The Need for a (Public-)Private Solution for America’s Highway Infrastructure

July 2019

Michael Koho, Senior – Valuation & Business Analytics, BDO USA, LLP
 
In 1956, President Eisenhower set into motion one of the largest public works projects in U.S. history when he signed the Federal-Aid Highway Act of 1956, with the federal government pledging $25 billion towards the completion of a nationwide interstate highway system. Coming out of World War II, the nation saw the immense military and economic value of a coordinated highway system in Germany, and between the 1950’s and 1970’s built out approximately 41,000 miles of standardized highways, and by the end of the project, an estimated $425 billion had been spent on construction[1]. The result was adding the largest and busiest roads to the country’s highway system that today handles over 1.5 trillion miles of driving[2].
 
However, since this golden age of infrastructure building, spending on construction and maintenance of highways has been inconsistent. Congress has occasionally passed legislation to increase spending on American roadways over the last 20 years; the Transportation Equity Act for the 21st Century made available $219 billion in federal funding over six years in 1998, the American Recovery and Reinvestment Act allocated $48 billion for repairs and improvements to highways in 2010 as part of the attempt to counteract the effects of the Great Recession, and the Fixing America’s Surface Transportation Act set aside $226 billion over five years in 2015, but each of these have only caused small spikes in spending during a larger trend downward. Overall, federal spending on highways and roads has halved from over .5 percent of GDP during the 1960s to approximately .25 percent of GDP in 2016[3]. This is despite research from the American Highway Users Alliance estimating that the initial Federal-Aid Highway act created $6 of economic benefit for every dollar spent, and current estimates from the Federal Highway Administration of a $5.20 return for each dollar spend on road-way improvements[1,2].
 
From the early 2000s, spending at all levels of government has dropped from approximately $200 billion a year to just over $150 billion in 2014 on highway infrastructure, with a large cause of this reduction in spending due to a dearth of funds. Almost all of the spending by the federal government on highway construction and repair comes from the Highway Trust Fund (“HTF”), which was set up to pay for the Federal-Aid Highway Act. The HTF is funded by a per-gallon tax for every gallon of gasoline and diesel fuel sold, but the HTF has not been able to keep up with increasing demands. The HTF has been spending more money than it takes in for almost a decade due to the fact that the federal motor fuels tax hasn’t been raised since 1993, resulting in a decrease in purchasing power of 40 percent due to inflation, at a time when increasing fuel efficiency of new cars and a turn toward electric vehicles is reducing fuel purchases on a per-use basis[2].
 
At the state and local government level, which contributes close to 75 percent of the total highway spending, highway and road expenditures have lagged in growth compared to other sources of direct spending. From 1977 to 2016, spending on roads and highways increased from $91 billion to $175 billion (in 2016 inflation-adjusted dollars), whereas spending on other direct expenditures increased from approximately $1 trillion to $2.75 trillion[4]
 
Unsurprisingly, hand-in-hand with declining government investment is a decline in the state of the nation’s highway system. The American Society of Civil Engineers (“ASCE”) publishes a national “Infrastructure Report Card” every four years. Most recently, in 2017, the ASCE gave U.S. roads a grade of “D”, noting that 21 percent of highway pavement is in poor condition, and that congestion and traffic delays caused by roads in disrepair are no longer sufficient for a growing vehicle population, costing the country $160 billion in wasted time and fuel. The ASCE concluded that this state of disrepair is the result of a more than $800 billion backlog of highway and bridge needs, including repairs, expansions, and safety and environmental projects. 
 
There are some signs of hope for a resurgence in investment and the state of system, though. From 2012 to 2017, spending on transportation infrastructure at the federal level increased by approximately $9 billion, and the number of highway bridges found to be “structurally deficient” has improved from 12 percent of all highway bridges ten years ago, to about 9 percent now per the ASCE. Even recent major failures of interstate bridges in Minneapolis in 2007 and Atlanta in 2017 were found not to be due to structural deterioration, but because of design flaws and combusted construction materials, respectively.
 
The biggest issue with trying to maintain these types of improvements, while also working through the backlog detailed by the ASCE, is future funding. There are more than four million miles of road to maintain in the U.S. being driven on more than ever before, but investment sources are drying up as the HTF moves closer and closer to insolvency. This has led many states to research new ways to secure funding. One avenue for increasing available funding is changing the structure of taxation on drivers to a mileage-based user fee system that leverages new-age technology to assess fees based on the number of miles driven by a vehicle. This kind of system steadies the expected incomes for states as vehicles rely less and less on fossil fuels and provides the ability for state and local governments to offer less congested lanes or roads for customers willing to pay a premium. However, there are still questions to be answered on the best ways to efficiently collect the mileage data and fees without compromising citizens’ privacy[5].
 
Public-private partnerships (“PPP”) are another emerging method for securing additional investments in U.S. infrastructure and are starting to be applied towards roads and highways. PPPs are contracts between public agencies and private entities in which the latter group takes on the responsibilities of design, construction, financing, operation and maintenance for an agreed upon number of years before transferring ownership over to the public agency. In return, the private party receives direct payment from users through tolls or fees, or through repayment plans from the government over the contract’s life. PPPs of these structures have been implemented over the last decade and are encouraged and assisted by the Federal Highway Administration and its Center for Innovative Finance Support.
 
Going forward, road and highway investment will increasingly depend on private investment. The current administration’s proposed budgets to Congress the last two years have called for investments of $1.5 trillion in U.S. infrastructure, but only designated $200 billion to actually spend to accomplish it. Over the next decade, this plan would actually reduce federal infrastructure spending by $55 billion[6]. Instead, the goal of the program is to use this money as an incentive to encourage greater spending by state and local governments, as well the private sector, to get total investment towards the levels needed to repair the nation’s roads, highways and other lagging areas of infrastructure. A larger infrastructure bill has been discussed between the White House and Democratic leadership but talks on the subject have been put on hold, and it remains unclear what may, if anything, be agreed upon and the subsequent ramifications. At this time, it seems prudent not to rely on a large infrastructure windfall from the federal government, but to instead focus on the evolving ways in which the private sector can contribute to the improvement of the nation’s highway system.
 
[1] https://www.fool.com/investing/general/2013/06/29/the-best-500-billion-the-united-states-has-ever-sp.aspx
[2] https://www.infrastructurereportcard.org/wp-content/uploads/2017/01/Roads-Final.pdf
[3] https://www.enotrans.org/article/70-year-trend-federal-infrastructure-spending/          
[4] https://www.urban.org/policy-centers/cross-center-initiatives/state-and-local-finance-initiative/state-and-local-backgrounders/highway-and-road-expenditures         
[5] https://www.ced.org/reports/fixing-americas-roads-bridges
[6] https://www.transportation.gov/buildamerica/programs-services/p3