Infrastructure Investment and the Federal Government

Infrastructure Investment and the Federal Government

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Updated November 19, 2018
Infrastructure Investment and the Federal Government
The condition and performance of infrastructure are
Figure 1. Public Spending on Transportation and
generally thought to be important for the nation’s health,
Water Infrastructure, 2017
welfare, and economy. More contentious are the optimal
level of infrastructure investment, the effectiveness of this
investment, and the appropriate role of the federal
government. The current federal role in infrastructure
investment is important but limited in size and scope.
What Is Infrastructure?
There is no agreed meaning of “infrastructure.” The term
generally refers to long-lived, capital-intensive systems and
facilities. Some definitions are limited to systems and
facilities that have traditionally been provided largely by
the public sector directly, such as highways and drinking
water systems. Others add predominantly private facilities,
such as electricity production and distribution, reflecting

Source: Congressional Budget Office, Public Spending on
both their importance to the economy and the different
Transportation and Infrastructure, 1956 to 2017. October 2018.
public-private arrangements through which services can be
provided. Some definitions include a narrow range of
Note: Federal grants to state and local governments are counted as
“core” systems, typically transportation, energy, water, and
federal spending. Data exclude tax expenditures.
telecommunications, whereas others include facilities for
such purposes as education, recreation, and health.
Inflation-adjusted public spending on both transportation
and water infrastructure has declined over the past 15 years,
The concept of infrastructure has become more malleable
but it is higher than it was in the late 1990s (Figure 2).
with the emergence of two relatively recent notions,
“
Figure 2. Annual Public Investment in Transportation
critical infrastructure” and “green infrastructure.” The idea
and Water Infrastructure (Adjusted for Inflation)
of critical infrastructure is a reaction to the threat of terrorist
attacks, both physical and through computer networks, and
to natural disasters. According to the Department of
Homeland Security, there are 16 critical infrastructure
sectors whose physical or virtual assets, systems, and
networks are vital to national security, the economy, and
public health or safety. Among them are chemical facilities,
critical manufacturing, defense industrial base, and
financial services. Green infrastructure encompasses a
range of facilities that some consider environmentally
friendly, such as wind and solar energy production. As
applied to stormwater management, the term refers to
facilities that deal with urban runoff at the source, such as
rain gardens, bioswales, and permeable pavements.

Federal Infrastructure Investment
Source: Congressional Budget Office, Public Spending on
Transportation and Infrastructure, 1956 to 2017. October 2018.
The federal government is an important investor in two

