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OCR for page 308
Urban Infrastructure:
Problems and Solutions
RICHARD R. MUDGE and KENNETH I. RUBIN
WHAT IS INFRASTRUCTURE, AND
WHY IS IT IMPORTANT?
Users of inadequate public works facilities bear significant costs.
Every time a bridge is closed to traffic or subjected to weight restric-
tions because of deterioration, users' time and money are lost. For
example, operating costs for small automobiles are almost one-third
higher on poor roads than on well-maintained roads (Congressional
Budget Once, 1983~. In the worst cases, there may also be substan-
tially increased safety risks.
The deterioration of existing facilities and their insufficient ca-
pacity to accommodate future growth will eventually constrain eco-
nomic development. The nation's urban transportation network,
water supply, and wastewater treatment facilities all provide vital
services both for industries and individuals; where capacity is inad-
equate, growth will be stunted. Similarly, a community with badly
deteriorated roads, bridges, or other transportation facilities is in a
weak position to attract new businesses. Although clifficult to quan-
tify, the costs of lost opportunities are no less real. For example,
This paper is based in part on a series of reports on public works in-
frastructure prepared by Apogee Research for the National Council on Public
Works Improvement.
308
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URBAN INFRASTRUCTURE: PROBLEMS AND SOLUTIONS
309
according to a 1983 Transportation Systems Center report, halting
deterioration (but not eliminating all deficiencies) in the nation's
highway network would improve economic growth for the economy
as a whole: national income would be 3.2 percent higher by 1995,
employment would be 2.2 percent higher, and inflation would be 8
percent lower than if road conditions had continued to deteriorate as
in the late 1970s (Transportation Systems Center, 1983~.
Why Is It Infiast~cture?
and
Infrastructure projects are not ends in themselves. Rather, their
importance to the economy and to society as a whole derives from
the services they offer: the opportunity to improve productivity or
reduce costs. Although most easily thought of in a physical form
a bridge, a wastewater treatment plant, a subway train the real
output of infrastructure is service: the movement of people and
goods, the provision of adequate clean water, and so forth (Apogee
Research, 1986b).
Infrastructure generates additional investment or economic ac-
tivity through a multiplier effect on private firms or other public
agencies. This process occurs in several ways:
~ by making better use of underutilized resources that previ-
ously were very costly or difficult to obtain;
~ by enabling more efficient trade-offs among factors of produc-
tion (for example, reduced transport costs versus a location closer to
markets);
by reducing costs and thus increasing economic efficiencies;
by expanding markets as improved efficiency results in more
effective competition with other countries or regions.
In other words, infrastructure encompasses those activities without
which there would be only limited economic activity. In particular,
most public works infrastructure projects share several character-
istics: (1) high fixed costs (they are capital intensive); (2) a long
economic life; (3) the potential to dominate local markets; and (4)
interaction with other infrastructure projects.
Because of their long time horizons and high construction costs,
major infrastructure investments usually involve higher risks than
the more typical industrial investment project. As a result, some
public sector involvement is often required. Also, most infrastruc-
ture projects are part of a larger system—for example, a national
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310
Richard R. Mudge arid Kenneth I. Rubin
road network or a regional water supply system. The coordination
required for projects of this type means that some public involvement
is needed even if the projects are financed privately. Also, because
of the high costs of market entry, many infrastructure projects have
near monopoly power in their local markets. As a result, economic
and safety regulations are often required.
Facilities with these general characteristics strong links to eco-
nomic development, high fixed costs, long economic life, interaction
with other parts of a system, and strong traditional public sector
involvement may be termed public works infrastructure. When
applied to urban areas, this definition usually inclucles the follow-
ing "modes": highways, public transit, wastewater treatment, water
supply, solid waste, and airports.)
Despite these special characteristics, infrastructure has much in
common with other sectors of the economy, particularly those that
involve capitalinvestments. By definition, allinvestments require
deferring current consumption to achieve greater consumption in the
future. As a result, infrastructure must compete for financial and
human resources with other public and private activities. In this
sense, even though they may generate important public benefits,
proposed infrastructure projects require the same careful analysis as
should be applied to other investment projects.
Why Is It Public?
Projects that can be characterized as infrastructure may be pro-
vided either by the private or the public sectors. Indeed, the division
of responsibility between public and private bodies varies consider-
ably by infrastructure mode, by country, and by historical period.
For example, freight railroads are now almost completely private even
though in the nineteenth century they received large public contribu-
tions. Also, telecommunications is a private sector responsibility in
the United States, but in most other countries it is publicly owned.
A number of straightforward rationales help determine the de-
gree of public sector involvement in providing infrastructure services.
Except for the lack of strong current public involvement, such areas as
communications and electric utilities would fit the public works infrastructure
characteristics set out in the text. Other observers might cite a broader list:
government buildings, housing, prisons, hospitals, education, and so forth.
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URBAN INFRASTRUCTURE: PROBLEMS AND SOLUTIONS
311
The applicability of each rationale may change according to the Toca-
tion of infrastructure ant] its developmental stage. These rationales
include:
.
