New Partnership Models Required to Address Future Infrastructure Needs
When policymakers in my home state of Maryland decided to scale back transportation funding by roughly $3.3 billion over the next several years, many stakeholders were caught off guard. The cuts, which span the state’s six-year transportation spending plan, would reduce the operating budget by roughly $1 billion, while also slashing $3 billion from the state’s capital program. There would also be an additional $400 million reduction in grants to local governments. As has been the case for many state governments, construction project inflation along with rising costs in other segments caused priorities to change, delaying many critical projects across the state.
Though Maryland’s economy has been among the nation’s weakest for years, it is not alone. Nearly 40 states have postponed transportation projects over the past two years. In many instances, funds were diverted toward other urgent needs. Oregon’s Department of Transportation recently indicated that officials would have to cut more than 1,000 jobs if state policymakers failed to address the agency’s financial difficulties. The agency’s budget is projected to suffer a revenue shortfall of more than $350 million over the next three fiscal years (2025-27). Officials in Arizona have proposed a budget that includes $118 million in diminished project spending while also shifting a number of projects to 2028.
The American Society of Civil Engineers (ASCE) projects a $2.59 trillion infrastructure funding gap by 2039 despite the ongoing investments being made under the Infrastructure Investment and Jobs Act, which was passed in 2021. Macroeconomic phenomena are not helping. Many contractors indicate a lack of personnel available to expeditiously and efficiently deliver public construction services. That drives costs higher. Though materials prices have been better behaved over the past year, inflation still managed to increase highway construction costs by approximately 25% in 2022, with similar increases in 2023.
Accordingly, many states are turning toward novel approaches to address funding gaps. For its part, the State of Maryland has started looking beyond the U.S. for potential investors. Public-private partnerships can utilize both domestic and foreign capital. Often, foreigners are interested in investing in America because their domestic economies are weaker than that of the U.S. and because they also prefer generating rates of return in U.S. dollars. But foreign involvement can also be controversial, especially when it comes to taking stakes in publicly owned properties and the revenues they generate.
Foreign Partnerships as a Path Forward
In 2017, then Maryland governor Larry Hogan announced plans to add lanes to two major highways in his state. The project was considered to be the nation’s largest public-private partnership. Transurban, the lead partner picked to build toll lanes on one of those roads, is based in Australia. The company was to lead a group to build toll lanes to widen I-270 and parts of the Capital Beltway in Montgomery County, Maryland’s most populous jurisdiction. Though they eventually dropped out of the deal in 2023 due to, in their words, “a changing political landscape”, they did potentially present a solution to Maryland’s funding problem. If they had completed the expansion, the private consortium would have recouped an estimated $7.6 billion in costs over 50 years via toll collections. At the end of those five decades, the toll lanes would have reverted to the state.
The Australian company has had success in the D.C. region in the past, albeit under a different political regime. It currently operates three roads in the Washington, D.C. area with plans to add express lanes to a segment of the beltway that surrounds the nation’s capital. The express lanes they have already added cost nearly $2 billion, with the majority of funding coming from Transurban. Likewise, express lanes added to a highway south of the District of Columbia cost just under $1 billion, with only $100 million provided by the public sector. These new roadways have eased congestion in one of the nation’s most notoriously traffic-heavy regions while limiting costs for local governments.
The Indiana Toll Road deal exemplifies a similar substantial foreign investment in U.S. infrastructure. The 157-mile highway, spanning from the Illinois border near Chicago to the Ohio state border, was leased by Indiana in 2006 under a $3.8 billion agreement with a Spanish-Australia consortium. The deal gave the private partners operational control and toll collection rights for a 75-year period.
Pros & Cons of Foreign Investment in Infrastructure
There are pros and cons associated with tapping into foreign investment to cover the nation’s infrastructure needs. First, the pros. Beyond the supply of potentially massive sums of upfront private capital, partnerships can transfer risk away from government balance sheets. Studies indicate that public-private partnerships shift up to 70% of cost overruns and delays onto private investors. Foreign investors can also offer unique operational expertise, a consequence of operating in so many different societies. The World Bank reports that projects headed by companies with public-private experience record completion times 15% less than similarly situated projects that are exclusively publicly financed.
As with anything economic, there are cons. A 2021 survey determined that more than half of Americans are unsettled by the concept of foreign entities controlling aspects of U.S. infrastructure. Data security is an issue since foreign companies are positioned to acquire American payment information. Moreover, while states and localities benefit from infusions of capital, they lose critical toll revenue, often for decades. It can also be challenging to negotiate future toll increases with private partners, since the private sector seeks to profit maximize while the public sector seeks to protect citizens from significant cost increases (at least theoretically).
Looking Ahead
The national debt is screaming towards $36 trillion. While federal government spending has been elevated in recent years, even post-pandemic, that is unlikely to continue. Today, government is spending ambitiously on infrastructure, subsidies to chipmakers and other manufacturers, and global defense. But over the next few years, the national debt will climb further, interest on the debt will continue to occupy a growing share of the federal budget, and Social Security and Medicare trust funds will march toward and eventually enter insolvency. In other words, the current pace of federal spending is unsustainable. Accordingly, state and local governments will have to rely even more heavily upon their own abilities to raise capital to finance infrastructure. It perhaps makes sense for public officials to begin forging relationships with potential private partners now, including partners located in foreign lands.