With Medicaid and education expenditures surging at state and local levels and with the federal government focused on defense and expanding Medicare and Social Security outlays in recent years, inadequacies in public capital spending are hardly surprising.

Underinvestment has persisted even as other construction segments have begun to recover. For instance, during the initial eight months of 2013, U.S. highway construction spending totaled $50.32 billion, down 3.3 percent from the same period in 2012. Meanwhile, overall construction spending (led by residential) advanced nearly 6 percent.

According to The Wall Street Journal, the decline was largely attributable to individual states that have been shifting transportation dollars to other programs such as education and health care or using funds to pay down interest on debt taken on in prior years to finance large capital projects. A stagnant level of support from the federal government contributes to ongoing declines in infrastructure spending.

Pennsylvania, once known for its abundance of infrastructure projects, is a prime example of today’s capital spending inadequacies. State spending on transportation projects declined from approximately $2.7 billion in 2009 to $1.6 billion during a recent 12-month period due in part to the cessation of stimulus funding and falling gas tax revenues.

Not only has the level of funding changed, but so too has the nature of projects. Rather than embarking on new, longer-term projects that enhance capacity, states have increasingly devoted available funds to small-scale repairs. Five years ago, nearly a
quarter of Pennsylvania funds went toward projects that expanded capacity. Now, only 3 percent of funding goes toward capacity expansion; the rest is for maintenance and repairs.

If anything, circumstances are set to deteriorate. The White House argued that without the president’s $302 billion four-year transportation program in place, transportation funding would run out later this year--endangering 112,000 highway, port and bridge projects; 5,600 transit projects; and nearly 700,000 jobs. Congress responded by clearing a short-term, $11 billion extension that funds the Highway Trust Fund through May 2015.

The bulk of transportation funding comes from the federal gas tax, which has been fixed at 18 cents per gallon since 1993. The U.S. rate is among the lowest in the developed world. Not coincidentally, the United States invests only 1.3 percent of national output in infrastructure, lower than any other nation in the Organisation for Economic Co-operation and Development, according to CG/LA Infrastructure. And according to President Obama, China is investing four times as much in transportation as the United States.

Can Public-Private Partnerships Solve the Problem?
While public agencies struggle to secure resources available to finance infrastructure investment, many private or quasi-private enterprises are flush with capital. The recent run-up in stock prices and growing risk of market correction, extraordinarily low interest rates in the United States and abroad, and growing dissatisfaction with investments in commodities such as gold have pension funds, endowments, life insurance companies and others searching for investment categories that can generate income without undue risk.

The presence of this surplus investment capital has helped finance rapid recoveries in apartment and hotel construction in parts of the country, but the search for investment opportunities continues. Infrastructure has emerged as a logical source of opportunity for these investors. At the same time, the public sector has become more open to the idea of engaging private capital.

While there has been plenty of skepticism regarding the capacity of government to fruitfully negotiate deals with private investors, the list of large public-private deals continues to expand. A recent Reuters article catalogued many of the largest deals, including last November’s Port Authority of New York and New Jersey agreement to rebuild the Goethals Bridge that links New Jersey to Staten Island. The deal is valued at $1.5 billion.

Earlier this year, the state of Maryland invited four teams to bid on a contract to design, build, finance, operate and maintain the Purple Line, a 16-mile light rail system to connect Montgomery and Prince George’s counties. The private sector is expected to invest $500 million to $900 million in the project, which comes with an aggregate price tag of $2.2 billion.

Looking Ahead
There is little chance the United States can pay back its accumulated debt obligations, relieve congestion, promote public safety, embrace innovation, accommodate population growth, and enhance productivity without radically increasing infrastructure investment. Public-private partnerships represent the only conceivable solution, even if it is only a partial solution.

The good news is an abundance of private capital is waiting to be invested. Infrastructure seems to be an ideal place for that capital to land.


Anirban Basu is chief economist of Associated Builders and Contractors. For more information, visit www.abc.org.