The public good nature of infrastructure. The benefits of
certain public activities are received by society as a whole. In these
cases, individuals cannot be assessed the costs of the activities (tliis
is sometimes called the "nonappropriability" problem). National
defense provides the classic example of a public good.2
Externalities. The full impact of some actions may not be
borne directly by the individual or group responsible for the action.
Because the benefits or costs are received or borne by others, there
are incentives to under- or overinvest.3
· Infant industries. The potential rewards from developing a
new industry may be so uncertain or remover] in time that outside
help is needed to share development risks.4 The major economic
eject of public aid for infant industries is to bring forward the time
when society benefits from a mature industry not to determine the
industry's ultimate success or failure. The timing of such support is
the key to its effectiveness and is not always obvious. Investments
may be premature, as with Dulles Airport in suburban Washington,
D.C.
Regional development. Underutilized resources can justify
public investment as a means to greater growth. In addition, infras-
tructure spending and the growth such projects may generate are
sometimes used as mechanisms to redistribute income.5 Further,
2Defense is also often closely linked with infrastructure development. Some
examples include the development of ports and inland waterways by the Army
Corps of Engineers in the last century, the construction of the interstate highway
system over the past 30 years, and certain current port proposals.
3Examples of externalities include dirty water that affects downstream
communities and extra peak-hour travel that increases the delay for all other
travelers. Solutions to these problems usually involve regulatory or financial
action by another level of government.
4The clearest examples concern interurban infrastructure; public support
for railroads and canals in the nineteenth century and federal promotion of the
aviation industry through mail contracts and the air traffic control system are
two such instances.
5 Using infrastructure to redistribute income ignores the primary consider-
ation that applies to decisions on infrastructure projects: how productive is the
investment relative to the benefits from greater productivity? The Appalachian
Regional Commission is a good example. Despite substantial expenditures to
repair and revitalize the old and decayed infrastructure of Appalachia, there is
no indication that the area developed more rapidly than it would have without
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Richard R. Muddle and Kenneth I. R?`bir~
regional competition for new development is a prime motivator for
locally sponsored infrastructure projects.
:[nfrastructure's Role ~ Fostering
Economic Growth and Employment
Functional View of Infrastructure
Infrastructure problems may be considered in two different con-
texts: (1) the physical (removing existing deficiencies, meeting re-
curring problems, or adding capacity for expansion), and (2) the
functional (considering population-based needs versus those required
to produce goods and services).
The physical view is the traditional approach to defining prob-
lems and framing solutions. The functional or economic view of
infrastructure has two components: one based on population and the
other on production. The first or core component of infrastructure
demand depends on individual needs that, in turn, are a function of
personal tastes, income levels, and location. Examples might include
local travel needs such as trips for work, shopping, anct recreation.
These components change relatively slowly and depend on social and
population makeup: for example, age distribution, family structure,
disposable income, and residential location. The second component
is oriented toward production; that is, what is needled to produce
goods and services. Infrastructure needs under this portion change
as the economic base shifts among agriculture, manufacturing ser-
vices, government, and foreign trade.
07
The functional view serves three purposes: (1) as an aid to
understanding the role of public works infrastructure in fostering
economic growth; (2) as one explanation for the development of
different public and private roles; and (3) as a possible explanation
for recent trends in infrastructure spending. These latter two points
are discussed in more detail in the next sections.
the expenditures. The most successful infrastructure investments were not those
linked to income redistribution but those designed to make resources more com-
petitive and to lower costs. The Tennessee Valley Authority is a prime example
of this kind of investment.
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URBAN INFRASTRUCTURE: PROBLEMS AND SOLUTIONS
Caveats About Economic Growth
313
Although there is an obvious link between infrastructure in gen-
eral and economic growth, this link generally must be taken on faith.
There have been few attempts to measure the magnitude of the effect
and how this link functions, except in the case of developing countries
and for certain individual projects.
As with every econorn~c sector, investing in projects with rel-
atively low rates of return diverts resources from other potentially
more productive economic investments. Investments of this kind may
be made because of limited information on alternatives or because
of financial incentives that distort investment decisions (e.g., overly
generous matching grants); however, whatever the reason, if such
a policy is pursued, overall economic growth will be smaller than
would otherwise occur. This problem is not unique to the infrastruc-
ture sector but can also occur in housing, steel, defense, and other
industries.
The effect of inefficient investment decisions can be seen in
an economic simulation of the costs of removing all highway defi-
ciencies that was carried out by the Transportation Systems Center
(19833. This study found that the costs exceeded the expected eco-
nomic gains from better roads. Thus, even if a particular infrastruc-
ture program stimulates economic growth, the question that must be
asked is whether there are other investment packages (public or pri-
vate) that might bring about even higher rates of social and economic
return.
