How to invest in infrastructure assets and why there is a perpetual infrastructure “crisis”.
In this episode you’ll learn:
- What are the benefits of infrastructure projects.
- How are highways improvements funded in the United States.
- What are public to private partnerships.
- Why do many infrastructure projects not get funded.
- How individuals can invest in infrastructure.
Show Notes
Approaches To Making Federal Highway Spending More Productive – Congressional Budget Office
Cost and funding for U.S. road projects – American Road and Transportation Builders Association
Infrastructure Report Card – American Society of Civil Engineers
Pressure and Time – Ben Hunt – Salient Partners
President Trump’s infrastructure plans probably involve more tolls – The Economist
Making the most of a wealth of infrastructure finance – McKinsey & Company
Bullet trains and the economics of high-speed railways – Susan Muldowney
The System of Automobility – John Urry
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Summary Article
Why Roads Go Unfixed
Last month, we drove our rented VW Gol automobile down a dirt road from our hotel in Tulum through the Sian Ka’an biosphere to arrive at the fishing village of Punta Allen in Quintana Roo, Mexico.
The distance was about 30 miles and it took 65 minutes for an average speed of just under 30 miles per hour. Three years ago, a friend and I attempted the same journey, this time in a Jeep. In two hours, we had only traveled a little over half way and stopped at Xamach Dos where we spent the night. We averaged less than 10 miles per hour.
Both times our speed was hindered by huge potholes in the road. In the earlier journey, some of the potholes were as big as our Jeep. The road had recently been graded in our most recent trip so conditions were improved, but there were still some sizeable potholes.
Had the road been paved, the journey would have been so much faster. Yet, does it make economic sense to pave the road to Punta Allen which has a population of just under 500 inhabitants?
The American Road and Transportation Builders Association estimates it costs roughly $2 million to $3 million per mile to build a road in a rural area.
Granted the cost might be lower in Mexico, but it would still cost hundreds of thousands of pesos per inhabitant of Punta Allen to fortify the road and pave it with asphalt.
Why Roads Are Fixed and Built
The primary reason federal, state and local governments fix and build roads is to increase the nation’s productivity or improve the well being of its citizens.
In February 2016, the Congressional Budget Office in a report titled “Approaches To Making Federal Highway Spending More Productive” wrote,
“Spending for highway infrastructure can increase economic productivity and well-being by providing benefits to businesses and households. It can increase the productivity of businesses when it reduces freight delivery costs, shortens travel times, or improves reliability.”
“Spending for highway infrastructure can also provide benefits to households by lowering the costs for employees to commute to work; shortening commuting times and improving the reliability of commutes; improving households’ access to health care, education, and other valued services; improving the safety of travel; and reducing some of the harmful byproducts of transportation, such as pollution.”
Why Rural Roads Are In Better Repair Than City Roads
The same report found that due to the use of formula grants to state and local government that less than half of highway funding has been tied to the amount of travel on the road.
That means governments spend more on less traveled roads than busier roads, which leads to rural roads often being in better condition than urban roads. In other words, highway funding is tilted more toward the well being of rural citizens than increasing productivity of metropolitan areas.
Of course every local and state government believes they need more funding to fix roads.
Why Is There Never Enough Money For Roads
Why is there is a shortfall in funding? Partly because citizens are frequently unwilling to have their taxes raised to pay for better roads. At the same time there is often a political backlash against toll roads.
The McKinsey Global Institute estimates there is more than $5 trillion a year available for infrastructure investment coming from institutional investors, development banks, corporations, public sources and retail investors.
But given the deep pool of capital not many public-private-partnership projects get funded.
The Economists writes, “Private investors don’t fix roads for the sake of smoother asphalt. They do it to get a return on their investment. That means the projects undertaken will be ones that make money through user fees—in most cases, tolls.”
The private sector will not fund an infrastructure project unless there is an identifiable and predictable cash flow stream to allow investors to get reimbursed for the construction costs and earn an economic return.
Insufficient cash flow to justify an infrastructure project can be a function of an unwillingness of citizens to pay user fees or there are insufficient users so even with fees there would be a funding shortfall.
Most Infrastructure Isn’t An Investment
Ben Hunt, Chief Investment Strategist at investment firm Salient Partners, issued this provocative statement on publicly funding infrastructure projects that the private sector is unwilling to build.
“My personal belief is that Larry Summers and the rest of the “public infrastructure projects are great investments!” crowd are sniffing glue. You’re pulling forward future economic activity, that’s all. I’m not saying that government spending is bad — on the contrary, government spending is absolutely necessary to preserve life, liberty, and the pursuit of happiness, and there’s certainly a societal “return on investment” from government spending — but don’t tell me that there’s this huge productivity-enhancing, non-quotation-marked economic return on investment generated by the government building stuff that the private sector doesn’t want to build.”
“Don’t tell me that what China is doing with their infrastructure is “mal-investment”, but that if we do it … well, that’s different, because, you know, our infrastructure is “crumbling” instead of “gleaming” the way it is in … umm … China. Yes, LaGuardia is a miserable airport. So stipulated. But there are infinitely greater productivity gains to be had from changing our insane TSA regulations and reducing security lines than by building a new Terminal B. If you want a massive Keynesian deficit spending program on top of our massive current debt … fine, make the argument. There’s an argument to be made. But don’t put a specious “investment” wrapper around it.”
If the public is unwilling to fund specific road improvements through higher taxes and the private sector is unwilling to do so because it is not economically viable then the road shouldn’t be fixed.
That certainly is the choice Teton County, Idaho made when they tore up the pot-holed road leading to our farm, turning a paved road back into dirt and gravel.
