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 both their importance to the economy and the different Source: Congressional Budget Office, Public Spending on public-private arrangements through which services can be Transportation and Infrastructure, 1956 to 2017. October 2018. 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, “critical infrastructure” and “green infrastructure.” The idea Figure 2. Annual Public Investment in Transportation of critical infrastructure is a reaction to the threat of terrorist and Water Infrastructure (Adjusted for Inflation) 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. Source: Congressional Budget Office, Public Spending on Federal Infrastructure Investment 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).

www.crs.gov | 7-5700 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, [email protected], 7-2216

IF10592

www.crs.gov | 7-5700