"Whenever I go into a restaurant, I order both a chicken and an egg to see which comes first"

Sunday, October 23, 2011

Sell the Tappan Zee Bridge

A week ago my wife and I were returning to DC from New England and followed our normal route which takes us over the Tappan Zee Bridge.  Just before the trip I had read that the bridge needs to be replaced.  The perennial maintenance (the last major effort a few years ago when at least one lane was always closed) financed by the New York State Thruway Authority, state, and federal governments has simply been not enough.  The penury of tax revenues and the high cost of upkeep of the entire thruway system let alone the bridge allowed only for ‘keep it up and running’ maintenance, without the major structural repairs that are periodically needed to keep any bridge safe and roadworthy.  Finally, agree local authorities, the time has come for the construction of a new one which would cost $6.4 billion.  How, in this era of tax avoidance, can this be done? The highway trust fund is out of cash, and the gas tax which funds it is little more than half the required amount to address necessary infrastructure improvements. “There is no public money”, said a former adviser to the Department of Transportation” (see Washington Post article, below).

As we were driving across the bridge and commiserating about how much more painful and already long-haul trip to Boston would be once works were started, we wondered how we might invest in the bridge.  In a very shaky and unsure financial market, this should be a good bet.  Over 140,000 cars use the bridge every day, we thought, and even if tolls were substantially raised to cover real costs, demand, even in slow economic times, would remain constant.

“Traffic on [any] road is highly insensitive to stock market levels”, said Chris Camarsh….That makes infrastructure a good way to save for one’s nest egg, since “there is a good predictability that the cash will be there when you are older. (Washington Post 10/23)

I guess we were thinking like a lot of other people, for the Business Section in today’s Post is entirely devoted to rebuilding America’s infrastructure, and the lead article (click on the weblink, below) is on privatizing the process. 

http://www.washingtonpost.com/business/with-us-infrastructure-aging-public-funds-scant-more-projects-going-private/2011/10/17/gIQAGTuv4L_story.html

There are a number of interesting facts cited in the article.  First, there is already as significant amount of private investment in infrastructure led by pension funds and sovereign wealth funds. In the past five years the 30 biggest investors have channeled $180 billion to infrastructure projects and the trend is continuing.  They, and the small investors like my wife and me, feel that this investment will pay good and safe returns.  The Canadian $52 billion Ontario Municipal Employees Retirement System has invested in US infrastructure and done well, helping to provide benefits to its  400,000 members. 

Private investment in infrastructure has a good record.  The privately-financed Midtown Tunnel (NYC) expansion has recovered finance costs and provides a return to investors.  The same company’s (Macquarie) has a similar project proposal pending (a new tunnel project north of the new Jordan Bridge in Virginia).  The private consortium will finance two-thirds of the cost with the Virginia Transportation Authority loaning the rest.  Increased tolls are expected from such investment, but as suggested above, the actual toll cost is far below that required to cover even basic maintenance.  The tunnels must be built to relieve congestion.  Citizens refuse to pay taxes to cover construction and maintenance costs.  Ergo, users will have to pay and pay real costs.

Leasing existing infrastructure to private sector companies has also found new currency throughout America.

A second argument for selling the Tappan Zee Bridge and encouraging private investment in infrastructure is the failure of the public sector to do the job.  In front page piece in the Outlook Section of the Washington Post today, Chris Edwards argues that the federal government, and especially the Army Corps of Engineers and the Federal Bureau of Reclamation have been guilty of poor planning and execution, waste, and inefficiency over its long history.

http://www.washingtonpost.com/opinions/infrastructure-projects-to-fix-the-economy-dont-bank-on-it/2011/10/18/gIQAgtZi3L_story.html

Federal infrastructure spending has a long and painful history of pork-barrel politics and bureaucratic bungling, with money going to wasteful and environmentally damaging projects…

When the federal government ‘thinks big’, it often makes big mistakes.  And when Washington follows bad policies such as….overbuilding dams, it replicates mistakes nationwide….Similar distortions occur in other areas of infrastructure such as transportation.  The federal government subsidizes the construction of urban light rail systems, for example….But urban rail systems are generally less efficient and flexible than bus systems, and they saddle cities with higher operating and maintenance costs down the road.  Similar misallocation of investment occurs with Amtrak…and funding is sprinkled  across the country [because of pork barrel interests in Congress], even in rural areas where passenger rail makes no economic sense….

The usual counter arguments appear – shouldn’t we be worried about selling our infrastructure assets to the Arabs?  Nonsense, says Ryan Orr of Stanford.  We live in a globalized economy and foreigners buy our Treasure Bonds.  What’s the difference?

Tolls will go up and put an undue burden on the poor, another argument does.  Yes, but in this era of no taxes where such revenues would allow for a progressive allocation of cost, there is no other alternative. 

Finally, some critics argue that the benefits of non-polluting rail systems will be better for the public at large than a bus-only policy (see light-rail, above).  Also true, but no one is currently willing to subsidize these externalities.

In conclusion, I hope that there is room for my little widow’s mite in the sale of the Tappan Zee Bridge.  I will be able to put up with the aggravation of construction a little better.

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