DIFFERENT PUBLIC ROLES
The relative incidence of benefits and costs is the key link in
determining the proper infrastructure role for the public and private
sectors and for the various levels of government. There are strong
equity and efficiency arguments that those sectors receiving great
benefits from a particular infrastructure mode should bear an equally
large share of the financing responsibility. When an imbalance ex-
ists between benefits received ant! financial responsibility, there are
strong incentives either to over- or underinvest. (For example, it is
doubtful whether New York City would have pursued the develop-
ment of the Westway highway project if the federal government had
not been paying 90 percent of the costs.)
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314
Richard R. Mudge arid Kenneth I. Rubin
Public Versus Private
Combining the physical and functional definitions of infrastruc-
ture helps provide a framework for considering what the public and
private infrastructure roles should be and how they have evolved in
the United States. Table 1 summarizes the interaction between these
two views.
Historically, the private sector in this country has been most
actively involved in areas that increase capacity for production
(see the lower right corner of Table 1~. These are also areas in
which the beneficiaries have been able to pay for the benefits re-
ceived, in part because they faced growing markets. Examples
of this phenomenon vary by historical period, however. For in-
stance, in the early nineteenth century, canals were privately owned
in large part because they were seen as an efficient way to serve
the nation's growing industrial capacity. Similarly, this combina-
tion of growth and key economic ties explains why the communica-
tion portions of infrastructure telephone, telegraph, and electronic
communications have been dominated by private firms from their
inception.
Once a particular infrastructure mode receives public subsidies,
it becomes more Biscuit for that mode to revert to an organization
TABLE 1 Comparison of Functional and Physical Views of
Infrastructure
Functional (Economic) Roles
Physical Core or Population
Problems Based
Economic or Production
Based
Maintain
system Intraurban
Increase
capacity
Public sector dominates
Intraurban
Sunbelt
Public sector dominates
Interurban
"older" systems (canals,
highways)
Public sector dominates
Interurban
Communications, airlines
Greater chance of profits
Strong private role
SOURCE: Apogee Research (1986b).
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URBAN INFRASTRUCTURE: PROBLEMS AND SOLUTIONS
315
having a strong private sector role. The larger the subsidies and the
longer they are received, the more difficult this reversal becomes;
witness the current efforts to restore a private role in urban mass
transit.
The line between public and private involvement is sometimes
difficult to draw. Pennsylvania now permits the establishment of
independent transportation districts that are funded in part by as-
sessments on local developers. For example, Upper Merion (near
Philadelphia) is financing some $66 million in highway improvements,
with one-half the funds from assessments on new development the
rate is $933 for each peak-hour auto trip generated, or one-half the
estimated capital costs of $1,866 for each new peak-hour auto trip.6
Texas has a program whereby developers help defray the costs of new
roads by contributing land for rights-of-way, thus speeding construc-
tion. Over the past 2 years, some $400 million of donations have
been received under this program. As a result, there appears to have
been a shift in priorities in state highway projects.
Many private infrastructure projects involve indirect public fi-
nancial support. For example, tax-exempt industrial development
bonds provide interest rates below those available to other corporate
borrowers. As with other private capital investments, rapid depre-
ciation schedules and investment tax credits are available as well,
although this may change with the new tax bill.
Private involvement in infrastructure projects depends on the
level of risk or uncertainty. Risk increases according to the size of
the investment required and the degree of market uncertainty. Even
massive projects can be financed privately if market uncertainty is
Tow enough; the Trans Alaska and Trans Canada pipelines were
privately financed and built, based on long-term contracts and take-
or-pay agreements. At the other extreme, if market uncertainty is
high because there are no commitments from end users, some form
of public support or guarantee may be required for even modest
projects (public transit is an example) (TELESIS, 1986~.
6In some cases, developers find it less expensive to make their contribution
in kind by contracting for the improvement work directly. Partly because of
this, Upper Merion has volunteered to double its contribution for state-local
highway projects to 50 percent if the state department of transportation will
provide additional funds. For a discussion of other new approaches to financing
urban infrastructure, see National League of Cities (1987~.
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316
Current Roles
Richard R. Mudge and Kenneth I. Rubir;
State and Local Versus Federal
The existing division of responsibility among local, state, and
federal governments derives largely from past history and political
forces and only partly from a logical examination of the distribution
of benefits and of financial and operational capabilities.
Beyond those areas of clear, overriding national interest- inter-
state highways, the network of inland waterways and canals, and
the ear traffic control systems federal involvement depends on the
importance of externalities and the strength of arguments to relieve
local fiscal pressures.8 For example, some federal role is called for
in water and air pollution, a recognition of which has resulted in
the Environmental Protection Agency (EPA) construction grants
program and federal regulations. On the other hand, the major
rationale for the federal transit program is ~ desire to help solve local
fiscal problems, and most federal aid for urban water supply systems
is targeted at fiscally stressed areas.
Yet any attempt to separate federal from other responsibilities
does not mean that the condition of "local" infrastructure is not
important to general econorn~c growth. Because these areas are vital
to regional growth as well, however, adequate incentives for local
support should already exist.
Development Stages
The current roles of each level of government vary considerably
according to the stage of the infrastructure development process.
