By John Latta, Tina Grady Barbaccia and Mike Anderson

Easy as 1-2-3

A new report claims, not surprisingly, that the disrepair of our highway infrastructure is a result of insufficient maintenance, and this deficit “is in part due to a prioritization of new projects over care for existing infrastructure and contributes to a higher-cost, lower-return system of investment.”

Matthew Kahn of the University of California, Los Angeles, and David Levinson of the University of Minnesota, authors of the report, cite “the way the federal government allocates money for transportation infrastructure investment” as a reason for both the shortfall of maintenance dollars and falling returns on new transportation infrastructure investments.

The report, a production of The Hamilton Project*, proposes a reorganization of our national highway infrastructure priorities to be subject to market discipline with a simple three-step-plan:

Fix it first.

Expand it second.

Reward it third.

First:

Rules governing the use of money from the federal 18.4-cent-a-gallon gas tax would prohibit it from being used for new construction. At present, about 30 percent of it falls into this category. All of those gas tax dollars would be dedicated “to repair, maintain, rehabilitate, reconstruct and enhance” existing roads and bridges. That would include safety enhancements, traffic control and environmental enhancements. The authors would set aside one percent of Highway Trust Fund (HTF) revenue to fund state DOT expansions to allow them to perform the analyses necessary to operate under this three-step system. One job local DOTs would have to do is to prioritize the work and start with projects offering the highest return on investment.

This basic step would boost federal highway investment for existing facilities by close to $12 billion a year, say the report authors.

Second:

The funds that states would need to build new roads, or add lanes to existing roads, would come from a newly-created, self-financing Federal Highway Bank (FHB), initially capitalized by the federal government. State and local governments would apply for loans, and the bank would prefer projects with the best prospects for repayment. But before the new bankers hand out a dollar, a series of strict criteria would have to be met, including a benefit-cost analysis that would have to demonstrate that the money was worth spending. If the state application was upside down, no loan. “States would be required to demonstrate an ability to repay the loan through direct-user charges by capturing some of the increase in land values near transportation improvements.”

The FHB, say the authors, would introduce market discipline into the process of investing in transportation infrastructure. “Under these new rules of the game, policymakers would have stronger incentives to embrace cost-effective projects. Using user fees as the primary repayment mechanism would encourage more-efficient use of the nation’s roadway network and would reduce congestion costs.”

Borrowers would get a break on interest rates over the open market and the bank would get a steady stream of revenue, according to the plan.

Third:

Any new capacity in the system that meets or exceeds performance targets (presumably set in the second stage) would receive an interest rate subsidy from a Highway Performance Fund, which would be financed by net revenues from the aforementioned Federal Highway Bank. For example, an on-time completion date, congestion and/or pollution reduction, improved capacity safety and equity would be eligible for a subsidy.

The project’s performance would continue to be monitored yearly until the loan is paid off “and bonuses would not be renewed if the project failed to live up to expectations.”

The authors essentially say the status quo is the problem and has to go.

“Federal highway infrastructure spending is allocated based on a series of subjective criteria that typically do not require any stringent analysis of expected benefits versus costs. Because there is often public pressure to build new projects using scarce funds, adding capacity often comes at the expense of supporting and enhancing existing infrastructure,” says the report.