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America Needs More Privately Funded Infrastructure
Our government-dominated transportation system has proven to be high in cost and low in benefits
By Christian Britschgi
In November 2022, the Washington D.C. Metro rail transit system was in an awkward transition phase. That month, the long-troubled second stage of its Silver Line was at last completed and opened for business. The Washington Metropolitan Area Transit Authority (WMATA), which would operate the new line, tried to put a triumphal spin on the occasion by inviting press and distributing commemorative pennants to riders.
Still, there was no escaping the fact that the new line was opening four years late and $250 million over budget, and would be expanding service miles into low-density suburban and exurban Virginia where demand for rail transit is low. The system would net few new riders. Furthermore, just a few weeks before the Silver Line’s opening, the WMATA announced that it would be shutting down its well-used Yellow Line, which connects dense downtown D.C. to Virginia’s dense inner-suburbs, for months of much-needed repairs. In the short-term at least, the D.C. area was losing transit capacity, not gaining it.
This one-step-forward, two-steps-back moment for D.C.’s rail transit is emblematic of many of the problems faced by America’s largely government-run transportation sector. Across the country, our roads and rail lines are in need of some serious work. Estimates vary, but the maintenance backlog of America’s public transit systems sits somewhere between $90 billion and $176 billion, reports Route Fifty. The Transportation Research Board estimated in 2019 that the Interstate Highway System requires about $1 trillion in repairs and capacity increases. Seven percent of the nation’s highway bridges are structurally deficient. Meanwhile, a growing economy and population are putting increasing demands on this deteriorating infrastructure.
The country needs an abundance of infrastructure, and it also needs a better system for selecting which projects to fund that more closely aligns a project’s benefits with a project’s costs. What the country needs is an abundance of privately funded infrastructure.
How It Works—Or Doesn’t Work
Americans sick of idling on increasingly congested freeways or waiting on a delayed train are demanding fixes in the form of more and better-performing infrastructure. In terms of funding at least, the federal government has been happy to provide: The infrastructure bill President Biden signed into law in November 2021 spends $1.2 trillion on surface transportation, waterways, broadband and more. It includes $550 billion in additional spending above baseline levels, including $110 billion in additional road and bridge funding and an additional $42 billion for public transit.
Yet as that money starts going out the door, it’s entering the same system of infrastructure provision that’s produced low-value-added projects that were over budget and behind schedule. Once built, these new projects require ongoing maintenance from various levels of government that neglected the last batch of rail lines and highways that people actually use.
These issues are of increasing concern for supporters of what’s been called the “abundance agenda.” This ideologically heterodox group of policy wonks, pundits and politicians has largely taken a view that what most ails America is a lack of stuff—whether that’s healthcare, housing, childcare, semiconductors, solar panels or transmission lines—and a self-imposed inability to create more of this stuff. Supporters of this agenda have largely come around to the idea that America’s failure to build things isn’t the result of a lack of funding per se.
Rather, it’s primarily the result of a sclerotic regulatory state that forces anyone trying to do anything new to get endless permission slips, dodge endless veto points and placate endless special interest groups. Navigating all that sucks up time and money, which then gets tacked onto delivery schedules and budgets of much-needed projects. What seemed like a beneficial project ends up being all costs.
Supporters of the abundance agenda have no shortage of ideas for how to overcome these problems: We should streamline environmental review laws that keep everything from new roads to powerlines in limbo for years or even decades. We should eliminate Buy America laws that drive up the costs of material. Union work rules and child care mandates should give way to economizing on labor costs.
These are all good ideas. Free marketers can easily get on board with them. They have their limits, however. Economizing on individual projects saves resources, sure. But it doesn’t change the fundamental nature of a system that spends boundless resources on low-value projects or neglects maintenance on existing high-value ones. If D.C.-area authorities had built the Silver Line on time and on budget, taxpayers would have been saved years and millions of dollars.
But it also just means we’d have had four more years of a low-value transit project ferrying relatively few riders between D.C.’s low-density Virginia suburbs and farther-flung exurban areas. Meanwhile, there’s no guarantee those savings would have been plowed into more worthwhile projects or spent to stay up to date on the maintenance projects that would have prevented the Yellow Line from having to shut down for months.
A Long Tradition of Privately Funded Infrastructure
While it might sound like libertarian fantasy, extensive privately funded infrastructure is no pipe dream. Indeed, America has a robust history of private parties building and operating transportation infrastructure.
Beginning in the 1790s, private, voluntary turnpike corporations (often called societies) formed to build tolled highways across New England and the Mid-Atlantic. These turnpike corporations were organized as joint-stock ventures. Private investors provided the initial capital, and then tolls on the finished road would pay for continued operating costs and dividends for investors. This model of private investors funding toll road infrastructure was replicated again during the “plank road” boom of the 1840s, and later in California and Nevada during settlement waves of the late 19th century.
Altogether, from the late 18th century through the end of the 19th century, private companies using private capital built 52,000 miles of toll roads, according to the figures collected by economist Daniel Klein. That’s longer than today’s 47,000-mile Interstate Highway System. And the benefits of this privately funded infrastructure were immense. Early America was “land rich” but “capital poor.” Turnpikes thus created huge value by leveraging that scarce private capital to connect the country’s spread-out and isolated communities.
According to Klein, investors in early turnpikes were well aware that they were unlikely to reap any serious dividends from tolls themselves. Nevertheless, their indirect benefits in terms of higher land values and lower transportation costs meant turnpikes still attracted copious amounts of private capital. Strong community pressure to participate in road investment helped overcome obvious free rider problems. Meanwhile, the rise of plank roads—roads constructed from wooden planks—represented voluntary organizations tapping private capital and innovative technology to plug the gaps created by poor government investment in transportation mega-projects.