Five separate but related stages can be identified: (1) nomination, or
the identification of candidate projects, including major new capital
investments as well as routine replacements and maintenance options;
(2) evaluation, in which potential projects are analyzed and those to
receive funds are selected (this process can range from highly techni-
cal and formal to ad hoc procedures); (3) finance; (4) construction;
and (5) operation.
7In fact, the federal government currently plans, finances, and operates
both the inland wateray and air traffic control systems and provides 90 percent
grants to construct interstate highways.
bother traditional arguments for public roles are limited. Today, there
are no new regions of underutilized resources, and infant industry arguments
appear to be restricted largely to special cases such as space transport.
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URBAN INF~4STRUCTURE: PROBLEMS AND SOLUTIONS
TABLE 2 Degree of Federal Involvement (percentage) by State in the
Development of Public Works
Mode
Nominatea Evaluate Finance Construct Operate
Highways
Interstate 50 0 91 0 0
Other federal 0 0 50 0 0
State-local 0 0 10 0 0
Transit 20 40 70 0 0
Airports
Large 0 20 20 0 0
Small 0 0 50 0 0
Wastewater 0 0 55 0 0
Water supply 0 0 15 0 0
Solid waste 0 0 0 0 0
NOTE: These percentages are overall averages; rankings for particular
facilities will vary considerably.
aFederal engineering standards often play a key role in identifying and
evaluating projects. In addition, governmental economic, environmental,
and safety regulations can influence any stage.
SOURCE: Based on data from the Office of Management and Budget (1986)
and the Bureau of the Census (1986~.
317
These stages are not of equal importance. Missed opportunities
in the nomination and evaluation stages are costly to correct. Fur-
ther, the steps are neither independent nor always sequential. Most
importantly, the terms and availability of financing has a major ef-
fect on the number and types of projects that agencies nominate, on
the rigor with which they are evaluated, and on the trade-offs made
between capital-intensive and operating proposals.
For example, now that it is clear that a significant local contri-
bution (50 percent or more for deep-draft ports) will be required for
local port development, projects are being reevaluated. By changing
its channel design, Baltimore will save about $100 million or one-
third of the original cost projection. Similarly, Norfolk has cut the
cost of its deep-draft development in half.
Table 2 summarizes how the current federal role varies across the
five development stages and each of the major urban public works
infrastructure "modes." The federal government plays a significant
role in financing almost every area of infrastructure except solid
waste and water supply. State and local governments dominate the
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Richard R. Mudgc and Kenneth I. Rubir'
nomination and evaluation stages of the process, including roughly 80
percent of the areas in which federal funds predominate. Except for a
small (14 percent) proportion of mass transit, virtually all operating
and maintenance funds for urban infrastructure are provided by state
and local governments.
While considerable attention is being given to encouraging a
greater private sector effort in financing public works infrastructure,
the present level of private involvement is quite limited. Currently,
this effort is most significant in water supply projects, for which pri-
vate firms supply about 20 percent of total funding (Congressional
Budget Office, 1987~. Also, private firms make significant invest-
ments in port development facilities. Private involvement in other
public infrastructure sectors, such as wastewater treatment, airports,
and transit, is limited to 2 or 3 percent of spending. Of course, with
the exception of mass transit, corporations and individuals provide
most transportation rolling stock- such as buses, trains, cars, and
airplanes.
Regulations
Federal or state regulations form an important "overlay" to this
"normal" five-stage development process, even when no funding is
involved. Environmental rules provide the most important examples.
Federal clean water and clean air rules have forced localities to modify
their investment plans quite significantly.
The costs of infrastructure projects are also influenced by federal
labor rules. By setting minimum wage levels, the Davis-Bacon law
increased the costs of virtually all construction projects that use
federal monies. Similarly, because of the Urban Mass Transportation
Administration's Section 13c rules, many transit operators do not use
certain types of cost-effective service in order to avoid conflicts with
labor unions.
The Development of Current Public Roles
Historical Background
There is a long history of federal financial aid to the states
beginning with the federal repayment of state debts from the Rev-
olutionary War. This early financial takeover in particular made it
feasible for the states to play a more active role in supporting public
works (Break, 1981~.
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URBAN INFRASTRUCTURE: PROBLEMS AND SOLUTIONS
337
capital outlays over the period 1960-1984. Conventional wisdom
generally notes the federal contribution to this public works mode as
much smaller than its actual amount.
~ Federal grant contributions to total state and local capital
outlays for airports have ranged widely but averaged about 30 per-
cent. Federal capital grants contributed only 1~20 percent Off the
total construction costs of major airports and 70-80 percent of the
costs of small airports.
Federal grants for all public works modes have remained sur-
prisingly steady since 1960 at about $75 per person, more or less.
The 1965 local peak in federal grants per capita was due chiefly to
highway grants; a similar jump in 1977 was due to the combination
of wastewater and transit grants.
