Musings on Financing of Transport Infrastructure

I’m no economist, but I have been fortunate enough to have talked with some very smart economists who are well connected with the big decision-makers.

Below are some themes I’ve picked up over these talks that affect transport infrastructure. I’m not an expert on this so some may not be quite right, but food for though anyway:

  • Transport infrastructure lasts decades (even centuries) and provides benefits to future generations. Therefore there is a certain logic to those future generations paying for it, rather than us trying to come up with money right now for it all. In other words, it makes sense to fund something like a motorway/railway line by borrowing, and repaying a bit each year for the next 100 years.
  • But the way banks work makes this impossible. Banks don’t really like lending to Councils because they are too easily swayed by public opinion. It’s too easy for a council to sign up to a loan in one election term so they can build some transport project, but then 10 years down the track when there are totally different politicians with totally different values, backtrack on that and end up defaulting on their loan repayments.
  • In the U.S.A. Councils borrow far more than they do here in N.Z., which is generally seen as one reason they have quite affordable housing and infrastructure. The U.S.A. is not perfect by any stretch of the imagination, but affordable housing is one area they generally do better than us on. Councils there have convinced banks to loan them more money only by putting in place strict rules that make it almost impossible to default on their loan repayments – things like limiting the power of politicians to rearrange budgets and divert spending.
  • In theory another solution is for a private organisation to be set up that could borrow money, build infrastructure, then pay it back. But the trouble is that private organisations can’t tax property, only councils have the power to do this. And taxing property is the only practical way to pay off infrastructure. So in reality this can’t be done, only a Council can ever do this.
  • To make infrastructure work properly we need either give private organisations the power to tax property like councils have, or we need councils to have the power to borrow that private organisations have. At the moment we have neither. This is a big problem.
  • Competition is also a much bigger player in the U.S.A. Their cities are not normally run by a single Council, they are split up into tens or hundreds of smaller borough councils. Their tax incentives are set up differently to N.Z. so that each on is competing for residents and businesses and the increased income that means for them, so they work hard to try to make themselves as attractive as they can. Part of this involves working together with landowners and developers to try to come up with proposals for transport infrastructure, which may involve them offering to pay for a chunk of the costs, to make it more attractive for central government to finance the rest.
  • Competition was a big player in the recently constructed Cross-Rail underground rail line in London. Instead of planning out where the line and its stations would go the government basically said to all the landowners along the route – if you want a station near your land, then come to us with a proposal and we’ll put our stations wherever the most attractive proposals are. So all the landowners along the route (most of whom were desperate to have a station under their property) came up with proposals that involved major redevelopments or offers to help fund the stations. Government then gave the stations to whichever landowners were willing to pay the most for them. In this way, private landowners ended up funding a significant portion of the new rail line, but there was not the same political adversity as a compulsory tax or rate would have had – it was seen as more of a win-win situation for all involved.

So no real proposals from me, just musings…

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