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Infrastructure Wish Lists vs. Sound Investments

The months since Election Day have brought forth a proliferation of lists of “needed” infrastructure projects. First came the Treasury’s list of 40 mega-projects that I critiqued last month. This was followed in short order by a list of 50 projects that was presented as if it came from the new Trump Administration (but was actually generated by a DC lobbying firm). And not to be outdone, Senate Democrats released their own $1 trillion plan—no specific projects but many billions allocated to categories such as schools, rail, electricity and broadband, etc.

The only one of these to even raise the question of benefit/cost analysis was the report from Treasury—and those estimates were provided by project proponents and could not be taken seriously. The lobbyist list and Senate Democrats’ announcement both focused instead on job creation, a justification that would be satisfied just as easily by building pyramids or (as Keynes once suggested, half in jest) by paying people to dig holes and fill them in again.

Against this backdrop, it was a great relief to receive the U.S. DOT’s 2015 Status of the Nation’s Highways, Bridges, and Transit: Conditions & Performance (generally known as the biennial C&P report). In addition to providing an update on the current (actually 2012) conditions and performance of roadways and transit, both FHWA and FTA employ benefit/cost analysis to review possible scenarios for capital investment. The agencies’ methodologies are continually improved, and their work is far more meaningful than the simple engineering wish lists that are the focus of media and political attention.

For highways and bridges, FHWA does analyses for (1) all highways, (2) just federal-aid highways, (3) just National Highway System (NHS) highways, and (4) just Interstates. In this discussion, I focus solely on all highways, at all levels of government. The baseline capital investment is the total spent in 2012: $105.2 billion. That number was somewhat higher than usual due to federal stimulus spending in 2012. FHWA ran three future scenarios (2012-2032), and estimated the capital spending associated with each (based on B/C analysis):

Maintain 2012 conditions and performance$89.9 billion/year
Sustain 2012 spending levels$105.2
Improve conditions & performance$142.5

FTA carried out a similar analysis, using its own modeling system:

Maintain a state of good repair$17.0 billion/year
Sustain 2012 spending levels$17.0
Expansion, low growth in ridership$22.8
Expansion, high growth in ridership$26.4

To illustrate the difference between economically sound investments and engineering wish lists, let’s compare these DOT results with the 2016 report card of the American Society of Civil Engineers (ASCE). Its section on highways, bridges, and transit posits an investment “gap” for the 2016-2026 decade of $1,101 billion, or $110 billion per year. In the DOT C&P report, the gap for FHWA is the difference between the “improve” scenario and the current 2012 spending: $142.5B minus $105.2B = $37.3 billion. For FTA, the comparable gap, using the low ridership growth (1.4% per year) scenario is $5.8 billion. That makes a total gap of $43.1 billion per year—just 39% of the ASCE number.

One of the reasons I am so positive about public-private partnerships for major infrastructure projects is to sort out economically sound projects from pyramid-building. You will not find investors willing to put equity into projects whose costs exceed their benefits (which are what economists refer to as “value-subtracting enterprises,” meaning that the value of their outputs is less than the value of their inputs). Over the years I have learned not to take seriously grandiose lists of projects or mega-buck investment “needs” that have not been subjected to a rigorous, independent benefit/cost analysis. A trillion dollars of private capital investment would likely yield a large array of economically sound infrastructure improvements. A trillion dollars of net new federal spending risks funding numerous value-subtracting enterprises.

(This article first ran in the February 2017 issue of Surface Transportation Innovations)

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