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Martin Hutchinson is the author of "Great Conservatives" (Academica Press, 2005) -- details can be found on the Web site www.greatconservatives.com
Both the
Economist and the Washington Post have recently denounced the poor state of
US
infrastructure; it is obviously becoming fashionable to do so. However, much of
their criticism is ill-founded. Infrastructure failures are inevitable because
infrastructure decisions have become politicized and suffer from the results of
that politicization. Infrastructure
investment has thus become a particularly economically inefficient area, the
reform of which would add greatly to national and global wealth.
When the
Duke of Bridgewater built the
Bridgewater canal
in 1758 to transport coal from his mines at Worsley to newly industrial
Manchester he didn’t need
political permission to do so. Neither did he raise outside capital; the canal
was financed out of his own resources. Hence his own entrepreneurial judgment
that money could be made from the canal was the sole factor in his decision.
His investment was spectacularly successful; the price of coal at
Manchester dropped by
three quarters within a year after the canal was completed in 1763. The canal
operation remained a profitable independent company until being sold to the
Manchester
Ship Canal (also private) in 1885 – the
canal itself remains active to this day.
Since
around 1900, most infrastructure investment has been financed by the public
sector. This has introduced a number of additional complications that the Duke
of Bridgewater did not need to consider. Politicians are elected on a short
term electoral cycle, so long-term projects have little appeal – even the
modest-scale
Bridgewater
canal took 5 years from conception to completion, longer than most electoral cycles.
Much of their power comes locally, so projects that benefit several
jurisdictions are difficult to get off the ground and small projects benefiting
only the immediate community are preferred.
Politicians
are also almost entirely ruled by popular fashion. Thus in periods when
infrastructure is fashionable, say 1920-1960, it is built in great profusion
(think for example of the complex spaghetti of poorly planned, poorly
integrated and environmentally destructive highways built by New York’s Robert
Moses during that period). Conversely in periods such as that since 1970 in
which environmentalist and “not in my backyard” objections have been given
priority, infrastructure spending is neglected.
As an
example of how this works, consider the state of
Connecticut.
Connecticut
benefited enormously from the first wave of suburbanization; it already had the
New Haven Railroad in place and no state income tax, so until 1980 it filled up
rapidly with the more affluent toilers in the
New York metroplex. The
Hudson
Valley
had equally good infrastructure, in the form of the local rail line, but its
towns of Ossining,
Peekskill, Beacon and
Poughkeepsie were blighted by the remnants of earlier
industrial development; in any case it did not offer wealthy New Yorkers the
same tax benefits as
Connecticut.
The
downside of having no income tax was that the state was always short of money,
and so built infrastructure less aggressively than
New York. It also made the mistake of
attracting financial services company headquarters to
Stamford,
and then building no road infrastructure to support them – in the 1980s, when
the major influx occurred, it still had no state income tax, and was attempting
to maintain a
Massachusetts level of social
services on a
New Hampshire
tax base.
Connecticut voters foolishly elected Lowell
Weicker, a leftist independent as Governor in 1990, and as a result they were
saddled with a state income tax but no improvement in infrastructure (the
Democrats had been terrified of introducing a state income tax themselves for
fear of facing the wrath of the voters.) Nevertheless, Connecticut’s state
income tax remained lower than New York’s, and its suburbs of Greenwich and Westport
in particular were highly fashionable, so in the late 1990s and onward it
attracted large numbers of hedge fund managers, who found they could carry out
their nefarious but profitable activities from the comfort of Connecticut,
without the bother of commuting into Manhattan.
The result
of economic growth without infrastructure provision has been gridlock, more or
less permanent except at 5am Sundays, on the Connecticut Turnpike between
Greenwich and
New
Haven, a distance of 45 miles. Even outside the rush
hour, it can take about 2½ hours to navigate the Turnpike, which now runs at
over 200% of “capacity.” There are few alternatives available, since
Connecticut has built a
maze of small highways that may serve local voters but don’t go anywhere and
relieve little if any of the congestion in East-West traffic. The cost of this
gridlock is immense, not only in the time of drivers but in the additional
environmental damage caused by hundreds of thousands of vehicles proceeding in
low gear for several hours.
The
solution is simple if you look at a map. Indeed it was contemplated by Moses
half a century ago, even before the Connecticut Turnpike was completed, when he
built the
Sunken Meadow State
Parkway across Long Island with a spur facing
Connecticut. However
even Moses, a Yale graduate born in New Haven, could not get the Connecticut
state government to cooperate, so he doubtless ground his teeth in frustration
and proceeded to demolishing more of the South Bronx.
Connecticut
needs to be connected to Long Island by a bridge, and connecting highways and
another bridge need to be built linking Long Island to
New Jersey.
