An Entrepreneurial Way to Rebuild America

09/12/2011 10:28 am ET | Updated Nov 12, 2011

It is no secret that much of America needs a facelift. Ever more cars and heavy trucks in increasingly crowded -- and expanding -- urban areas require more road capacity and massive repairs to decaying bridges. The World Economic Forum ranks the United States 23rd in the world on the condition of its physical infrastructure, when just a short time ago it was a major source of its economic competitiveness.

As part of its new jobs package, the Obama Administration has proposed both new infrastructure spending by the federal government, as well as the creation of a new "Infrastructure Bank," which would co-fund with other sources new infrastructure projects. Given the flat economy, a major rebuilding program, employing lots of currently unemployed construction workers, would seem to come at just the right time.

Unfortunately, there are two problems with these proposals. As the last stimulus package demonstrated only too well, few worthwhile infrastructure projects are really "shovel ready." In addition to the delay introduced by permitting issues at various levels of government and the protracted process of allocating funds, it will take time to put the pork-free decision-making process in place that can identify worthy projects to undertake while rejecting wasteful projects. In short, don't look to more infrastructure spending to add many jobs quickly.

More fundamentally, the new infrastructure bank looks a lot like the now infamous housing government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, that went poorly regulated for too long and that ultimately went bust after no one thought they could, with taxpayers footing a bill likely to exceed $400 billion. The financial crisis should have taught us that the real bill for banks like these can be much larger than initially advertised.

Moreover, unlike housing, where the initial decision-makers are individual households, with infrastructure, the initial decision-makers are units of government, namely the states. In practice, this involves Congressional sponsors who want projects in their districts despite any objective analysis of their benefits or costs and state transportation officials with vested interests who want their say. The Administration may say that the projects will be decided purely on their merits, but who really believes that?

Indeed, the overall plan presumes that the first answer to congested roads and bridges is always new construction, when we know that roads, like electricity and telephone lines (more about them soon), are used most heavily in peak periods, but are almost always uncongested in off-peak hours. If congestion were priced to reflect this variation in demand, then economic activity would shift to different times of the day so that traffic is smoothed out. Yes, this would mean varied and staggered work hours at many locations, and yes for this and other reasons, congestion pricing is not wildly popular with the public. Yet, this is largely because voters have not been confronted with the choices involved.

Namely, do they want to pay more taxes financing more roads, or would they prefer to try congestion pricing first as a way of leveling out traffic? If elected officials would be honest about the choices involved, I believe that many voters would choose pricing first. Indeed, the initial evidence on high-occupancy-toll (HOT) lanes indicates that motorists in all income groups value the option of paying a toll to get to their destinations faster.

Nonetheless, I am also the first to admit that congestion pricing won't solve all of our physical infrastructure problems, and that some new investment, ideally with the latest technology, is required to put a new face on America.

But there is no iron law that these new facilities must be financed and owned by government. After all, with a few exceptions, governments do not own electricity transmission and distribution lines, nor does the government own the telephone wires and fiber optic cables that are the backbone of our modern global telecommunications network. These "infrastructure projects" have long been in private hands, financed by equity and debt sold to a broad range of individual and institutional investors. Currently, private infrastructure companies are active abroad but not here because government has essentially crowded them out.

There is little doubt, if given the freedom to operate, a new private infrastructure industry would have little trouble convincing investment banks to raise funds for them. Indeed, these financial institutions have been salivating to get into this business because they know there is strong latent investor demand for these bonds, especially in a low interest rate environment.

With the development of transponders, EZ passes and similar tracking technologies, users can easily pay for road or bridge use without having to stop at toll stations or reveal their whereabouts. Toll revenues, in turn, provide the income streams that support privately issued bonds which finance facilities construction, without the need for any federal guarantees.

Relative to governments, privately owned infrastructure is likely to be more efficient and innovative because private owners have much stronger incentives to reduce costs and respond to users' preferences to maximize profits.

In addition, private owners are likely to encounter less opposition to congestion pricing than
governments, since customers are used to paying for premium service from other types of private businesses (such as airline and train travel, credit cards, and so forth). Moreover, private firms are likely to apply congestion pricing to cater to users' varied preferences for speed and reliability -- for example, offering a few lanes with high tolls and little delays and lanes with lower tolls and more delay.

From a social perspective, greater use of congestion pricing provides a signal to help insure that only truly essential infrastructure projects are built. Indeed, at the end of the day, the strongest case for private infrastructure is that markets rather than government officials will determine which roads, airports, and the like get built and where.

This does not mean that government is irrelevant for bringing America's infrastructure into the 21rst century. Instead, government must take on a new role: as facilitator, rather than as owner and financier. A new private industry, one centered around the ownership of roads, bridges, airports, and other formerly publicly owned facilities is thus waiting to be born, if policy makers at all levels of government will do everything they can to birth it with carefully designed experiments in selected cities, as a precursor to making this national policy.

This means expediting permits, where needed, and possibly establishing a process for governments to invoke eminent domain (with the private parties paying any required compensation to land owners). In addition, roads and other facilities must satisfy government safety requirements and to meet regular inspections. Private owners, in turn, should be required to fully explain their inspection process or fund one (much as pharmaceutical companies now support the FDA and patent applicants pay fees to the patent office).

It is also possible that the experiments may reveal that governments may need to regulate the prices of some transportation links where drivers or fliers have few alternatives, but this should be the exception, not the rule, since price regulation introduces its own distortions (especially when it is based on a measure of costs, since this is likely to lead to gold-plating).

They say that necessity is the mother of invention, and that there are silver linings in black clouds. Both sayings could not be more apt in describing America's infrastructure and deficit challenges. America can get the new, advanced infrastructure it truly needs without adding to the deficit in the short or long runs if policy makers would enable the private sector to do the job.