It’s getting harder to finance the world’s infrastructure needs — perhaps nowhere more than in Washington. States, sometimes partnering with the private sector, are getting creative in building and maintaining roads, bridges and ports.
The debate in Washington over how to fund a rapidly depleting Highway Trust Fund has been important enough that it has earned the ultimate award: a Twitter hashtag. At #FixTheTrustFund, you’ll find all types of pleadings for Congress to do something — anything — to ensure that when May 31 comes, the fund has a mechanism in place to allow it to continue operating.
With that scuffle going, elsewhere in D.C. this week the issue of infrastructure is a focus at the World Bank/IMF spring meetings, where leading officials from several countries — stretching from Japan to Latin America — will take up the issue on a panel entitled, The Why, Where, and How of Infrastructure Investment.
The importance of infrastructure cannot be understated. A recent analysis by Standard and Poor’s, a division of McGraw Hill Financial, shows that infrastructure investment could yield greater than one-to-one returns in several countries across the globe. An increase in infrastructure spending of 1 percent of real GDP ran as high as 2.5, in Brazil and the U.K. The multiplier effect in the U.S was 1.7 times the investment, bringing with it a potential 700,000 additional jobs.
However, the ability to fund infrastructure is getting harder as traditional players — governments and banks — become increasingly constrained. Standard and Poor’s calculates the global funding gap at $500 billion.
But even as an inadequate level of infrastructure investment is bemoaned, there are plenty of developments — big and small — that offer more creative approaches to infrastructure investment.
In Asia, China passed its first deadline date for membership into the Asian Infrastructure Investment Bank with nearly three dozen countries signing up — despite U.S. unease with the new financing institution, a possible World Bank/IMF alternative.
But the U.S., in the absence of greater federal support, is increasingly employing a bottom-up approach, as states and local governments turn to alternative funding — as well as the private sector — to fill its infrastructure funding gap.
For a 10-year period that ended in 2011, states actually cut their infrastructure funding, according to a recent Pew Charitable Trust report. During that time, Pew said, total U.S. spending on surface transportation was down 12 percent in real terms. But state spending showed an even sharper real decline: 20 percent in real terms.
Yet there may be signs of a reversal. States are increasingly raising or altering their gasoline taxes to provide more funding for road infrastructure. The key number is 14 — that’s the number of states that have either simply raised their gasoline tax or altered it to produce more revenue between 2013 and the first months of 2015.
Carl Davis, a senior analyst with the Institute on Taxation and Economic Policy Institute, who tracks the issue closely, notes that the states that have made these moves include some with Republican control of both the governorship and both houses of the state legislature. Of those 14 states with increases, six of them have made their moves in just the first three months of this year. “In a lot of the states, the business community has gotten behind the increases,” Davis said when I recently spoke to him. “That allowed it to become bipartisan.”
Still, state and federal lawmakers that are facing a funding gap know that continuously raising the gas tax isn’t sustainable. A one-shot approach is being taken by New York. The state has received settlements from litigation with various financial institutions, and it’s being put into a dedicated fund for one-time capital investments to the tune of $4.6 billion. The problem, of course, is that it is one-time — and infrastructure needs are recurring.
Other states have undertaken new bonding programs to provide the funding for infrastructure projects, which sometimes include private sector financing. As McGraw Hill Financial President and CEO Douglas Peterson outlined in a recent speech, the private sector has the cash, investment expertise, and appetite to help finance badly needed projects. Surprisingly, not all states take advantage of this.
In states where we’ve seen local governments use public-private partnerships (P3s) for infrastructure projects, we’ve seen instances of great success. For example, the Port Miami Tunnel was recently agreed upon in this fashion. Without the partnership, the Port would not be able to sustain the 176,000 jobs it generates, the $6.4 billion in wages it supports, and the $17 billion in economic output it produces.
Whether employing a bottom-up or top-down approach, more creative approaches are needed to fund infrastructure investment. However, one thing is for certain — don’t expect the infrastructure funding problem to go away anytime soon unless all hands are on deck and all tools are being used. Considering all options is paramount to bridge the gap.
(Top image: Courtesy of Daniel Azoulay)
John Kingston is President of the McGraw Hill Financial Institute.