Let's Leave Our Roads to the States

WASHINGTON-As Americans take to the roads on Memorial Day weekend, almost all are blissfully ignorant that Congress must pass a highway bill by September 30, when authorization for the Highway Trust Fund expires.

The Senate Finance Committee is well aware of the deadline, though, and held hearings earlier this month to explore different options for infrastructure finance. The focus of the hearing was a proposal for a federally-funded $10 billion infrastructure bank, which would provide funding for the nation's highways and bridges.

Although the Highway Trust Fund, funded by motor fuel taxes, is likely to be reauthorized, Congress probably won't provide the extra $10 billion to $15 billion annually from general revenues to keep highway spending at prior levels. And, since Americans are using more fuel-efficient cars, the Congressional Budget Office expects revenues from motor fuel taxes to stay approximately the same.

The infrastructure bank would fill the gap by lending funds for transportation projects at low cost. It has garnered an unusual array of bipartisan support.

President Obama proposed a bank in his budget, at a cost of $5 billion in fiscal year 2012 and $30 billion over the next six years. Congressional legislation is sponsored by Senator Kay Bailey Hutchison (R-TX) and Senator John Kerry (D-MA). The bank is supported by U.S. Chamber of Commerce president Tom Donohue and AFL-CIO president Richard Trumka, whose areas of agreement are limited.

According to Kerry, "when you've got a Massachusetts Democrat, a Texas Republican, the Chamber of Commerce and the AFL-CIO preaching from the same hymnal, you'll find a sweet spot that can translate into a major legislative step forward."

But should the step be taken?

Mr. Kerry envisages the infrastructure bank as independent, with governors appointed by the president. Loaned funds would be repaid, with interest, so the bank would supposedly make a profit. Similar promises were made for Amtrak, when it was established in 1971.

Testifying at the Senate Finance Committee hearings was former Pennsylvania Governor Edward Rendell, now co-chair of Building America's Future, a non-profit coalition of state and local officials where he serves without compensation. He told the committee that the infrastructure bank was the only way to channel funds into the states, and that private organizations would not lend for infrastructure projects because the returns are too low.

Mr. Rendell called for changes in laws that would make it easier for the private sector to invest in transportation infrastructure-changes that would obviate the need for federal involvement. "Lift the cap on tolling," he said. Currently states need special waivers to place tolls on federally-funded projects. If they were allowed more extensive use of tolls, private users could pay for maintenance.

As governor, Mr. Rendell wanted to place tolls on Interstate 80, raising $450 million a year, but the U.S. Department of Transportation in 2010 rejected his request because part of the revenues would have gone to repair other Pennsylvania highways and bridges.

In 2008, Mr. Rendell tried to lease the Pennsylvania Turnpike for $12.8 billion to a consortium of Citibank and the Spanish firm Abertis Infraestructuras, but the state legislature did not pass the proposal.

The committee hearings gave Mr. Rendell a chance to say "I told you so," because it's now obvious that both proposals would have benefited Pennsylvania residents.

Senator Hatch (R-UT), ranking member on the committee, said that states should have more flexibility to raise revenue. Just because someone gives you a car, he said, it doesn't mean that the donor has to pay for the tune-ups. In the same way, just because the federal government funds a road, it should allow states flexibility in funding for maintenance.

Another witness, Gabriel Roth, disagreed with Mr. Rendell about the need for a government-funded infrastructure bank. (Full disclosure: Gabriel Roth, who has considerable experience in the transportation field, is my father.) He testified that even with existing funding systems, transportation finance could be provided by the states in partnership with the private sector, rather than by the federal government.

Mr. Roth pointed out that other federal laws, such as Davis Bacon, project labor agreements, high-road contracting, and "Buy America" provisions, slow down infrastructure and raise costs. Environmental impact statements can take two years. States are forced to spend money on mass transit, even where there are few users.

There are many examples of private sector investments in roads. A road in the suburbs of Washington, the Dulles Greenway, and California's electronically-tolled express lanes on Route 91 were conceived, designed, financed, and built by private sector consortia. The Macquarie Infrastructure Group is operating and managing the Indiana Toll Road and the Chicago Skyway.

The private sector is also operating other formerly-public infrastructure, such as garbage collection, water systems, and wastewater treatment plants. With state budgets in difficulties, bringing in the private sector saves crucial dollars. The same can happen for roads.

Sohail Bengali, Managing Director of Stone and Youngberg, a financial services company, told me in a telephone conversation, "I think that for certain targeted infrastructure projects, the private sector can be very effective."

A federal infrastructure bank, although ostensibly independent, would be swayed by political criteria and would be tempted to invest in low-return projects, such as roads to nowhere. Mr. Rendell admitted that the bank was needed because the returns to the projects were so low that the private sector would not want to invest in them.

Yet if the projects have such low returns, why should they be funded by taxpayers?

Congress has a choice of how to proceed to provide highways in America. On the one hand is the proposal of a new federally-controlled infrastructure bank which would require even more federal control over highways and the resources to support them. On the other are proposals for individual states to raise their own funds through new technologies and solve their own transportation problems. This Memorial Day, as we sit in traffic jams, the choice is clear.