Full-Cost Pricing for Infrastructure Projects

Let’s begin with basic market economics for Dick or Jane: prices affect individual consumption behavior. Let’s next add to basic economics of building a city’s infrastructure for Dick and Jane: ribbon-cutting prices affect behavior. In the former case, Dick or Jane chooses to purchase or not purchase a good based on the price, its quality, and Dick or Jane’s preference to actually own the good. The good’s price is of course influenced by supply and demand and it’s also tied to the cost of production.

In the latter case, the price of the infrastructure good (let’s say a bridge) is the cost of constructing the bridge spread over, in many cases, the life of the bond that was sold to build the bridge. The cost of building the bridge includes labor and capital costs, but capital costs do not include the price of repair, maintenance, and reconstruction. Dick and Jane, then, pay an annual tax (unrelated to their use or demand for the bridge, unless a toll bridge was created) so that the bondholders are happy. And they can only wish that their city council will allocate a sufficient amount of additional funds for the bridge so that it can be adequately repaired, maintained and reconstructed over its useful life.

And therein is the difference between pricing a good that Dick or Jane consumes individually and pricing a good that both Dick and Jane consume jointly. The price for a private good typically includes the cost or production, unless the good is a gift from the firm or a loss-leader for a short duration. The price for a public good, such as a bridge, typically includes the cost only up to the time of the ribbon-cutting ceremony.

Municipalities, it turns out, are very, very bad at budgeting for anything at any time thereafter. The American Society of Civil Engineers has published an annual report card on the nation’s infrastructure deficit for decades now. The latest report estimates our infrastructure deficit at $2.2 trillion.

Budgeting for Maintenance

Cities should manage public infrastructure the way one manages a large personal asset – by setting aside in a monthly budget a reasonable sum of money for basic repairs, maintenance, replacement, a new paint job.

Right now, cities (and other local governments and all state governments) separate their annual (or biennial) budgeting processes into two piles: one for the basic operations of the city; the other for the capital investment activities of the city, which cannot be used for basic maintenance and repair.

By separating the two budgetary processes, there is never enough funds for basic repairs, maintenance, replacement, a new paint job for the new or expanded capital asset that appears in the capital budget because the operating budget is already crowded with too many commitments from previous years’ basic repairs, maintenance, replacement activities, not to mention all the other service responsibilities, such as public safety.

Cities should adopt the “Utah model” of setting aside 1.1 percent of the value of an asset for the express and only purpose of maintaining and repairing capital assets. Utah’s approach to adequately maintain fixed assets by following a life-cycle for repair and maintenance is contained in legislation that assures funding for maintenance activities for the state’s public buildings. State law requires that before new capital projects can be approved, the legislature must allocate 1.1 percent of the state buildings’ replacement value to capital improvement projects which, by definition, do not add square footage to the state’s building inventory. This statute binds the budgetary authority of future legislatures because it requires a set-aside in current operating budgets that is determined by previous legislatures’ capital investment decisions. (Although the law only applies to public buildings, I raise this policy action as a tool that ought to be extended to other capital assets of cities and states.)

By linking current capital investment policy to future sequestration of the operating budget to assure a pool of resources is available for maintenance and repair, this policy ensures, or at least makes highly probable, an adequate resource base to maintain an asset throughout its useful life. It also has the added benefit of constraining over-building on the part of the government because the more building, the more future resources are set aside for capital maintenance and unavailable for other basic operating concerns.

Full-Cost Pricing

Cities have been extraordinarily unsuccessful in pricing services and capital facilities that are provided for both Jack AND Jill to
consume, that is, services and assets that cannot be priced via user fees, such as public safety and fire stations, and city streets and
alleys. These types of services and goods are priced poorly. We have no way of estimating demand or consumption needs for the “jointly-consumed” services that local government provides. Yet, approximating the market value of city-delivered services would possibly reduce subsidies to free-riders.

Instead of attempting to fold into the price of these assets and services the full life-cycle costs of building and maintain them, we typically announce the construction cost of the asset which signals to the taxpayer the full cost of the asset. Cities announce that the new bridge cost $70 million, but never let on that the $70 million only covered the cost of construction and that another equal amount will be required to repair and maintain it, to paint and re-deck it, over its useful life. And rare is the asset that is annually maintained at an adequate level.

Until the asset begins to crumble or fail, we consumers are fairly oblivious to the fact that asset has deteriorated due to neglect because, after all, didn’t we just pay for the brand new bridge. Indeed, a question of “what will the public bear” would be answered differently, I propose, if they were asked to vote for issuing bonds to cover the cost of a $70 million bridge project than if they were asked to vote for a $70 million construction project with annual maintenance and repair costs of $5 million that would reduce public safety by a like amount.

There Is No Silver Bullet

All too often, the citizens and policy makers hope that a ‘creative solution’ to the infrastructure crisis can be found. There is nothing ‘creative’ at all about the two recommendations above; they’re commonsensical.

The bottom line: The costs of an asset are not only the initial construction costs and later renovation costs. Operating and maintaining the facility require planning for day-to-day use and adequate funding. In areas from infrastructure spending to city pensions to subsidies for sports facilities and other large civic projects, cities need to ensure that they are weighing the full, long-term costs associated with today’s decisions. If the price were right, Dick and Jane would be better off.