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How the Private Sector Can Improve Public Transportation Infrastructure

Posted by Content Coordinator on Monday, August 4th, 2014

RESERVE BANK OF AUSTRALIA

Written by Clifford Winston, Brookings Searle Freedom Trust Senior Fellow

1. Introduction

Transportation infrastructure significantly contributes to a nation’s prosperity by facilitating workers’ access to employers, consumers’ access to shopping and leisure activities, and firms’ access to capital, labour and potential customers. The public sector has generally provided the vast amount of a nation’s infrastructure – roadways, waterways, railways and airways – and expanded it to satisfy users’ growing demand for transportation. But as demand has increased and ageing infrastructure facilities have required ever-greater funds for maintenance and new construction, capacity has become increasingly strained and travellers and shippers have experienced more congestion and delays. Policymakers have tried to find new sources of money to finance projects to expand capacity; but congestion and delays have persisted.

The public sector’s ‘strategy’ of increasing spending to build its way out of congestion has been entrenched for decades and is unlikely to change for the foreseeable future into a sustainable strategy that could improve infrastructure performance.1 I therefore consider in this paper three ways that private sector firms could potentially contribute to that goal.

1. They could purchase infrastructure facilities from the government and operate them more efficiently subject to general business laws (privatisation).

2. They could develop technological innovations that the public sector could implement to improve current infrastructure performance.

3. They could make technological advances that greatly improve the operations of transportation modes that use the infrastructure.

In what follows, I explore those possibilities by drawing on evidence based primarily, but not exclusively, on highway and aviation infrastructure services in the United States, which have been the main focus of infrastructure policy discussions. I conclude that: privatisation, while worthy of carefully designed experiments, faces considerable uncertainties as to its long-run success in the United States; technological innovations developed by the private sector are available for  the public sector to implement but policymakers have resisted doing so; and, more positively, technological advances in the transportation modes could facilitate significant improvements in infrastructure performance provided its implementation is not impeded by the government.

2. An Overview of Public Infrastructure Inefficiencies

I begin with a brief overview of the economic inefficiencies that have developed under public ownership and management of transportation infrastructure.3 Although I draw only on the US experience, other countries’ infrastructure is characterised by similar inefficiencies.

The United States has grappled with determining the optimal mix of public and private provision of transportation since its founding. Infrastructure was initially developed and operated by the private sector but the public sector soon after played a role. For example, starting with the Ohio Statehood Enabling Act in 1802, states provided limited funds for road building, and in the 1820s state governments subsidised and owned some canals and railways. But even by the 1860s, cumulative private capital investment in bridges, canals, ferries, railroads and roads amounted to roughly US$3 billion (in 1860 dollars), a significant share of the nation’s GDP (Wright and Murphy 2009).4 Various financial crises subsequently resulted in the government owning and operating most of the nation’s infrastructure, although it has been contested whether the government effectively responded or contributed to those crises. For example, Klein and Fielding (1992) argue that government regulations of highway tolls during the 19th century greatly contributed to the failure of private highway companies. And the government takeover of private airports during the Great Depression can be questioned because a better course of action in the long run may have been to allow private airport competition to develop by offering struggling airports financial assistance so they could stay in business and compete.

Funding for public highway and aviation infrastructure is obtained from various taxes and fees. Motorists and truckers are charged gasoline and diesel fuel taxes for their use of the roadways, aircraft are charged a weight-based landing fee for their use of airport runways, and air travellers are charged a fixed rate, currently US$4.00 per flight segment, and a 7.5 per cent tax on their fare to pay for air traffic control services (Airlines for America 2014).

As auto, truck and plane traffic has continued to grow, those sources of funds have become inadequate to cover the costs that users impose on public infrastructure. The federal gasoline tax, which is the primary source of highway user-fee revenues, has not been raised since 1993 and Congress has recently been forced to add general funds to the Highway Trust Fund to close what would otherwise be a deficit. Airports are experiencing similar problems. Since 2000, the Airport and Airway Trust Fund has been running annual deficits of between US$3 and US$5 billion that have been covered by general taxpayer funds (Winston 2013b). And the Federal Aviation Administration (FAA) was forced to furlough air traffic controllers, which significantly increased flight delays, when the government sequester hit in April 2013 because its funds could not cover current operations (Winston 2013a).

Funding shortfalls have contributed to longer and more frequent travel delays related to pothole-ridden roads. According to data from the Texas Transportation Institute (TTI) reported in Winston (2013b), the average annual traffic delay endured by motorists in urban areas has more than doubled during the past three decades. At the same time, despite frustratingly frequent lane closures for road repairs, highway crews cannot seem to outpace the rate of pavement deterioration. The Federal Highway Administration’s (FHWA) Highway Statistics indicate that although the condition of the nation’s highways and bridges varies with general economic conditions, as much as one-third of the nation’s highways may be in poor or mediocre condition, and one-quarter of the nation’s bridges may be functionally obsolete or structurally deficient for several years before repairs are made. Due to greater airport and airspace demand, congestion and travel times by air in the United States have steadily increased since airlines were deregulated in 1978.

Public provision of highway and aviation infrastructure is characterised by growing budget deficits, travel delays, and physical deterioration because it has not been guided by basic economic principles: prices do not reflect social marginal costs, especially a user’s contribution to congestion and delays; investments are not based on cost-benefit analysis and have failed to maximise net benefits; and operating costs have been inflated by regulations. In addition, those static inefficiencies have been compounded by dynamic inefficiencies that are attributable to the slow rate of technological advance in infrastructure services.

Download full version (PDF): How the Private Sector Can Improve Public Transportation Infrastructure

About the Reserve Bank of Austraila
www.rba.gov.au
The Reserve Bank of Australia (RBA) is Australia’s central bank and derives its functions and powers from the Reserve Bank Act 1959. Its duty is to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people. It does this by setting the cash rate to meet an agreed medium-term inflation target, working to maintain a strong financial system and efficient payments system, and issuing the nation’s banknotes.

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