Trends In the Issuance of State and Local Debt
According to the Bureau of the Census, new state and local long-
term debt (maturities greater than 1 year) has grown from about $7
billion (in current dollars) in 1960 to $95 billion in 1984. Most
of this growth, however, comes from uses that are not defined as
public works for the purposes of this paper. For example, bonds for
public housing, hospitals, and other "social welfare" purposes now
account for about one-third of these new issues. Industrial pollution
control bonds industrial development bonds issued publicly and
used to fund private investments account for another 16 percent.
Educational facilities claim another 8 percent.
Public works, as defined in this paper, accounted for about 20
percent of all new debt issued in 1984, which was about the same
percentage as in 1980 but roughly a third tower than the comparable
percentage in the 1970s and 1960s. As a result of the Tax Reform
Act of 1986, this percentage is likely to increase as noninfrastructure
areas such as industrial development bonds face new restrictions.
The data do not allow a detailed analysis of the role of debt
within public works modes, but experience has shown that in recent
years, debt accounted for about half of all state and local capital
financing for public water supply systems, 10 to 20 percent of highway
financing, about 20 percent of transit financing excluding New York
or perhaps over 50 percent if New York is included, 90 to 95 percent
of airport financing (100 percent for the major hub airports), and
perhaps 60 to 70 percent of wastewater treatment facilities financing.
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Richard R. Mudge arid Kenneth I. Rubirz
Trends in the Use of Own-Source Funds to
Finance Public Works
State and local own-source funds include tax receipts, user fees
collected from government-owned or government-run enterprises, and
other special charges assessed periodically. These sources generally
fund current government operations, but in special cases they di-
rectly fund public works construction through "enterprise funds."
An enterprise fund is a capital management technique that is used to
finance the capital expansion of a particular public works system out
of fees paid by users of that system. Some airports finance capital
expansion this way by setting up a so-called "sinking" fund to siphon
off the excess of current revenues over current expenditures and hold
the balance until needed for a future capital outlay. Similarly, some
port authorities allocate a portion of their current revenues to en-
terprise funds. The highway trust funds maintained by most states
operate much the same way, with the exception that projects are
built on a pay-as-you-go basis, with annual outlays equivalent to
annual revenues. In a recent survey of 529 cities, common city enter-
prise functions included water and sewer utilities (when supported
by user fees), electric and gas utilities, airports, parking Tots, and
local transit (Matz and Petersen, 1985~.
Unfortunately, the use of own-source revenues to finance public
works is not well documented historically. This is the case with
the Census Bureau's and the Bureau of Economic Analysis' (BEA)
series on sources of state and local receipts data; these series tabulate
revenues by government and by type of revenue but not by use of
those revenues. Some of the other data sets that are not centrally
collected attempt to link sources of funds to uses, but most are
limited in one way or another: they focus on one public works mode,
data represent a small sample of all state and local governments, or
data have been collected only over a short period of time.
This section briefly reviews the trends in the composition of over-
all state and local government receipts. It may not be appropriate to
extend conclusions drawn from this section to the finance of strictly
public works investments.
Aggregate State and Local Own-Source Revenues
Total state and local own-source revenues have tripled in real
terms from some $150 billion in 1960 to $480 billion in 1984. This
increase is equivalent to about 5 percent a year in real growth. The
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URBAN INFRASTRUCTURE: PROBLEMS AND SOLUTIONS
339
combined state contribution to this total roughly equals the combined
local government contribution. Moreover, the rates of growth in each
have been roughly comparable over the midyear period. Interestingly,
this 5 percent annual rate of growth in own-source revenues compares
closely with the 4 percent annual growth rate in state and local
operating expenditures for public works (Apogee Research, 19866~.
Trends by Source
Between 1960-1984 user fees and other user-based revenue
sources accounted for an increasingly larger share of total state
and local own-source revenues. That the share of state and local
own-source receipts claimed by property taxes fell by about the same
amount during the study period suggests a substitution of user-based
revenue for property taxes. California's Proposition 13, passed in
1978, provides the most dramatic example, but this trend appears to
have caught on in other states and localities throughout the nation.
Income and other taxes have also grown slightly as a proportion
of total state own-source receipts; sales taxes, on the other hand,
have remained relatively stable. The opposite is true at the local
level, which has seen a small increase in relative sales taxes and
steady property taxes.
ALTERNATIVE MODELS FOR
INFRASTRUCTURE SOLUTIONS
The economic and financial costs of neglecting infrastructure
problems can be substantial. These costs include higher long-term
construction and repair costs for facilities that are not properly
maintained, higher costs borne by users of inadequate facilities, and
potential constraints on economic development.
Three alternative but related "models" for analyzing and solving
public works infrastructure problems are presented in this section:
.
a needs- or engineering-based approach that emphasizes the
identification of facilities and services that do not meet engineering
standards;
~ a private sector model that considers the rates of return from
public works improvement projects and compares these rates with
returns available elsewhere in the economy; and
;
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Richard R. Mudgc and Kenneth I. Retire
~ a capital management mode} that focuses on improving the
incentives for productive public and private action contained in the
way in which fecleral, state, and local funds are provided.
