By R. Richard Geddes and Dimitar N. Nentchev
This post originally appeared online for the American Enterprise Institute.
The United States faces major challenges related to the funding of transportation infrastructure, such as roads, bridges, and tunnels. Revenues from fossil fuel taxes are declining as vehicles become more fuel-efficient and as the purchasing power of fuel tax revenue declines with inflation. Such revenue declines are occurring at the same time that investment needs are rising because of aging infrastructure. Many states and localities are considering new and innovative models to fund and finance their transportation infrastructure. Such models almost invariably include a greater role for the private sector in the form of public-private partnerships (P3s).
Private infrastructure investment is, however, often viewed as providing an alternative financing method given a revenue stream from a transportation facility, rather than as creating new revenue or funding for the facility. This view overlooks the possibility that private investment in the form of upfront lease payments for newly priced roads can be used to enhance the public appeal of adopting that road pricing. Pricing existing roads generates substantial additional revenue from the current road network while adjusting traffic demand to meet market conditions. The approach proposed here uses the value embedded in US infrastructure, which is released through road pricing, to increase the political feasibility of that road pricing.
To accomplish this, we suggest preserving a portion of the wealth generated by road pricing in perpetuity through a permanent fund. This is one type of public trust fund. Permanent funds are currently in use in Alaska, Texas, Norway, and Alberta, Canada, to preserve natural resource wealth.
Following the Alaskan approach, we propose that investment income from the fund be used to provide an annual dividend payment to all households within the newly priced region. We refer to this approach as an investment public-private partnership, or IP3. The IP3 has numerous advantages relative to current proposals to increase citizens’ support for road pricing. It creates a contractual structure to ensure that roads are properly maintained. It ameliorates the agency problem between citizens and their elected representatives that is exacerbated by the free cash flows that road pricing often generates. It also creates direct citizen stakeholdership in transportation infrastructure. Alaska’s experience suggests that this approach can also reduce income inequality, create higher personal income, and mitigate the effects of recessions.
We estimate potential dividends generated by an IP3 approach using data from the Columbus, Ohio, metropolitan area. Assuming full pricing of the Columbus road network, we find that the IP3 approach would generate household dividends similar to those offered by the Alaska Permanent Fund.
This study offers three key insights:
1. Pricing the use of transportation assets that are presently “free” liberates massive latent economic value currently trapped in those assets;
2. Latent value can be best realized through competitive bidding among a group of firms on the basis of the largest upfront lease payment to operate the asset; and
3. A portion of the realized value can be invested in perpetuity through a permanent fund that generates income for all citizen-owners of the asset. The investment income from the permanent fund helps encourage citizen-owners to accept the pricing necessary to release the asset’s latent economic value.
R. Richard Geddes is an associate professor in the Department of Policy Analysis and Management at Cornell University. His research focuses on public policies surrounding private infrastructure investment. Geddes will be the featured speaker at the 2014 CTS Winter Luncheon on Wednesday, February 12, 2014.