infrastructure sectors: transportation and water resources,
Investment in energy and telecommunications infrastructure
which includes dams and levees. In 2017, according to the
comes largely from private companies that own it. Oil
Congressional Budget Office, the federal government spent
pipelines, natural gas transmission and distribution systems,
$84 billion on transportation and $10 billion on water
and fiber-optic networks are overwhelmingly in private
resources, whether directly or by making grants to
ownership. Federal involvement through activities such as
nonfederal entities. These data reflect spending on capital
construction of federally owned hydroelectric projects and
investment as well as operations and maintenance. State
grants to support the deployment of broadband in rural
and local governments spent far more than the federal
communities accounts for only a small proportion of total
government on transportation and water resources
investment in these sectors.
infrastructure. State and local governments also spent much
more than the federal government on drinking water and
wastewater utility infrastructure (Figure 1).
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Infrastructure Investment and the Federal Government
Types of Federal Infrastructure
Policy Options
Investment
Infrastructure investment is a means to satisfy demand for
There are four main ways in which the federal government
the services provided by infrastructure facilities. Three
invests in infrastructure:
main policy options for helping to meet the demand for
such services are federal spending, improving the cost-
Direct spending on infrastructure it owns and operates.
effectiveness of investment, and improving management of
This includes spending on the inland waterway system,
infrastructure demand. The federal (versus state, local, or
roads and bridges on federal lands, the air traffic control
private) role in these policy options varies by sector.
system, and federally owned dams and levees.
Grants to nonfederal entities, especially state and local
Federal Spending
governments. For example, the Department of Agriculture’s
Increasing federal spending on infrastructure facilities may
Rural Utilities Service provides grants to low-income rural
lead to more investment overall, especially if the spending
areas for water supply systems and waste disposal facilities.
leverages additional infrastructure investment from
nonfederal entities. For instance, state and local
Loans to nonfederal entities. For example, the Department
governments typically need to contribute 20% to a federally
of Transportation provides loans and other types of credit
funded highway project. However, increased federal
assistance to public and private sponsors of transportation
spending could result in little or no change in infrastructure
projects and lends directly to small freight railroads.
investment if state and local governments use federal funds
Tax preferences that forgo federal revenue to provide
to substitute for their own funds.
incentives for nonfederal investment in infrastructure.
These include the authority granted state and local
More federal spending would increase the federal deficit
governments to issue tax-preferred bonds to finance capital
proportionally unless more revenue is generated, due to
spending on infrastructure and the ability of private
higher tax rates or more economic activity, or funding in
investors to depreciate infrastructure assets over short time
other areas is cut. Greater highway and transit spending, for
periods to reduce taxes.
example, could be supported by raising the taxes that flow
into the Highway Trust Fund, particularly the federal fuels
Assessing Infrastructure Investment
tax. Federal loans and tax preferences are typically less
Needs
generous than grants, and rely heavily on the actions of
Estimating infrastructure needs is fraught with difficulties.
nonfederal entities. More loan capacity could entail
Key assumptions can make major differences in estimates
enlarging existing programs or the creation of a new entity
of the amount required to bring infrastructure to a state of
like a national infrastructure bank. The federal government
good repair or to meet a public health or reliability
could also provide more support for the issuance of state
standard. Estimates of need in such cases will vary based on
and local government bonds. Investment tax credits for
the standards set, and also on assumptions about
private equity investment are another possibility.
construction costs that may subsequently prove inaccurate.
Different estimates may result from analyzing investment
Promote Infrastructure Cost-Effectiveness
needs on the basis of anticipated costs and benefits that are
The federal government could attempt to improve the cost-
necessarily imprecise. For example, whether a new
effectiveness of infrastructure investment by supporting
highway bridge will reduce travel times and improve safety
better project selection. This might involve requiring or
sufficiently to warrant its cost of construction and
improving the use of benefit-cost analysis, asset
maintenance over its design life depends heavily on a travel
management, and performance management when
demand forecast that might look 30 years into the future.
delivering and operating federally funded projects. It could
also mean relying more on public-private partnerships that
Another difficulty with estimating infrastructure needs is
can, in some situations, improve project selection,
that, for some categories, consumer demand can be met and
construction management, operation, and maintenance.
managed in various ways. Demand in such cases can
Relying more heavily on state and local government can
depend on how a service is priced. For example, compared
sometimes improve cost-effectiveness. Another possibility
with “flat” pricing of electricity that does not change by
is reducing the costs of infrastructure projects by improving
time of day or season, dynamic pricing that relies on
the processes for selecting, designing, and building projects.
advanced metering infrastructure can reduce peak loads and
overall demand. Technological changes and educational
Promote Demand Management
efforts may also help to reduce demand for infrastructure.
Infrastructure provision in many sectors is inefficient
because infrastructure use is not priced in ways that limit
There is no optimal percentage of Gross Domestic Product
demand. For example, motorists in urban areas impose
that every country should invest in infrastructure. Countries
costs on other motorists by crowding roads during the
with undeveloped infrastructure are likely to benefit from a
morning and evening peak travel periods. Variable tolls can
relatively high level of investment. Countries with well-
be used to persuade some people to drive at a different time
developed infrastructure, like the United States, are likely to
or switch to another form of transportation, alleviating
benefit much less from a disproportionately large
congestion without expanding highway infrastructure.
investment.
William J. Mallett, Specialist in Transportation Policy
IF10592
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Infrastructure Investment and the Federal Government

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