Although distinctly different in philosophical approach, all three
of these models are closely related. Thus, the needs-based approach
can help define the physical problems of public works that are, in
turn, a key input to estimating the economic returns from alterna-
tive projects. And correctly setting public and private incentives as
called for under the capital management view depends on informa-
tion assembled using tools that properly belong in one of the other
two models.
Engineering-Based Mode}
An engineering-based needs assessment is the typical first step in
evaluating the adequacy of public works (Apogee Research, 1986a).
After identifying the scope and efficiency of available capacity in
light of present and projected demands, needs assessments highlight
two types of specific project investments: (1) those that meet cur-
rent demand and (2) those that provide additional capacity to meet
projected demand. Removing bottlenecks to meet current demand
and improving existing levels of efficiency are usually assigned the
highest priorities.
Many presentations of needs estimates amount to a picture of
a technically possible optimum, an idealized goal measured without
regard to economic feasibility and based principally on age, capacity
utilization, or technical standards. Age alone ~ not a reliable indica-
tor of the demand for repair or replacement; age-based estimates tend
to ignore intensity of use, materials, and construction techniques-
even the state of maintenance. Standards tend to be vague in the
scope of their definitions and, in some cases, "gold-plated." Strong
incentives to overestimate needs frequently offset the pressures for
cost-effective solutions that budget limits tend to impose. Finally,
the analysis is usually based on average standards instead of being
site-specific.
Priorate ln~restment Mode!
If there were no limits on available resources (no budgetary
constraints), the entire capital investment program identified by a
needs assessment could be carried out without financing problems.
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URBAN INFRASTRUCTURE: PROBLEMS AND SOLUTIONS
341
Yet resources are limited and budgets are constrained, forcing society
to make difficult choices among competing investment projects, as
well as among competing economic sectors. In the private investment
model, the basis for the choice is rooted in the extent to which the
project contributes to the economy in effect, its economic efficiency.
The private investment mode} applies the same economic criterion of
efficiency to infrastructure investments as would be applied to any
investment, public or private.
In economic terms, the project's contribution to the economy is
measured by its return on capital investment. Rate-of-return analysis
measures the rate at which current investments will be converted
into future consumption Value. As such, it is a key toot used by
many private firms to help choose among competing investments. It
has seen only limited use, however, as a too! for ranking and then
selecting among alternative government investments.
A positive rate of return is not enough to justify the selection
of a project, however; rather, the return should exceed the rate
available on the last project to be invested in the marginal rate of
return. The most widespread use of rate-of-return techniques has
been by private corporations in which the future strewn of benefits
is simply expected profits (or perhaps expected cash flow). The use
of these techniques by the public sector obviously requires a broader
definition of benefits.
This simple description begs a number of serious technical prob-
lems with the use of rate of return for government-sponsored projects.
Some problems are largely technical and concern the availability of
adequate data and estimating techniques: most importantly, what is
the proper discount rate? Other problems are conceptual and con-
cern the degree to which a technique designed for private, financial
returns can be applied to public investments in which intangible out-
puts (income redistribution, for example) and returns to the public
at large (national defense, for example) are often a key rationale for
government involvement.
to Rate of return is closely related to a number of other techniques and
concepts, including some in regular use by the public sector. These include
benefit-cost analysis, in which the ratio of benefits to costs is used to rank
projects; net benefits, which calculates the total dollar value of benefits minus
the total costs; and the first-year benefit. Other cost-effectiveness approaches
might use measurer of physical output instead of financial return, calculating,
for example, the number of new passengers per dollar spent on different transit
strategies.
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Richard R. Mudge arid Kenneth I. Rubir;
When applied to public rather than private projects, benefit-cost
analysis attempts to quantify the economic returns to the commu-
nity as a whole rather than merely the financial returns. This kind
of emphasis represents a significant difference from the application
of the same techniques to private sector investment decisions. More
specifically, a project could generate great public benefits but still
show up as ineffective in terms of its financial returns. This difference
between public and private costs and benefits is a major justifica-
tion for public investment in public works. For example, because a
new or upgraded highway provides improved operating conditions,
it thus generates savings in user time, operating costs, and reduced
accidents. These savings eventually result in greater productivity
and lower transport costs and could justify the project even if public
financial support were required.
Capita] Management Mode]
The capital management approach attempts to combine eco-
nomic techniques from the private sector model, local data available
through the engineering model, and the recognition that an attempt
to apply either of these models in their pure form would be likely to
run into impossible technical and political problems. A key assump-
tion is that decision makers act in their own best interests. Thus,
the goal is to find those financial and organizational incentives that,
along with adequate data, will encourage actions that support an
effective infrastructure.
Many of the options presented in the next section might be
characterized as capital management, even though they have been
debated for years (Congressional Budget Office, 1986~.
SOLUTIONS
There are two general solutions to public works infrastructure
problems: (1) increase funding, and (2) make more effective use of ex-
isting resources. These solutions are not mutually exclusive because
no matter what the level of funding, there is a natural interest in
seeing it used effectively. Given the fact that all levels of government
will probably be faced with budgetary pressures for the foreseeable
future, a significant increase in general funding for infrastructure is
improbable. Infrastructure revolving funds may be one way to es-
tablish a new financing mechanism despite such budget pressures.
