Fewer federal barriers increase local revenues.

Removal of federal barriers to states and cities wishing to privatize government-owned infrastructure – such as airports, utilities, ports and highways – would increase federal, state and local government revenues and lower financing and operating costs for state and local infrastructure, according to the study “Revitalizing State and Local Infrastructure: Empowering Cities and States to Tap Private Capital and Rebuild America,” which was released by the Los Angeles-based Reason Foundation.

“There is no good reason for the U.S. government to continue to tilt the scales in favor of government- versus investor-owned firms,” says Robert Poole, president of the foundation and author of the study. “Empowering cities and states by removing federal barriers to infrastructure privatization is the next logical step for Congress to take if it is serious about devolving power away from Washington.”

The study argues that private firms are typically more efficient in their use of labor than government-run enterprises and cites Indianapolis as an example. When the city contracted out the operation and maintenance of its two wastewater treatment plants in 1994, the winning firm was able to reduce operating costs by more than 40 percent, primarily by redesigning the work force.

“The single most significant barrier to infrastructure privatization is the tax code’s discrimination against private capital,” Poole says. “Removing the tax-exemption for those infrastructure enterprises assumed to be businesslike and fully supportable by user charges would result in new federal tax revenues and significant private-sector participation.”

A gradual transition would ultimately result in a new source of federal revenue estimated at $24.5 billion by year 18 (see chart). The estimate is based on the assumption that the average annual dollar value of municipal infrastructure bonds issued is $51 billion (26.3 percent of the total municipal bond market) with annual interest of $3.7 billion. At a tax rate of 36 percent, this would produce $1.36 billion in tax revenue in year one.

“Investment banking firms would be no worse off from this change, assuming the total volume of infrastructure bonds remained at least the same,” Poole says. “They would simply be doing a larger fraction of their bond volume on the commercial rather than the municipal side of the business. The remaining three-fourths of new issues in municipal bonds – these would remain tax-exempt – would likely see some reduction in interest rates due to increased demand. City and state governments would therefore benefit from lower interest charges on the majority of their new issues.”

Sector-specific reform recommendations include the removal of provisions in the federal Airport Improvement Program, which prohibit private airports from receiving entitlement grants that public airports receive, removal of the current ban in interstate highway tolls and repeal of a special tax on investor-owned utilities.

“It is ironic that the land of free enterprise has thus far largely missed out on the opportunity to develop the modern infrastructure needed in the former Communist world and the rapidly growing Third World,” Poole says Privatization of infrastructure would also help stimulate the growth of an important export industry, he says. “Creating a home market for privatized infrastructure would give U.S. firms the kind of experience that would increase their competitive edge in the huge worldwide infrastructure market of the 21st century.”