Infrastructure Finance, Politics, and the “Entanglement” Problem

By Tripp Androy

How do we explain why so many critically important systems of public infrastructure consistently require operating subsidies or fall into hazardous disrepair for lack of necessary reinvestment? I argue this phenomenon has very little, if anything, to do with the economic performance of infrastructure, with regards to either the prudence of initial investment decisions or the subsequent productivity of assets. Rather, it is the result of a political problem endemic in large public expenditures, yet frighteningly absent in the process of making such decisions.

Let’s say, for example, a society is considering a substantial investment in its public infrastructure (the particulars do not matter). Once in place, the asset(s) are expected to last for 50 years and result in a myriad of positive outcomes for the society: economic output will increase, as will property values, and negative environmental externalities will diminish, simultaneously improving the health of its citizens and reducing health-care expenditures. Let’s further stipulate that any decently-trained MBA will be able to provide a discounted cash flow analysis showing with adequate certainty the positive outcomes of the investment are sufficient to justify the initial investment.

Where this analysis will fall short is in considering the long-run political economy of the investment. Our MBA should be able to identify the short-run political hurdles that must be cleared to actually start construction, and even provide some guidance as to how to overcome them. But short-run problems (e.g. NIMBYism, political obstructionism, and vested interests in the status quo) have no bearing on the problem described above—their power is limited to simply making it harder to break ground on a project. The long-run problem is much more subtle.

While infrastructure investments create massive economic value—perhaps more than any other type of investment, public or private—they only do so over long periods of time, in many different kinds of ways, and in many different areas within a society, none of which might be easy places from which to redirect cash flows. In the context of our example, as soon as it is sufficiently clear economic output has increased, and/or property values have appreciated, the Rentier classes within the society will begin agitating for tax cuts. Any agency funded by property taxes will similarly resist transfers of funds out of their budget to pay for infrastructure. With regards to public health, while the society may be spending less on healthcare as a result of the investment, this means less money in the pockets of doctors and hospital administrators, who could very well decide to raise prices or demand increased research budgets. While the society could impose tariffs on the users of the new infrastructure, there is an upper-limit to how much can be charged as any such pricing must be competitive with other modes of providing the same good or service.

If tariffs collected are inadequate, increased tax revenues or transfers will be needed to pay for the investment. But if any of the above constituencies are successful in their efforts, such cash flows will be unavailable and the phenomenon of efficacious yet fiscally stressed infrastructure will begin to emerge. What’s more is that, by the time political deliberations regarding issues like taxation and healthcare policy materialize out of a successful infrastructure investment: firstly, the particular assets will be in operation, humming away in the background of society and out of the collective conscious; and secondly, none of the issues will appear as having anything to do with infrastructure. All of this makes it even more likely the phenomenon will emerge.

I call this the “Entanglement” problem. Its basic premise is that a single political act cannot be taken successfully without also simultaneously defining a necessary resolution to some number of other political questions, present or future. In the case of our example, the polity in question made a sound infrastructure decision, but in doing so made certain specific answers to questions of tax and healthcare policy, and the management of government infighting necessary. If the political process were to arrive at other resolutions than were necessary given the investment decision, the financial success of the investment would become increasingly unlikely.

It occurs to me we almost never consider the entanglement problem in our infrastructure decisions, which I think does a great deal to explain how public works and transit systems in major cities consistently run operating losses, and how, according to the American Society of Civil Engineers, the United States is in need of approximately $2 trillion in infrastructure investment to adequately support our society. I also hesitate to look emerging metropolises in the developing world: it will not be clear they have successfully managed this problem until they have lost the allure of youth. It is, however, clear that the already-substantial political complexity of such major developments is, in fact, much deeper than we perhaps have ever truly realized. In the hope of disarming our often technocratic biases, I suggest those of us whose primary expertise is in designing, financing, or managing such large projects, and maybe even economists or policy wonks among us, to error on the side of assuming the difficulties of such projects are more political than economic or technological. For as good as we all are at navigating technocracies, politicking is more likely the activity critical to our efforts’ ultimate success.

One thought on “Infrastructure Finance, Politics, and the “Entanglement” Problem

  1. A successful new technique to avoid the entanglement problem is employing value-capture taxing strategies to ensure that the benefits accrued from a capital-intensive transportation projects are used for funding to supplant or replace traditional revenue streams.

    Value from new infrastructure is derived from the time-savings of the facility, consistency of that travel time or the added flexibility of the mode. Take for instance the 7 subway train extension in New York City. This $1.5B transit project will extend the line from 42nd Street & 8th Avenue to 34th and 10th, unlocking previously transit-remote parcels for dense development. Instead of allowing this added value to accrue to the existing owners, the city took via eminent domain many of the sites for redevelopment and also created a tax-increment-financing district whereby parcels in the district will pay additional property taxes from the added value of the investment, which will be used to pay off the bonds used to finance the extension. Since the social-cost benefit of the project was clear, the city had an easier job developing a strategy to pay for this project. Had it relied on the MTA capital budget (funded significantly from transfers from others such as bridge toll-payers), the project would likely never have happened.

    Much of the challenge for funding infrastructure investment in the U.S. is the free-rider problem: we primarily fund transit and highway maintenance and expansion through motor fuels taxes. Users who pay those taxes when they drive frequently do not use the facilities that receive investment, like the $1.1B Green Line extension in Somerville, MA or the $225M worth of repairs to the Longfellow Bridge in Boston. They are therefore loath to pay more in user fees to address the critical backlog of investment needed to bring our system back to good repair and address future needs.

    By targeting those who receive the benefits of transportation to pay for the value they accrue as a private actor (tolls, higher farebox, TIF districts, etc.), we can recreate trust among the public that benefits and costs are properly aligned.

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