The
principal purpose of such construction would be to allow traffic to move from
New England to the Mid-Atlantic states without having to drive 270 degrees
round New York, a city that is particularly awkwardly situated for modern road
traffic. A bridge could be built west of New London to the tip of Long Island,
crossing 12 miles of water, from East Haven, crossing 20 miles of water (but connecting
conveniently with Connecticut’s meager north-south road network) or from
Fairfield to Moses’ Sunken Meadow State Parkway, covering 14 miles of water. At
the
New Jersey end of Long Island, a bridge
from Rockaway Point to
Sandy Hook would cross
only 8 miles of water. Short links would connect the
Connecticut
bridge terminus to the Connecticut Turnpike, the
New
Jersey terminus to the
Garden
State Parkway (or a longer link to the New Jersey
Turnpike) and the
Long Island termini to the
island’s extensive road network.
Constructing
such bridges would not be particularly difficult or expensive – the waters to
be crossed are much shorter than that crossed by the Chesapeake Bay
Bridge-Tunnel, completed in 1965, let alone the Channel or Seikan tunnels. As
well as removing the 110 mile
New
York circuit for long distance north-south travelers,
the bridges would relieve the Connecticut Turnpike of most long-distance
traffic, allowing the remaining locals to enjoy their gridlock in peace. They
would also free Long Islanders from long-term imprisonment, allowing them to
visit the rest of the
United States
without driving through
New York.
Such a project
would be dear to the heart of the Duke of Bridgewater. However it is unlikely
to proceed because it cuts across the jurisdictions of three different states,
would take a decade to build and would run into enormous opposition from
various local interests, as well as from environmentalists who would have six
different court systems and five appeals courts in which to harass it. Senator Barack Obama has proposed a $60
billion infrastructure fund at the federal level. This project would be an
obvious candidate for such a fund, but is unlikely to fare well there because
of the diffuse nature of its beneficiaries – even at the federal level it is
easier to fund “pork” in a single district, so the local Congressman gets the
benefit.
The other
and better way to fund infrastructure is through the private sector. This only
began to be squeezed out by public sector financing with the success of the
Erie Canal, financed by
New York
State guaranteed bonds in
1817-25. From roughly 1930 to 1980, public sector financing was assumed for all
major infrastructure projects, since the state was able to borrow more cheaply
than the private sector. In addition, private sector finance, which had focused
largely on debt through the nineteenth century, from the 1920s onwards focused
increasingly on equity, a very expensive means of financing infrastructure
needs. However after 1980 the increasing popularity of the private sector and
budgetary constraints in the public sector swung the pendulum back towards
private finance.
The ideal infrastructure
finance involves both debt and equity, with the equity used as a cushion to
provide assurance that the debt will be repaid. That should be readily
available in a universe that includes junk bonds. The problem is that infrastructure
brings only long term returns, which are generally fairly low but very secure.
In addition, political harassment can hugely increase the cost of even the
simplest infrastructure project, primarily by delaying it.
The
Eurotunnel project, which ran so far over its cost estimates it was eventually
forced to declare bankruptcy, is a prime example of an infrastructure financing
gone wrong. It required agreement on even small details between two governments
and two public sector rail operators. Its form, a rail-only tunnel, was chosen
for political reasons when a road bridge was clearly economically preferable.
Finally, it was selected through the kind of public sector bidding process that
almost always results in costs running astronomically over the heavily massaged
estimates that win the bid.
Even with
the relevant governments lined up, private finance for infrastructure today is
questionable, because of the excessively short-term orientation of most
financiers. The infrastructure specialist Macquarie Bank’s approach, in which
the project arranger extracts a high return quickly through financial
engineering, works only when the investor takes over existing infrastructure in
return for an up-front payment to the seller. The
Macquarie
structure can be very attractive to local governments with aging infrastructure
and urgent budgetary needs; it is no solution when more than minimal new
construction is involved.
There is
however a natural match between the long term modest but fairly certain returns
of infrastructure projects and the long term investment requirements of life
assurance companies and pension funds, which have a need to diversify their
assets beyond stock and bond markets. Rather than investing fiduciary money in
fly-by-night short term operators in hedge funds and private equity funds, such
institutions should form consortia to hire engineers and undertake
infrastructure projects directly. As representatives of thousands or even
millions of life policyholders or pensioners, they would have the political clout
to deal with recalcitrant local governments. For them, infrastructure projects
would provide that ultimate diversification: long term returns that were
inflation-protected and independent of stock and bond markets, though not of
the economy overall.
To build
better infrastructure, we need superb engineers and sober, long term oriented,
moderately paid fiduciaries. Not expensive fast-buck financiers and not
governments. The problem is one of
US economic structure, and it
urgently needs to be solved.
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