If You're Planning to Invest in Infrastructure, You Need to Understand These 3 Concepts

It has been suggested here by a local government official that cities need to spend money to make money. Will it work? "Don't know" was the answer, which is true. Public officials at the local level rarely, if ever, even bother to measure whether or not something is working before they proceed confidently to the next big thing.

This mentality has infected local governments across the country, where gambling with other people's money is seen as good stewardship, particularly if it is being done in service of the "right thing to do". This often pits different factions of society into arguments over what the "right thing to do is"—is it another highway lane or perhaps a streetcar line or maybe a subsidy to a new business or an emissions reduction program—without any objective understanding of what is actually working or what the trajectory of the public balance sheet actually is.

I've promised to describe how a local government can have growth without risk—can experience the upside of growth without the downside—and opt out of the gambling, Ponzi scheme approach. Before I do that, we need a common understanding of how to know whether or not a local government investment is "actually working".

We've developed three short videos that explain how this would be done:

REAL Return on Investment

The first is called the REAL Return on Investment and it explains the difference, as measured by a local unit of government, between investing in economic activity and investing in a project that pays an actual return for the taxpayer.

Costs and Benefits

The next video, Costs and Benefits, gets into additional detail on how to calculate the actual return. It explains the difference between benefits that might be desirable, yet generate no capturable revenue, and those benefits that directly manifest in the revenue stream of a local government. We have many reasons to pursue the former, but can only do so after sufficient pursuit of the latter. (And while I didn't make the case, this points out another effect of orderly but dumb policies that limit the flexibility of local governments—California's Prop 13 being Exhibit A).

The Second Life Cycle

The third video then extends the conversation of costs to ensure that we are getting beyond cash flow and actually talking about the long term costs (ie. the second life cycle). There needs to be a direct correlation between the long term liabilities we are taking on and the new revenue streams we are creating. If those don't balance, the project can cash flow just fine but, long term, it is a failure.

Final Thoughts

Whatever goals or desires a local government may have, the prerequisite to accomplishing those goals is financial solvency.

I realize these are nuts and bolts kind of conversations, but it is important to note that I'm not suggesting that local government must always have a positive return on investment on everything it does. I'm also not suggesting that local government should stay completely out of any endeavor that would be altruistic. All I'm pointing out is that, whatever goals or desires a local government may have, the prerequisite to accomplishing those goals is financial solvency. The higher the return on public investments a community has and the greater its financial solvency, the more capacity it has to take on other endeavors.

That's actually not a difficult concept to comprehend.

And in reality, none of this is difficult. In fact, there were times when I was putting these videos together that the sheer obvious nature of them caused me some private embarrassment. That was, until I stepped back and noted that no local government that I've ever seen operates in anywhere near this fashion. I shared them with a few friends last week and the consistent feedback I got was one word: radical.

That these basic concepts are radical in America, circa 2013, says more about us than anything I could write.

Next, we'll delve into the high upside, limited downside, approach for local governments.

(Top photo source: Johnny Sanphillippo)

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