid.
The private sector will usually do better, thanks to competition, the profit motive, and — critical but overlooked — the ability to restructure failed projects. And even infrastructure that we think of as inherently public can be privately financed: Many recent suburban developments have been required to install their own street, water, and sewer infrastructure.
Private infrastructure is no panacea, however. When municipalities grant monopoly franchises for the installation of new types of infrastructure (such as cable TV four decades ago), bidders compete on lobbying and campaign contributions, not just price and quality. Once they obtain the franchises, private-infrastructure investors risk expropriation: The Boston subway, originally privately owned, went broke and was ultimately taken over by government because politicians won elections by freezing fares.
The hazards of privately owned infrastructure can be reduced by limiting the monopoly period and deregulating at its end, as the transportation industry demonstrated: For nearly a century, the Interstate Commerce Commission had held railroad rates below what was needed to fund repair and replacement. Then government-subsidized competition from the interstate-highway system and airports bankrupted much of the rail industry, reducing rail’s share of intercity freight to 35 percent by 1975. With deregulation in 1980, private money transformed freight-rail infrastructure. Today, America’s reorganized freight rail, which transports bulk cargo far more efficiently than trucks do, controls 43 percent of the freight market and is regarded as the best in the world. Meanwhile, quasi-public Amtrak bleeds money on politically mandated long-distance passenger rail in low-population regions and underinvests in the high-volume Northeast corridor, occasionally with woeful results, as in the recent Amtrak crash in Philadelphia.
Competition makes for winners and losers and adds efficiency by reorganizing the way infrastructure is provided. Of the eleven infrastructure companies at the creation of the Dow Jones Transportation Average in 1884, just one, Union Pacific, still exists. After deregulation and a court-ordered breakup ended AT&T’s telecommunications monopoly, the turn-of-the-century telecom bubble generated massive private infrastructure investment. Then, after post-bubble bankruptcies, the industry — without government bailouts — reorganized into competing national carriers, which now provide improved wireless and Internet service at a fraction of the former cost.
By contrast, most government infrastructure agencies are forever, and forever inefficient. Take the Colorado River dams in the West, most of which are more than 60 years old and owned by the federal government: They offer below-market-priced water and power, creating environmental damage and worsening the effects of the current drought.
Improving the process by which we build and maintain infrastructure won’t be easy, but we can improve the incentives. When costs become visible, so will the advantages of preserving existing infrastructure. To avoid deferred maintenance, fund maintenance of existing infrastructure first. Shine a light on the inevitable overruns of proposed new capital projects by budgeting them at 250 percent of estimated cost, and reflect this in the cost-benefit analysis before the ribbon-cutting. Bus-rapid-transit and high-occupancy-vehicle lanes, which more intensively use existing infrastructure at minimal cost, will suddenly look much more attractive than fixed rail. Rather than hiding infrastructure costs in public authorities, consolidate their books with those of their government sponsors — and subject their borrowing to state borrowing limits. Eliminate the triple tax exemption for “economic development” projects, and reserve it for transportation and communications improvements that benefit the entire public.
Political payoffs are hard to stop, as James Madison in Federalist No. 10 explained more than 200 years ago. But if a fat cat like Donald Trump can run against special interests, so can reformers. Eliminate set-asides for favored groups, get infrastructure built at the best price for the taxpayer, and simplify the permitting process. As Philip K. Howard suggested in the Wall Street Journal, governments should set up “one-stop approvals,” whereby one agency has the power to grant approvals, impose hard deadlines, and resolve disputes.
Finally, privatize, which encourages competition and attention to maintenance. Private infrastructure providers not only want to reduce costs, increase efficiency, and restructure failed projects; as special interests themselves, they have an incentive to fight political payoffs that undermine infrastructure.
For too long, infrastructure acolytes have looted the public till while purporting to build a better future. The first step toward building tomorrow’s infrastructure is accountability.
– Mr. Weiser is an associate professor of law at Baruch College.