Antebellum state governments had invested huge sums of tax dollars in often poor-performing canals intended to move goods along America’s waterways, while neglecting the need for short-distance highways. To fill that void, private companies formed to build those short-distance highways. To keep costs under control, they devised plank roads, which could be built far more cheaply than dirt or gravel roads and were less affected by inclement weather. The same was true in the American West, where private capital dominated infrastructure provision. “An abundance of testimony indicates that the private road companies were the serious road builders, in terms of quantity and quality,” writes Klein.
Urban transit systems of the later Industrial Era were also often private endeavors. As Randal O’Toole describes in his book “Romance of the Rails,” many American cities’ streetcar systems were financed by real estate developers who would buy greenfield land outside the city, build a streetcar line to it from downtown, and then sell off subdivided lots to homebuilders. The land sales financed the capital costs of the line, while fares covered the operations of the streetcar.
Other urban transportation systems, such as elevated trains and trolley buses, were also wholly or largely privately financed. While many of these private infrastructure endeavors failed, a legacy of falling transportation costs and faster, more dependable transportation suggests that a system of privately provided infrastructure was allocating capital efficiently and generally selecting good projects.
A Rougher Road
A mix of market competition, regulation and government funding eventually ended much of America’s experiments with private infrastructure. Over time, jitneys, buses and private automobiles outcompeted private electric streetcar lines. It didn’t help that the streetcar owners were often forbidden by city governments from raising fares. They were also often required to pave the streets that their motorized competition would then use, bearing the full cost while these competitors reaped the benefits.
Then, as automobiles took to the roads in the early 20th century, the federal government started funding highway construction. This government funding crowded out private investment. It came with the requirement that new federally funded roads weren’t toll roads. That meant future road maintenance would have to be covered by taxes, instead of direct fees on road users.
This has all left America with a transportation infrastructure that’s almost entirely publicly built, operated and financed. In such a world, costs are spread across taxpayers who generally have no choice in whether or not to fund a particular project—and little stake in whether or not it’s successful. Riders, investors and adjacent property owners aren’t ultimately the stakeholders who determine where scarce capital is invested. Instead, the real power players are the political entities who distribute tax funding and the interest groups who hold sway over them.
D.C. Metro’s Silver Line is a great example: Building a massive new transit line out to car-oriented exurban Virginia is hardly in the best interests of the people and property owners who use and depend on Metro the most. Extending Metro service to additional municipalities, counties and congressional districts does, however, benefit those jurisdictions’ elected officials, who now also have an interest in fighting for continued and expanded Metro funding.
Moving in a Positive Direction?
Federal competitive infrastructure grant programs that award funding to projects based on how much they improve travel times, freight movement, safety and more were supposed to inject a little cost-benefit rationality into the whole system. The discretion these programs give the executive branch to decide who gets funded meant they ended up being little more than pork barrel patronage. The infrastructure law’s massive expansion of discretionary transportation grant programs will make things worse.
Getting not just more infrastructure, but also the right infrastructure, will require moving to—or, more accurately, returning to—a system of privately owned infrastructure financed by a mix of user fees (like tolls) and land value capture, where infrastructure investors benefit from the higher land value their projects generate. Already, there are experiments underway that would shift America’s infrastructure in that direction.
In addition to the Silver Line, Northern Virginia is the site of several public-private partnerships (P3s) that have leveraged private capital to add new toll lanes to the Capital Beltway. The tolls provide a return to investors and mitigate traffic congestion. A number of similar P3s whereby private infrastructure firms use a mix of private capital and public funding to build or operate tolled highway lanes—reaping a return from the toll revenue—are in the works across the country. In Florida, the privately owned and operated Brightline rail line in Florida is reportedly earning an operating profit on its initial Miami-to-West Palm Beach segment. Capitalizing on the line’s popularity, the rail line’s parent company has also turned rail stations into major mixed use real estate projects.
None of these projects are perfectly private. They still benefit from low-cost government financing and, often, direct government grants. But nevertheless, they’re proof that even in America’s thoroughly government-controlled and regulated transportation sector, private parties see some profit opportunity in building infrastructure and charging consumers a fee to use it.
Internationally, there are even more stirring examples of privatized infrastructure. Beginning in the 1990s, the Chilean government started granting highway concessions to private infrastructure firms to build and operated tolled highways both between and within its cities. Chile’s capital, Santiago, now has a whole system of interoperable, urban expressways operated by competing private firms. It’s a system that’s reportedly allowed the government to save public resources for other “social investments” while improving road quality and road safety.
In Hong Kong, the operator of the city’s subway, the semi-privatized MTR, runs a profitable, unsubsidized transit service. Fares alone cover 185% of the company’s operating costs. Most of its profits, per a 2014 United Nations report, come from the returns it’s receiving from developing and renting out the land on top of its stations.
America could reap these same benefits. It just has to legalize making money off infrastructure again. For roadways, that would involve eliminating the federal government’s restrictions on tolling existing interstate highways. Liberalizing zoning laws would also be a crucial reform. As mentioned, most private infrastructure of the past was funded by parties primarily interested in the higher land values resulting from their transit projects. But when the government limits the amount of development that can go on top of or next to transit projects, a lot of land value (and therefore potential for land value capture) is regulated away.
The history of private infrastructure in the U.S., as well as contemporary examples both here and internationally, suggest that private, profit-seeking firms can deliver high-quality, value-increasing roads and rail systems if given the opportunity. More private infrastructure would meet our population’s transportation needs and habits better than our government-dominated system has to date. Indeed, it’s the right road to an abundance agenda.