By: Dr. John Brown Miller
Note: The following piece was published online on July 27, 2017 by The Hill, with the headline: “Look to the past to find a way forward on infrastructure”
Miller was previously a professor of civil engineering at MIT, chairman of the American Bar Association Section of Public Contract Law and is an expert on infrastructure procurement. This is the first part of a three-part series on infrastructure.
Since George Washington, American infrastructure has relied on both public and private sources of funds and know-how. Even if Americans had perfect infrastructure planning, people like Edison, Ford, and Gates appear – tipping even a perfect plan on its head.
The key principles in the Trump Administration’s “2018 Budget: Infrastructure Initiative” restore balance to 200 years public/private experience, and are worthy of thoughtful consideration. For 230 years, American governments have followed the dual-track of direct (public appropriation or taxpayer money) and indirect (private investment) funding of infrastructure. These two tracks built America – literally. The logic for two tracks is both political and practical. Experience confirms it. For example, making American rivers and harbors navigable by clearing obstructions was assigned to Congress by the constitution. Such projects naturally fell into the direct (appropriation) track.
We encourage individuals to make advances in materials, know-how, and technology. Spontaneous and unforeseeable, these advances cause the second, indirect (private investment) track to flourish. Because individuals keep innovating, our infrastructure needs are in constant flux. For example, Robert Fulton’s steamboat changed how goods moved. Different docks were needed for steam ships. Wharfs for sailing ships went away. John Roebling’s wire rope enabled cable stayed bridges, from New York to Brooklyn and across the Golden Gate. Roads took priority over ferry docks. Yet, the changes wrought by Fulton and Roebling are tiny compared to the train, the car, the plane, the web, and blue tooth. Private sector innovators rewrite our list of public infrastructure needs every day. It is political fiction to think that any Congress could anticipate these needs, let alone keep up.
The indirect track (private investment) predominates in American history. This is a surprise to most Americans. Sixty-two (62.5%) of the federal statutes for public infrastructure projects between 1780 and 1933 authorized projects in which Congress relied on private sector investment to produce public infrastructure. These were procurements in which government contributed things other than “all the money.” Past Congresses succeeded with the indirect track, leveraging taxpayer money with private sector investment of time and money, at risk.
Americans have always been adept at what we now call “PPPs.” This is also a surprise to most. Ninety-three (93%) of the federal statutes for public infrastructure projects between 1780 and 1933 authorized projects in which a single entity accepted contractual responsibility for both production and operation of an infrastructure project. Americans took real risk, with firm, long commitments on price and schedule to design, build, operate, and (often) finance infrastructure.
We tend, for natural political reasons, to careen back and forth between placing primary emphasis on the direct and on the indirect track. One end of this spectrum embraces unfettered, direct public spending, with no system-based benchmarks to ensure taxpayers get value for money. The other end of the spectrum embraces unfettered private sector investment, with insufficient competitive protections to ensure value for money. Neither extreme works.
For example, between 1800 and 1850, Congress and many state legislatures made direct public investments in many projects, like the National Road, the B&O Canal, and turnpikes. A series of spectacularly poor investments by Pennsylvania, Maryland, South Carolina, and Virginia nearly bankrupted these states. In 1830, Andrew Jackson’s Maysville Veto cooled the fever of over-reliance on the direct track. In 1850, Congress moved to the indirect track, with the first of many private railroad concessions – the Illinois Central. Railroad mileage soared, along with the mobility of Americans. But, scandals like Credit Mobilier cooled the fever of over-reliance on the indirect track.
From 1916, Congress has increasingly over-relied on the direct track, with subsidies to states for the first costs of highways and with the requirement that states separately contract for design, as a condition of further construction grants. After WWII, Congress added similar programs for the Interstates, airports, water, and wastewater. By separating design from construction, and more importantly, by excluding long term operations (those activities and costs after first costs) from all analysis, Congress throttled the indirect track down – way down. This was a major misstep. Life cycle costs are 10 to 20 times first costs. Our research at MIT confirmed that failing to design for the life cycle adds up to 35% in avoidable costs across the entire public infrastructure collection. We face huge challenges in deferred maintenance and repair. The evidence is before our eyes: roads, bridges, tunnels, transit, water, and wastewater in a state of disrepair. Over-reliance by Congress on the direct track has failed again.
In 1990, Alicia Munnell, then at the Boston Federal Reserve and now Professor of Management at Boston College, allocated our $6.8 Trillion in infrastructure holdings this way.
- 64% of these assets held by the private sector;
- 25% of these assets held by state and local governments;
- 7% of these assets held by the US Military;
- 4% of these assets held by the Federal government.
This is good news. Two-thirds of America’s infrastructure assets are managed by private sector owners, who still use the indirect track. Open, competitive procurement ensures value for money. Vendors take real risk, and make firm commitments on life cycle prices, costs, and schedule. Private sector owners use Enterprise Risk Management (ERM) systems – akin to supply chain principles – to match needs with resources. ERM identifies what needs to be done, where, when, at what cost, and with what effect on level of service.
Systems that rely on ERM and open procurement are routine for the governments of England, Scotland, London, Holland, the Australian states, and all of Canada. A few U.S. states are experimenting with them, too. Avoidable cost savings up to 35% have been achieved.
An effective infrastructure policy has never been a binary choice. The choice is not public or private. Both tracks are necessary for America to rebuild an infrastructure platform that makes every American more competitive in world markets. The Administration’s key principles reopen the indirect track and get value for money from the direct track. These are moves that commuters, the trades, and taxpayers want. See, Fact Sheet at whitehouse.gov.