By R. Richard Geddes and Dimitar N. Nentchev
This post originally appeared online for the American
The United States faces major challenges related to the
funding of transportation infrastructure, such as roads, bridges, and tunnels.
Revenues from fossil fuel taxes are declining as vehicles become more fuel-efficient
and as the purchasing power of fuel tax revenue declines with inflation. Such
revenue declines are occurring at the same time that investment needs are
rising because of aging infrastructure. Many states and localities are
considering new and innovative models to fund and finance their transportation
infrastructure. Such models almost invariably include a greater role for the
private sector in the form of public-private partnerships (P3s).
Private infrastructure investment is, however, often viewed
as providing an alternative financing method given a revenue stream from
a transportation facility, rather than as creating new revenue or funding
for the facility. This view overlooks the possibility that private investment
in the form of upfront lease payments for newly priced roads can be used to
enhance the public appeal of adopting that road pricing. Pricing existing roads
generates substantial additional revenue from the current road network while
adjusting traffic demand to meet market conditions. The approach proposed here
uses the value embedded in US infrastructure, which is released through road
pricing, to increase the political feasibility of that road pricing.
To accomplish this, we suggest preserving a portion of the
wealth generated by road pricing in perpetuity through a permanent fund. This
is one type of public trust fund. Permanent funds are currently in use in
Alaska, Texas, Norway, and Alberta, Canada, to preserve natural resource
Following the Alaskan approach, we propose that investment
income from the fund be used to provide an annual dividend payment to all
households within the newly priced region. We refer to this approach as an
investment public-private partnership, or IP3. The IP3 has numerous advantages
relative to current proposals to increase citizens’ support for road pricing.
It creates a contractual structure to ensure that roads are properly
maintained. It ameliorates the agency problem between citizens and their
elected representatives that is exacerbated by the free cash flows that road
pricing often generates. It also creates direct citizen stakeholdership in
transportation infrastructure. Alaska’s experience suggests that this approach
can also reduce income inequality, create higher personal income, and mitigate
the effects of recessions.
We estimate potential dividends generated by an IP3 approach
using data from the Columbus, Ohio, metropolitan area. Assuming full pricing of
the Columbus road network, we find that the IP3 approach would generate
household dividends similar to those offered by the Alaska Permanent Fund.
This study offers three key insights:
1. Pricing the use of transportation assets that are presently “free” liberates
massive latent economic value currently trapped in those assets;
2. Latent value can be best realized through competitive
bidding among a group of firms on the basis of the largest upfront lease
payment to operate the asset; and
3. A portion of the
realized value can be invested in perpetuity through a permanent fund that
generates income for all citizen-owners of the asset. The investment income
from the permanent fund helps encourage citizen-owners to accept the pricing
necessary to release the asset’s latent economic value.
R. Richard Geddes is an associate professor in the
Department of Policy Analysis and Management at Cornell University. His
research focuses on public policies surrounding
private infrastructure investment. Geddes will be the featured speaker
at the 2014 CTS
Winter Luncheon on Wednesday, February 12, 2014.