While there are sharp divisions in the United States with regard to almost every political, social and economic question, there is one issue on which there is virtually universal agreement and that is the sorry state of America’s infrastructure and the pressing need to do something about it. Both political parties actively discuss the need to modernize our bridges, roads, airports, dams and so on. And because there is a steady stream of articles in the media warning of the dire consequences of not doing so, the public is at least peripherally aware of this issue. Yet, for a variety of reasons, we seem unable to actually get off the schneid. It’s like going to a disaster movie when you know what is about to happen but feel powerless to do anything about it.
What is the full extent of the problem? Why have we been unable to deal effectively with infrastructure? What are some of the solutions proposed by thoughtful experts?
We all need to become more aware of the dimensions of the problem and to take any steps within our power to get the ball rolling.
THE STATE OF U.S. INFRASTRUCTURE
Every four years, the American Society of Civil Engineers produces a scorecard on U.S. infrastructure, and the latest report, published in 2017, assigned a grade of D+, which was also the grade the U.S. received in 2013. The ASCE report divides infrastructure into a number of underlying categories, and for the nation as a whole, the only categories receiving a grade of C or above were rail, given a B grade, and bridges, ports and solid waste, each receiving a C+.
All of the other categories received either a D or D+. These grades, while sobering, are somewhat opaque, so let’s focus on just a couple of statistics that should bring the problem closer to home:
- 24 of the top 30 U.S. airports experience peak Thanksgiving traffic volume at least once every week.
- There are 614,000 bridges of which more than 200,000 are at least 50 years old.
- There are 15,500 high-hazard dams.
- 32 percent of urban and 14 percent of rural roads are described as being in poor condition.
Some of these issues pose a risk to life and limb. For example, Americans take 200 million trips daily over bridges deemed deficient, and one estimate suggests that poor roads led to an increase in fatalities of 7 percent from 2014 to 2015, the last year for which this data is available. But I don’t want to be accused of overemphasis on the sensational, so let’s focus on economic impacts:
- Traffic congestion wastes 6.9 billion cumulative hours of motorists’ time and 3.1 billion gallons of fuel annually. The estimated cost of all of this is more than $120 billion per year.
- Poor roads lead to about $112 billion in extra auto repair and operating costs annually.
- The World Economic Forum publishes competitiveness rankings based on each country’s infrastructure, among other categories. With respect to the infrastructure category, the United States only ranks ninth as compared to fifth in 2002.
- Airport and road congestion are estimated to cost the U.S. more than $35 billion per year in lost tourism.
We should also focus on the positive economic impact of infrastructure investment. A 2014 study by the University of Maryland found that infrastructure spending adds $3 to GDP growth for every $1 spent, and the consulting firm McKinsey & Co. estimates that increasing infrastructure spending by 1 percent of GDP would generate 1.5 million jobs. And, by the way, 11 percent of the U.S. labor force is already engaged in sectors related to infrastructure.
In summary, the fact that we have not dealt with our infrastructure problems is dampening potential economic growth and is likely impacting our emotional well-being and possibly our physical safety as well.
WHY OUR INFRASTRUCTURE IS SO POOR
As usual, people tend to gravitate toward simplistic answers, while this is actually a very complex set of problems with many root causes:
- Disjointed ownership. I was surprised to learn that over 90 percent of all non-defense related infrastructure assets are owned by states and localities, which also provide approximately 75 percent of the funding. In fact, the federal government only owns 3.7 percent of all U.S roads, while states own 20 percent including the Interstate Highway System, and local governments own the remaining 77 percent.
- Politics. Governments at all levels are plagued by pork barrel politics, poor planning, prioritization and execution, and financial difficulties. Remember Alaska’s infamous “bridge to nowhere?”
- Bureaucracy. At every level of government, permitting processes tend to be very slow and inefficient. For major projects, the time frame from planning to ribbon-cutting can be as much as 10 years.
- Inadequate spending. The United States spends roughly 2.4 percent of GDP annually on infrastructure, while many European countries spend at the 5 percent level. After adjustment for inflation, U.S. public spending on infrastructure declined about 2 percent from 2007 to 2017.
- Inconsistent funding. The United States does not have a unified, sustainable source of funding for infrastructure investments. While there are a large number of smaller programs of one sort or another, the primary sources of funding have been the Highway Trust Fund, which is supported by the federal gasoline tax, the issuance of tax-exempt bonds by state and local governments, and state gasoline taxes.
- Unbalanced expenditures. Because of budget pressures, expenditures have often been directed to operations and maintenance of existing infrastructure rather than construction of newer, more modern facilities and programs.
It seems clear that there is no “silver bullet” that deals with all of these realities, so the solution will have to be multifaceted, complex and long term in nature.
