Infrastructure investment in the US
January 2016 | COVER STORY | FINANCE & INVESTMENT
Financier Worldwide Magazine
Infrastructure projects provide the literal and metaphorical building blocks on which countries and continents are able to construct their economies. Investing in and developing infrastructure helps countries to generate jobs, improve the quality of life for their population and boost economic growth.
However, there is a notable deficiency in much needed infrastructure funding. It is estimated that between $700bn and $800bn is invested in infrastructure worldwide each year, around $550bn of which goes into emerging and developing economies. Yet the lack of infrastructure funding and development is rife within developed, world leading economies. The US, despite its position as the world’s biggest and most innovative economy, is suffering from a gap in infrastructure investment, particularly in the transport space. The US was once a global leader in infrastructure networks, however due to significant under funding and partisan political posturing, now ranks 16th globally.
By neglecting infrastructure obligations and failing to invest in new and existing infrastructure projects, the US is threatening the productive capacity of its own economy. According to a 2013 study by the American Society of Civil Engineers, the US could lose as much as $3.1 trillion in GDP up to 2020 by failing to respond to the country’s infrastructure needs.
According to the US Department of Transport, the country needs to spend between $124bn and $150bn a year simply to maintain its existing, crumbling infrastructure network. Given the level of pressure on US cities and the connections between them, more must be done to revitalise the underlying infrastructure. Many roads, highways and railways were created decades ago; indeed, much US infrastructure was constructed during the building booms of the 1930s and 1950s. Some cities rely on water and sewage pipelines that have been in place for many than a century. Annually, there around 240,000 water main breaks in the US, and inadequate sewage systems let up to 850 billion gallons of untreated waste water flow into rivers and lakes. Efforts are made to patch up the country’s decaying pipes and water works, but there are calls to replace networks wholesale, rather than carry out continual repairs. Everyday people utilising the country’s transport networks can see the results of underinvestment. Escalating traffic congestion and deteriorating road networks are common.
This decaying public infrastructure has to service the needs of more than 316 million people, and issues are rife across the US. “As many population centres in the US are facing tremendous growth, they are relying on aging infrastructure designed for half of today’s population,” notes Dale Bonner, executive chairman of Plenary Concessions. “The diminishing level of investment over the years has now reached crisis levels, and sustained investment in infrastructure is critically important for the US to maintain its competitive economic advantage and improve safety and a high quality of life.”
In 2014, a study commissioned by the US government found that 65 percent of the country’s roadways are in “less than good condition”. According to estimates from the Federal Highway Administration, more than 10 percent of the country’s bridges are structurally deficient. In 2013, the American Society of Civil Engineers estimated that it would cost around $450bn a year up to 2020 to improve the quality of the country’s existing infrastructure and bring the country’s networks of roads, bridges, ports, dams, railways, electrical grid and wastewater management facilities up to scratch. In light of current federal, state and local government funding, it seems unlikely that the $3.6 trillion the American Society of Civil Engineers thinks is necessary will be made available.
The lack of governmental support for infrastructure development has been striking in recent years. Shortcomings have been brought into sharp focus as other economic rivals such as China have poured trillions of dollars into new infrastructure. Power plants, high speed railways, and even entire cities have been created at breakneck speed.
Meanwhile, the spectre of infrastructure spending haunts politicians on both sides of the US political spectrum. Last year, Republicans in the senate were criticised for blocking a $478bn infrastructure bill introduced by Democratic presidential candidate Sen. Bernie Sanders. Given the divided nature of government, it is little surprise that Congress is struggling to settle a deal on long-term highway funding. The majority of spending on municipal transportation projects in the US comes from state and local governments and the federal Highway Trust Fund. The HTF contributes between $40bn and $50bn a year to construction projects and is funded by a gas tax of 18.4 cents per gallon, a rate that has not increased since 1993. Though some commentators argue that raising the gas tax is the most practical solution, the current state of the oil & gas market makes a price rise is unlikely.
To attempt to tackle the issue of infrastructure funding, it was announced in late October that a panel of travel industry leaders would be formed. The panel – which will include Amtrak president and chief executive Joe Boardman, Amtrak board member Thomas Carper, Environmental Law and Policy Centre founder Howard Learner and the former chairman of the Railroads Subcommittee of the House Transportation and Infrastructure Committee Jack Quinn – will discuss the infrastructure crisis in the US and how to secure funding for major projects. In a statement, Mr Boardman highlighted the need to change the US approach to infrastructure investment. “Amtrak is doing what it can, but the root of the problem is lack of funding needed to address the congestion challenge that contributes to these delays,” he said. “Persistent underinvestment leads to congestion – and the lack of investment threatens our national economy... We don’t need to find a solution – we need to fund one... This is a fight our country needs us to win – it’s time for us to build.”
As easy as PPP
There is a growing appetite for improved infrastructure investment across the US, and thankfully steps are being taken to generate additional investment. But the budgetary pressure at local and state level means infrastructure investment is being stymied by a serious lack of public funding. At the same time, there is a little appetite for increasing taxes or user fees.
One potential solution to the funding conundrum may be the use of non-public funds. But the public sector is not up to speed on using innovative financing and delivery methods. It also lacks sufficient resources for early planning and analysis, and other pre-development activities.
