On the campaign trail, Donald Trump touted plans for $1 trillion in new infrastructure spending. Rather than paying for this directly using tax dollars or government borrowing, he has proposed largely relying on private companies to raise the necessary funds, incentivized by tax credits. At a Senate hearing today, Trump’s choice for transportation secretary, Elaine Chao, touted the advantages of this approach.
Chao vowed to “unleash the potential for private investment in our nation's infrastructure” using public-private partnerships. “In order to take full advantage of the estimated trillions in capital that equity firms, pension funds, and endowments can invest, these partnerships must be allowed to participate with a bold new vision,” she said. “We all know that the government doesn't have the resources to do it all.”
Chao is wrong. The federal government does have the resources to “do it all.” And the costs of infrastructure spending ultimately fall on taxpayers and motorists whether or not financing is provided by private companies.
The feds have a virtually unlimited ability to borrow cash. And while interest rates have ticked up slightly since Donald Trump’s election, the government’s borrowing costs are still near the lowest levels in decades. For example, right now the government can borrow money for 10 years at an interest rate of 2.4 percent.
Of course, you might believe the federal government has too much debt and shouldn’t take on even more — even if it’s technically able to do so. But the key thing to remember is that from an accounting point of view, a public-private partnership is very similar to a loan. It’s just a very complex loan that’s likely to cost the government more money in the long run.
The way public-private partnerships are usually structured is that a private company puts up money at the beginning and in exchange is entitled to a flow of payments. The company might get the right to collect tolls on a newly constructed road. Or the company might be entitled to fixed, taxpayer-funded payments for use of the road.
Either way, the private company is effectively lending the government money and getting paid back over time using taxpayer dollars. And because the company hopes to turn a profit on the deal, the value of these payments is likely to be higher than the interest payments the government would have paid if it had financed the work directly.
There are some good arguments for involving private companies in infrastructure projects. Sometimes private companies have management skills or technical expertise the government lacks. In other cases, public-private partnerships can be a way to route projects around dysfunctional government bureaucracies that would botch the job if given direct control.
But “we don’t have enough money” is a terrible reason for the federal government to involve private companies in infrastructure projects. The US government has more capacity to raise cash than any other institution on the planet.