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The Future of Infrastructure is Expensive and Corporate as Hell

The Future of Infrastructure is Expensive and Corporate as Hell

I don't know what this machine is, but I want one.

I don't know what this machine is, but I want one.

I’ve been having conversations with coworkers desperate to see some silver lining to a Trump Presidency and a Republican Congress. One thing they keep returning to is the prospect of a big infrastructure bill, one that Trump has been promising since the early days of 2016.

The problem, of course, is that Congressional Republicans don’t really want to spend any additional money on infrastructure. They could barely pass a highway bill back in 2015, and that has about as much bipartisan support as anything in American politics.

So, what happens when you want to build roads and upgrade infrastructure but don’t want to directly spend any money? Why, bury that spending in the tax code with a bunch of really untargeted, inefficient tax breaks for large businesses, of course!

First, Trump’s plan is not really an infrastructure plan. It’s a tax-cut plan for utility-industry and construction-sector investors, and a massive corporate welfare plan for contractors. The Trump plan doesn’t directly fund new roads, bridges, water systems or airports, as did Hillary Clinton’s 2016 infrastructure proposal. Instead, Trump’s plan provides tax breaks to private-sector investors who back profitable construction projects. These projects (such as electrical grid modernization or energy pipeline expansion) might already be planned or even underway. There’s no requirement that the tax breaks be used for incremental or otherwise expanded construction efforts; they could all go just to fatten the pockets of investors in previously planned projects.

Moreover, as others have noted, desperately needed infrastructure projects that are not attractive to private investors — municipal water-system overhauls, repairs of existing roads, replacement of bridges that do not charge tolls — get no help from Trump’s plan. And contractors? Well, they get a “10 percent pretax profit margin,” according to the plan. Combined with Trump’s sweeping business tax break, this would represent a stunning $85 billion after-tax profit for contractors — underwritten by the taxpayers.

Beyond even these concerns, the greater trend of privatization of roads, bridges, energy grids, water systems, and the like is—in general—quite dismaying. We used to be a nation that happily poured public resources into big infrastructure projects, knowing that their return on investment (in the form of economic growth) was massive and vital. It’s incredible to think how many people wouldn’t live where they do or have the jobs they have without some major, major infrastructure project having been built in the past.

Today, the obsession with not increasing government spending under any circumstances has infected infrastructure as well. Here in Virginia, the politics of expanding the Metro and building more highways in Northern Virginia, building more tunnels and bridges in Southeast Virginia, and overall replacing our infrastructure has become so beset by miserliness and regional jealousy, the only hope is to turn to the private sector to provide the funding to make all these needed projects happen.

The results haven’t been promising. Whenever the private companies screw up, Virginia has to foot the bill, and the companies still get to enjoy monopoly-level profits and privileges. Just look the Midtown Tunnel Project in Norfolk:

The private proposal to build a new underwater tunnel in this congested port city was originally billed as a way for Virginia to get a crucial piece of infrastructure without having to put in a single dollar of state money.

Instead, Virginia officials have agreed to spend slightly more than $580 million on the project, more than twice the investment from the companies behind the deal. With no competition, the companies won the right to collect billions of dollars in tolls over 58 years.

The state also agreed that the companies — Swedish construction giant Skanska and Sydney, Australia-based finance group Macquarie — are entitled to large government payouts if Virginia builds or expands other bridges or tunnels nearby, making fixing other traffic problems more costly for generations to come.

This ability of private companies to negotiate insanely favorable deals is what troubles me most. Private partners are always, always going to be better negotiators than government officials. There just aren’t a lot of companies who can tackle huge infrastructure projects, and they have way more incentive to increase their bottom line than any government negotiators will have to protect taxpayer dollars. In my experience, public-private partnerships rarely include the kind of taxpayer protections you’d like to see. Just look at the rates of return private investors expect at a time when the federal government can borrow at around 2-3%.

In the typical private equity water deal, higher rates help the firms earn returns of anywhere from 8 to 18 percent, more than what a regular for-profit water company may expect. And to accelerate their returns, two of the firms have applied a common strategy from the private equity playbook: quickly flipping their investment to another firm. This includes K.K.R., which is said to be shopping its 90 percent stake in the Bayonne venture, a partnership with the water company Suez.

But even if you are okay with everything else I’ve laid out, the real problem that comes into play is most infrastructure projects are natural monopolies. Odds are, that bridge you’re building or that energy grid you’re upgrading is the only one nearby. Whereas a government can be pressured to keep tolls down or to not raise prices, there is no pressure you can put on a private operator. Their goals are to make money: and if they can charge $20 to cross the bridge, they’ll charge the monopolist’s rate. Worst still, those companies then have incentive to hire lobbyists and make campaign donations to make sure no other bridges or similar infrastructure is built. That sort of incentive system should really be avoided at all costs. 

Besides, there’s really nothing broken about the traditional way we build infrastructure in this country. We all use roads or water systems or public transportation or energy grids, so why not simply raise taxes or cut spending elsewhere? But if that’s not possible, at the very least, we need to build much, much stronger taxpayer protections into these kinds of deals from the outset.

What kinds of protections would I like written into the law? I've always been a fan of requiring that a set amount of project revenue (say 25%) in any PPP valued over $500 million has to go back to the state. That way, even if private companies are raking it in, a fair amount of that flows back to the general public. It also wouldn't hurt if each PPP carried with it a maximum public contribution, after which the private company would have to foot the bill or return the project to state control. These are all pretty broad, and yes, they might make PPPs less likely to occur, but they're basically just steps to align incentives between the state and any private partner. And if private partners balk at those kinds of protections, that's probably a good sign that the project isn't a good investment of taxpayer dollars anyways. 

The future of infrastructure under President Trump and a Republican Congress isn't all bad, but it is one where public resources are increasingly sold off to the private sector, and where any failures on their part are still covered by taxpayers. Add to the mix outsized gains due to the monopolistic nature of these projects, and you have a very fitting infrastructure plan for a robber baron like Donald Trump.  


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The Judges of Their Own Drunkenness

The Judges of Their Own Drunkenness