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URBAN INFRASTRUCTURE: PROBLEMS AND SOLUTIONS
343
Revolving funds are currently used in several states, and at the fed-
eral level, they will probably replace the existing EPA wastewater
treatment grant program during the 1990s (Congressional Budget
Office, 1985b).
Thus, the most promising policy alternatives are likely to involve
ways to improve the effectiveness of existing as well as any new
resources devoted to infrastructure.
Managing Demand: [ow-Capital Solutions
The purpose of infrastructure is to provide productive services.
As such, there is no inherent reason why infrastructure solutions
must be dominated by capital-intensive projects. In fact, ways of en-
couraging more productive use of existing capital often show greater
rates of return than do new investments. For example, the 1968
decision by the Port Authority of New York and New Jersey to quin-
tuple peak-hour minimum landing fees for general aviation (from
$5 to $25) brought about an immediate decline in aircraft delays
of 30 minutes or more (Federal Aviation Administration, 19763. A
comparable improvement could have been achieved by adding new
airport capacity but not without also incurring massive capital and
operating costs.
The productivity of Tow-capital options has long been recog-
nized. In the early 1970s, Congress even earmarked funding for
Tow-capital urban highway improvements (this program was called
TOPICS and included traffic signal coordination and high-occupancy
vehicle lanes). Indeed, an analysis of recent state and local spending
trends for public works infrastructure shows a shift away from capital
spending and toward what the data classify as operations.
Better Incentives
The U.S. economy is governed by free market precepts, under
which individuals, acting in their own best interests, increase the
productivity of the economy as a whole. The parallel principle for
the public works economy may be called "rational parochialism."
Most of this nation's infrastructure has been built using one or both
of these principles as the rationale for its construction. Thus, it is
important that infrastructure programs contain incentives to channel
this parochialism along productive lines.
The interstate highway trade-in program provides a good exam-
ple of the influence of financial incentives. For more than 10 years,
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Richard R. Mudgc and Kenneth I. R?~bir'
states have been allowed to "transfer" local interstate highway seg-
ments back to the federal government and to use the released funds
either for transit improvements or alternative highway projects. Since
1980 projects worth some $3.7 billion have been withdrawn. Fully 71
percent of these projects turned out to have had low (often negative)
rates of return (Congressional Budget Office, 1986; Skrotzki, 1983~.
Thus, when 90 percent funding was available only for new highways,
states acted quite rationally in trying to maximize the number of
segments that qualified for this level of funding. When trade-ins per-
mitted states to keep these funds for other local purposes, they also
acted quite rationally in dropping road segments with low economic
returns.
At present, the federal government provides quite generous
matching rates for those programs in which it is active: 70 to 90
percent for highways, 75 to 85 percent for transit, 55 to 75 percent
for wastewater treatment plants, up to 90 percent for airports, and,
of course, close to 100 percent for most water resources prograrrts.
These high ratios of federal to nonfederal dollars have a history
of encouraging capital-intensive projects. For example, a statistical
analysis of wastewater treatment plants found that dropping the ba-
sic federal matching rate from 75 percent to 55 percent would reduce
the overall costs of secondary treatment plants by some 30 percent
(Congressional Budget Office, 1985a).
The Shifting of Current Roles
There is always considerable inertia favoring the current division
of infrastructure responsibility, whatever it may be. At present, the
federal government dominates the funding of infrastructure capital
despite the fact that most of the direct benefits accrue to lower levels
of government. A realignment of responsibilities could be made based
on one of two different principles.
First, financial responsibilities could be adjusted to bring them
closer to the incidence of benefits shown in Table 1. This adjust-
ment would be likely to shift considerable financial burdens to state
and local governments (and probably to the private sector as well).
Arguments against such a move have usually centered on the heavy
new financial responsibilities that would be imposed on state and
local governments. Given the significant level of federal user fee fi-
nancing of public works infrastructure, however, there may be ways
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URBAN INFRASTRUCTURE: PROBLEMS AND SOLUTIONS
345
to soften the transition (Advisory Commission on Intergovernmental
Relations, 1986~.
Second, the degree of responsibility for each of the major stages
in the infrastructure development process could be realigned more
equitably. Because the federal government is the dominant source
of funding, this realignment might imply an increased federal role,
particularly in the key nomination and evaluation stages (see Table
3~. There would probably be increased costs as the decision process
became further removed from the local level.
Better Information and Techniques
Good information is needed at several stages of the infrastructure
development process:
engineering and socioeconomic trend data are needed to help
develop long-term plans for federal as well as state and local agencies;
inventory-type data are required both to help formulate gen-
eral policy options and to help identify and evaluate specific local
project proposals; and
~ performance measures are needed to help develop and evalu-
ate a range of alternatives that includes low-capital options as well
as more traditional approaches.
System performance measures could also play a valuable role in
ex post facto evaluations of program effectiveness, but they are usu-
ally ignored. Such a use of performance measures would help greatly
in the design of new infrastructure programs and in improvements to
existing ones.
