Elizabeth Nelson
Elizabeth Nelson

The Economics of Infrastructure Delivery

by Jackie Swift

Many of us take the civil and social infrastructure that underpins our society for granted. Large, networked systems such as airports and electric power grids, as well as stand-alone facilities such as hospitals and prisons, exist on the periphery of our consciousness—until something goes wrong. If a bridge buckles or the municipal water supply tests positive for lead, we suddenly catch a glimpse of the complicated economics behind their existence.

R. Richard Geddes, Policy Analysis and Management, has spent years exploring the economics of infrastructure projects like these. He was drawn to the topic after serving as a senior economist on the Council of Economic Advisors in the White House in the early 2000s. As one of three economists working on regulation, Geddes learned details about civil and social infrastructure that changed the trajectory of his career. “They were throwing stuff at me right and left,” he remembers. “Highway tolling, environmental permitting, all kinds of things. It was the most incredible learning experience.”

After returning to Cornell, Geddes knew what he needed to do. “There’s a whole world of infrastructure and public policy that has been neglected by economists and universities,” he says. “I realized we needed a center at Cornell that focused on infrastructure because we have all kinds of faculty who are interested in different pieces of it: for example, things like environmental impacts, the structure of delivery contracts, infrastructure funding and finance, and legal questions of liability.”

In 2012, Geddes became the founding director of the Cornell Program in Infrastructure Policy (CPIP), which seeks to improve the delivery, maintenance, and operation of infrastructure. His own research focuses on infrastructure delivery. “Delivery means the whole set of things that has to happen for a particular infrastructure to work,” he says. “For example, to build and maintain a water system that delivers a clean glass of drinking water requires that you think about design, construction, operation, maintenance, financing, and increasingly, retirement, which can mean recycling at the end of it all.”

Value Capture through Public-Private Partnerships

Much of Geddes’ work centers on the concept of value capture through public-private partnerships (PPPs). “This is particularly important in the eastern United States where the infrastructure is older,” he explains. He gives an example from Ithaca, New York, where Cornell University is located: “The Ithaca wastewater treatment plant was over 100 years old. A private company came to the city and said, ‘You’re wasting a lot of energy with this old technology. We can install our new technology and capture some of that value through reduced electric usage, which will pay for the technology’s installation.’ That means it cost the city of Ithaca nothing to implement the new technology because the city gave the private partner a cut of the electricity savings.”

Delving deeper into the economics of PPPs, Geddes joined with Rui Cunha Marques, of the Technical University of Lisbon, in a research paper exploring how Detroit and other cities around the world handled the switch from incandescent streetlights to light-emitting diode (LED) lights. “Most public authorities can now enter into a streetlight modernization PPP agreement,” Geddes says. “Paris did it. Detroit was a major U.S. city that did it. We studied the contract between the city, which is the public owner, and the private partner. The key aspect in value capture deals is this contract. How exactly do you structure the contractual relationship between the two partners?”

“The United States is behind the curve in terms of innovative infrastructure delivery...We have always been a rich country that could afford to do things inefficiently.”

Using Detroit as an example, the researchers found that cities transitioning from wasteful incandescent streetlights to LEDs spend very little when they share their post-upgrade energy savings as compensation for the private contractors who carry out the retrofit. “They can install the bulbs and towers just on the savings alone,” Geddes says.

Do PPP-Enabling Laws Increase Investment?

Geddes continued his study of PPP laws by collaborating with Daniel Albalate and Germà Bel, of the University of Barcelona, in the first in-depth look at whether the laws increase private investment in transportation. In the United States, 35 state legislatures have passed PPP-enabling laws to encourage private infrastructure investment in the state, including investment in interstate highways. These highways actually belong to the states, Geddes explains. This means that each state is responsible for upkeep such as ice removal, signage, and surface smoothness for the portion of the interstate highway that is within its borders.

“We looked at 13 provisions, or clauses, in each of the 35 state laws, to see what they said about private investment,” Geddes says. “There are, for example, provisions that specifically allow the mixing of public and private funding to pay for infrastructure.”

The researchers found that the PPP-enabling laws will attract private investment when the provisions allow the private partner such benefits as exemptions from property taxes, confidentiality protections, and the assurance of noncompete clauses for the life of the project, which could be for as long as 35 years or more.

The Cost of Borrowing Money: Private versus Public Sector

Geddes turned his attention in another paper to the cost of borrowing money—known as the cost of capital. “There’s been a big debate in economics that goes back 50 years about whether the government or the private sector has the higher cost of capital,” he says. He joined with Joshua Goldman ’07, director of strategy and development at Via, to answer that question in light of the growing popularity of PPPs, which facilitate new capital projects such as hospitals and electric grids.

Early research by others found that the private sector had the higher cost of capital because the public sector spreads risk across multiple taxpayers. However, Geddes and Goldman concluded that further research on the topic should take into consideration the expense inherent in conflict between shareholders and company management—known as agency costs—that can increase the private sector’s cost of capital.

“These papers illustrate the kinds of things we can do at CPIP,” Geddes says. “Our investigation into PPPs is fun because it’s international. The United States is behind the curve in terms of innovative infrastructure delivery. Ireland is a leader. Canada and Australia are leaders. The U.S. is learning about these innovative ways of doing things from other countries. We have always been a rich country that could afford to do things inefficiently. Other countries without as much money have more experience than we do at being efficient.”