Gas Tax Increase or Private Capital?
China, Australia, European countries are funding infrastructure with private capital
By Samuel Staley

Congress isn't waiting to see who wins in November before deciding how to spend the next trillion dollars or so on the nation's roads, rails, bridges, and tunnels. Yet, all the beltway jockeying for transportation money may be diverting attention from an even bigger problem: our inability to tap into billions of private capital as our competitors soak up a growing worldwide pot of infrastructure funds.

The stakes are high. We're not just faced with the problem of how to maintain and repair our roads and rails. We also need to find a way to come up with billions of dollars to redesign and reconfigure our transportation network for the 21st century. That's a big challenge because we are already facing an annual transportation deficit of at least $75 billion, according to groups such as the American Society of Civil Engineers and the National Cooperative Highway Research Program, the National Surface Transportation Policy and Revenue Commission.

But where will the money come from?

Some are holding out for a major increase in the gas tax to fund infrastructure needs. The National Surface Transportation Policy and Revenue Commission recommended a hike of 60 cents. Many in Congress would like to see a gas tax increase increase, but most insiders doubt they can get much more than a few pennies at the end of the day. Few see Congress rushing in to hike the gas tax in the midst of record-high gas prices and a slumping economy.

Further complicating a gas tax option is its scale: even if taxes were increased dramatically the gas tax still wouldn't provide all of the needed funding for road projects.

Meanwhile, the US is in danger of leaving billions of infrastructure dollars on the table for other countries to eagerly snatch up. Private investments funds are capable of leveraging $525 billion for infrastructure investments worldwide, more than 10 times the amount available just eight years ago. These funds are simply looking for the right places to invest. And thus far they've found them outside of the United States.

Europe and Asia have decades-long histories of tapping into private equity to fund their transportation infrastructure using public-private partnerships. France has virtually its entire limited access highway system under the management of privately-owned firms, including Cofiroute, ASF, APRR, and Sanef. Australia has been tapping into private capital using companies such as Macquarie and Transurban to build tunnels and tollroads in its major cities since the 1990s. Italy and the United Kingdom claimed nearly half of the private investment in public infrastructure between 2003 and 2006 among the 20 nations that make up the Organization for Economic Cooperation and Development (OECD), according to Standard & Poor's.

China may be the most aggressive in using private capital to build its transportation infrastructure. The nation is embarking on an epic road-building program that will match the size of the US Interstate Highway System and be completed in less than half the time. Its expressway network is intended to link all provincial capitals, 80 percent of the nation's population, and 90 percent of the nation's ports, according to a report prepared by the China Construction Bank Corporation (CCBC). Most of these expressways are being financed by tolls, and the tollway companies depend on private capital to finance them.

The US lags behind all of these countries. Just a handful of projects have closed in the US for a fraction of the amount of capital available on the global market, most notably the $3.8 billion Indiana Toll Road and the $1.8 billion Chicago Skyway. In a positive sign, three Greenfield (new) toll road deals were signed recently in California, Texas and Virginia. The combined investment value, however, doesn't even match the Indiana deal. While a consortium of domestic and foreign companies submitted bids to lease the Pennsylvania Turnpike, the winning bid of $12.8 billion is still far from a done deal even though it is strongly supported by Democratic Governor Ed Rendell.

The US market appears to be limited largely for political reasons. In the immediate aftermath of the Indiana and Chicago partnership deals, Congressmen James Oberstar (D-MN) and Peter DeFazio (D-OR) sent a letter to governors and state highway officials warning them that the US House Committee on Transportation and Infrastructure would "work to undo any state public-private partnership (PPP) agreements that do not fully protect the public interest and the integrity of the national system."

A strong response from state officials quelled some the protest from Capitol Hill and the short-term momentum to rein in public-private partnership projects. Nevertheless, proponents of public-private partnerships were put on notice that the federal government might become active in discouraging the further use of private capital in highway and transportation projects.

We may be giving private capital, even US-based funds, little choice but to invest their billions in fruitful, but less lucrative projects abroad. That would be unfortunate for the US, undermining our global competitiveness and undercutting efforts to shore up a transportation system desperately in need of an extreme makeover. Unless national transportation policy gets on track and embraces private capital, our transportation system will continue to lag far behind our global competitors.

Samuel Staley is director of urban growth and land use policy at Reason Foundation. He is also co-author of the forthcoming book Mobility First: A New Vision for Transportation in a Globally Competitive Twenty-first Century (Rowman & Littlefield) and co-author of The Road More Traveled: Why the Congestion Crisis Matters More Than You Think, and What We Can Do About It (Rowman & Littlefield, 2006). An archive of his work is here.