RlD~lDRENClDS
Advisory Commission on Intergovernmental Relations
1986 Dcvol~nng Federal Program Rcapon~bilitic~ arid Revenue Sources to State
arid Local Gonc~r~mcut~. Report A-108. Washington, D.C.: Advisory
Commission on Intergovernmental Relations.
Apogee Research, Inc.
1986a A Review of the Uses and Misuses of Infrastructure Needs Surveys
and Inventories. Paper prepared for the National Council on Public
Works Improvement. Apogee Research, Inc., Bethesda, Md.
1986b Infrastructure: Issues, Problems, and General Solutions. Paper
prepared for the National Council on Public Works Improvement.
Apogee Research, Inc., Bethesda, Md.
1986c Trends in Financing Public Works, 196~1984. Paper prepared
for the National Council on Public Works Improvement. Apogee
Research, Inc., Bethesda, Md.
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346
Richard R. Mudge and Kenneth I. Rubies
1986d Trends in Public Works Expenditures, 1960-1984. Paper prepared
for the National Council on Public Works Improvement. Apogee
Research, Inc., Bethesda, Md.
Break, George F.
1981
1983
1986
Fiscal federalism in the United States: The first 200 years, evolution
and outlook. Pp. 39-65 in Advisory Commission on Intergovernmen-
tal Relations, The Future of Federalism in the 1980's. Report M-126.
Washington, D.C.: Advisory Commission on Intergovernmental Re-
lations.
Broude, Henry
1959 The role of the state in American economic development, 1820-1840.
Pp. 4-28 in Hugh G. J. Aitken, ea., The State and Economic Growth.
New York: Social Science Research Council.
Congressional Budget Office
1978 Highway Assistance Programs: A Historical Perspective. Washington,
D.C.: U.S. Government Printing Office.
Public Works Infrastructure: Policy Considerations for the 19808. Wash-
ington, D.C.: U.S. Government Printing Office.
1985a Efficient Investments in Wa~tewater lkeatment Plants. Washington, D.C.:
U.S. Government Printing Office.
1985b Infrastructure Revolving Funds: A First Review. Washington, D.C.: U.S.
Government Printing Office.
1985c The Federal Budget for Public Works Infrastructure. Washington, D.C.:
U.S. Government Printing Office.
Federal Policies for Infrastructure Management. Washington, D.C.: U.S.
Government Printing Office.
1987 Financing Municipal Water Supply Systems. Washington, D.C.: U.S.
Government Printing Office.
Federal Aviation Administration
1976 Airport Quotas ar~dPeak-HourPrscing: Theory and Practice. Washington,
D.C.: U.S. Department of Transportation.
Hilton, George W.
1974 Federal Transit Subsidies. Washington, D.C.: American Enterprise
Institute.
Matz, Deborah, and John E. Petersen
1985 Trends in the Fiscal Condition of Cities: 1983-1985. Report prepared
by the Government Finance Research Center for the Joint Economic
Committee of the U.S. Congress.
National Council on Public Works Improvement
1987a Airports and Airways. Report prepared by Apogee Research, Inc.
Washington, D.C.: National Council on Public Works Improvement.
1987b Wastewater Treatment. Report prepared by Apogee Research, Inc.
Washington, D.C.: National Council on Public Works Improvement.
National League of Cities
1987 Financing Infrastructure: Innovations at the Local Level. Prepared by
Apogee Research, Inc. Washington, D.C.: National League of Cities.
Office of Management and Budget
1986 Budget of the United States, ~987. Historical Appendices. Washington,
D.C.: U.S. Government Printing Office.
Peterson, George E.
1984 Financing the nation's infrastructure requirements. Pp. 110-142 in
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URBAN INFRASTRUCTURE: PROBLEMS AND SOLUTIONS
347
Royce Hanson, ea., Per~pectiocs on Urban Infrastructure. Washington,
D.C.: National Academy Press.
Skrotski Associates
1983 Economics of Completing the Interstate Highway System. Cor~gres-
~iorzal Record, 98th Congress, First Session, 1983, Vol. 129, No. 5,
pp. 53533-53537.
Tarr, Joel A.
1984 The evolution of the urban infrastructure in the nineteenth and
twentieth centuries. Pp. 4-60 in Royce Hanson, ea., Perspectives or'
Urban Infrastructure. Washington, D.C.: National Academy Press.
TELESIS
1986 Promoting and Financing Large Scale Infrastructure Pro; ects in
Europe. Report prepared for the Commission of the European
Communities and the Roundtable of European Industrialists.
Transportation Systems Center
1983 Highways and the Economy. Report FHWA/PL/33/014, DOT-TSC-
FHWA-83-1. Cambridge, Mass.: U.S. Department of Transportation.
U.S. Department of Commerce
1980 A Study of Public Works Investment in the United States. Report
prepared by CONSAD Research Corporation. Washington, D.C.:
U.S. Department of Commerce.
Representative terms from entire chapter:
wastewater treatment