Accordingly, efforts are being made to attract private sector commitments, as well as overseas interest in the US infrastructure space. Public-private partnerships (PPPs) are becoming popular, with public pension funds expected to play a major role. At a time when federal funding for infrastructure development is at an almost historic low, PPPs can help state and local governments tackle their funding issues. Thankfully, this process has already begun. In light of budgetary restraints at all levels of US government, steps are being taken to engage with private investors on infrastructure projects, as Mr Bonner explains. “Recent trends across the US include a growing demand for infrastructure investment and a lack of public support for taxes or user fees to support it. This has forced all levels of government to look more closely at innovative strategies to leverage private investment in public infrastructure. In the past two years, we’ve seen a large majority of states enable one or more forms of PPP delivery, with public agencies using the PPP model in Colorado, Indiana, Florida, Texas, California, Pennsylvania and other states. This has resulted in a growth in the number of PPP projects, in various stages of procurement, across a wider range of sectors. In 2014, for example, we saw a more diverse pipeline of projects, more awareness and use of availability payment structures, and importantly, more federal leadership across party lines,” he says.
PPPs represent a largely untapped potential source of much-needed capital. The structure has worked well in other jurisdictions, such as the UK under the private finance initiative. In Australia, pension schemes have invested heavily in infrastructure projects both domestically and abroad. However, to date take up in the US has been comparatively slow, although things are improving. Between 2005 and 2014, 48 PPP infrastructure transactions were announced with an aggregate value of $61bn – 40 of which successfully closed. According to a September 2014 report by Moody’s Investors Service, “The United States has the potential to become the largest P3 market in the world, given the sheer size of its infrastructure”. But the future success of PPP deals in the US will be reliant on a number of factors, most notably the next presidential elections, the continuation of federal loans and other forms of financial assistance to PPP transactions, and the availability of other funding sources for PPPs.
Some local authorities are trying to tap into the PPP market. New York’s LaGuardia airport, for example, is in a state of considerable disrepair. A number of local authorities are attempting to raise money for the demolition and redevelopment of the airport’s central terminal building, and are embracing the PPP model.
The Transportation Infrastructure Finance and Innovation Act (TIFIA) programme, enacted in 1998, plays an essential role in the US PPP arena as it provides “credit assistance for qualified projects of regional and national significance”. The Qualified Public Infrastructure Bonds (QPIB), proposed by president Obama, could also help to secure funding. The QPIB, according to the Obama administration, would not expire and would have no cap on issuance. “The QPIB would resemble private activity bonds, but would have no limits on the total amount issued, and the interest paid would not be subject to the Alternative Minimum Tax,” says Mr Bonner. “Another Administration priority is to find more resources for predevelopment activities, including a more consistent use of ‘value for money’ analysis. If successful, these efforts will help public agencies formalise PPP programmes identify candidate projects, and implement PPP projects.”
It must be noted that not all PPPs have proven successful. The proposed $3.5bn Texas highway, the $12.8bn Pennsylvania Turnpike lease and the $2.5bn Chicago Midway Airport lease are among the most high profile PPPs that failed to close, however this failure was at least partly the result of political posturing. For PPPs to be successful they require some degree of political consensus to support the project through to realisation. Political divisions can easily torpedo a scheme before launch.
Over the last two to three years, cyber security threats and attacks have become common. It is not just individuals and companies that are vulnerable to attack; infrastructure is too. Critical infrastructure, both physical and virtual assets, comprising networks which are vital to national and economic security, health and safety, can be targeted by malicious individuals, hacktivists and enemy governments. As we have seen with the likes of Sony, Target and Ashley Madison, a significant breach of cyber security can be embarrassing and costly. However an attack on critical infrastructure in the US could be extremely disruptive with potentially devastating consequences. As a result, the Cybersecurity Enhancement Act of 2014 gave authority to the Director of the National Institute of Standards and Technology (NIST) to work with the private sector to develop a “voluntary, industry-led, consensus-based” set of cyber security standards and best practices for “critical infrastructure”. The year before, Executive Order 13636 was issued with the aim of improving critical infrastructure cyber security. In February 2013, the president also directed NIST to work with private stakeholders to develop a voluntary framework for reducing cyber risks. Yet attacks on the industrial control systems which operate and protect the majority of US critical infrastructure are increasing. Investors in critical national infrastructure (CNI) projects must consider the likelihood of a successful attack and be prepared for the impact it may have on the value of their assets.
There will be no panacea when it comes to infrastructure development in the US. Given the size of the country and the cost of renewing infrastructure networks, simply relying on PPP investment or hoping for increased investment on a local, state and federal level will never yield results. Instead, efforts should be made to marry different investment streams together “Based on international experience and a growing use of PPPs in the US, there is a growing awareness that PPPs are not a ‘solution’ to our infrastructure crisis, but they can create more capacity to get the work completed sooner, bring more private sector investment and innovation, ensure projects are completed on-time and on-budget, and provide long-term value for taxpayers,” says Mr Bonner. “The spate of recent developments at all levels of government seems likely to yield a more robust and sustainable PPP pipeline in the future”. Newer schemes such as the QPIB should complement existing policies such as the TIFIA. By embracing a number of different strands of financing, infrastructure in the US will be on much stronger footing.
There is a strong argument to be made for infrastructure development in the US. Given the state of the global economy and the position of the US within it, definitive action is necessary. Now is the time for a new and wide ranging infrastructure plan for the US, one which embraces both the public and private sectors, and helps to develop lasting economic growth. Historically, the US has prospered during periods of significant infrastructure development, going back through the 19th and 20th centuries. Undoubtedly, it can do so again; the country just needs a clear vision.
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