THE COST OF FIXING THE PROBLEM
Not surprisingly, estimates of the cost of upgrading our infrastructure vary considerably. But, given that caveat, the American Society of Civil Engineers calculates that $4.5 trillion needs to be spent over the next five to eight years, which represents roughly a $2.5 trillion gap versus our current spending level. The largest component is for highways, roads and bridges, which the Department of Transportation estimates will require $800 billion to $1 trillion to shore up. The Environmental Protection Agency estimates that $632 billion is necessary to upgrade drinking and wastewater systems. Dams might require another $64 billion, and there are other categories included in the ASCE report including airports, energy, hazardous waste, inland waterways, parks, ports and schools.
Obviously, these are large numbers for the U.S. economy, which currently measures about $20.5 trillion in size. But, to provide one data point for perspective, a newly published study by the Watson Institute of International and Public Affairs at Brown University estimates the United States has spent $6.4 trillion on the wars in the Middle East since 2001.
I’m going to divide proposed solutions into two broad categories: operations and financing. You won’t be surprised that figuring out how to pay for all of this is the more daunting issue. Here are some recommendations around operations:
- Develop data-driven, nationally coordinated approaches to project selection and prioritization to replace politically motivated processes.
- Invest in technologies such as the infrastructure required to support driverless vehicles, “smart” roads and signage, managed traffic lanes and intelligent transportation systems, new construction materials, etc.
- Streamline regulatory processes at all levels.
- Consider public/private partnerships such as outsourcing the operation and maintenance of various types of infrastructure.
While not necessarily easy to implement, all of these are relatively straightforward. Now for the hard part — finances.
The overriding issue surrounding financing infrastructure upgrades is the necessity for a national decision that this is critical to the future success and safety of our country. In other words, we need a national mandate akin to The Marshall Plan, which was largely responsible for the reconstruction of Europe following World War II.
Sources of funding: A large source of funding for roads and other transportation projects has been the Highway Trust Fund, which is supported by a federal gasoline tax. The Highway Trust Fund supports federal projects and also makes block grants to states and localities. But there are a number of problems with this financing model. First, the federal gasoline tax has been fixed at 18.4 cents per gallon for more than 25 years. By way of comparison, gasoline taxes in Europe range from $1.61 to $3.53 per gallon depending upon the country. So, one proposal is to simply raise the tax as many states have already done with their own gasoline levy. But there is a fundamental problem with the gasoline tax as the principal funding source. As cars have gradually become more fuel efficient and electric vehicles proliferate, this tax produces less revenue. There are a number of proposals to more directly tie raising revenue to the usage of roads, bridges, tunnels and so on. For example, the gasoline tax could be eliminated in favor of a tax on actual miles driven. Several states have experimented with a program of this nature. Similarly, user fees such as tolls could be more widely employed.
Private infrastructure investment and execution: A more sophisticated approach is now available for public/private partnerships to operate and maintain infrastructure since there is a well-developed segment of the capital markets focused on infrastructure investment, as well as a large number of private companies that have the capability to enter into contracts with governments to design, build, finance, operate and maintain a wide variety of projects.
The bottom line is that we need to:
- Develop a national mandate to deal with this issue.
- Construct a sustainable and predictable source of funding that could represent a blend of private and public capital.
- Optimize the process of prioritizing, building and maintaining infrastructure.
While this article has been focused on the United States, the need for infrastructure investment is obviously a global problem. Oxford Economics forecasts that global investment in infrastructure of $94 trillion will be required between now and 2040, some $15 trillion above the current rate of spending. At the same time, many governments are already saddled with too much debt, and institutional investors such as pension funds, insurance companies and sovereign wealth funds are actively searching for new investment opportunities with stable returns in which they can place large amounts of capital. The combination of these forces has resulted in the development of a large and growing infrastructure investment industry.
PwC estimates more than $1.7 trillion of private funds has been invested in infrastructure assets over the past decade. The United Kingdom provides an interesting case study in that 56 percent of water assets, all of the major airports, most of the ports, and all passenger rail are held in specialized infrastructure investment funds. Of course, there are always potential problems in public/private partnerships, and there are those who question the insertion of the for-profit sector into what have hitherto been public assets. But these investment funds potentially offer one component of a multifaceted solution to the infrastructure challenge.
WHAT ARE WE WAITING FOR?
After doing this research, I was initially discouraged by the magnitude of the problem, the difficulty in overcoming inertia, and all of the political problems associated with this issue. But then I remembered that we have done this before. We built the railroads in the 1800s, electrified the country in the 1920s and 1930s, and built the interstate highway system in the 1950s. More recently, we built cell phone infrastructure and the backbone of the internet. We have all of the necessary skills including engineering, construction, financing and project management. Moreover, there are new sources of capital that could fill a portion of the gap between current and necessary spending levels. What we need now is simply resolve.
William Spitz is founder and principal of Diversified Trust. Read his complete white paper on this subject at this link: https://bit.ly/2wqAMoz