The challenge for aging infrastructure

Colorado bridge
Andrea Murad By Andrea Murad, CA Today

17 January 2018

President Trump has promised a total investment of $1tn for aging infrastructure upgrades. The country’s roads, railways, bridges, tunnels, airports, ports, energy and water systems aren’t fully equipped to handle the current and projected population, and devastating natural disasters are moving to the fore. Where will future infrastructure funding and materials come from?

Trump has recently changed course from his initial plan to leverage $200bn of federal dollars to encourage $800bn of private sector investment. While the administration’s infrastructure team is built around experts in public private partnerships (P3s), Trump has now stated that these partnerships don’t work.

Andrea Murad spoke with Klair White CA, Senior Vice President at EY Infrastructure Advisors LLC., Ryan Sweet, Director of Real-Time Economics at Moody's Analytics, and a state transportation agency public servant to provide contextual background to this growing issue.

Why is infrastructure investment so important and who has responsibility?

“If you have massive amounts of infrastructure spending, new industries would emerge and it would generate some bursts across business and new industries,” said Ryan.

Infrastructure investments can improve productivity for the US, and not investing when interest rates are at rock bottom is a missed opportunity.

You’ll see more states start to prioritize infrastructure spending because this will have long-run economic benefits.

Most infrastructure assets are maintained by a state, city or municipality rather than the federal government. Projects must meet federal regulations and receive limited federal funding, but state regulations and budgets drive these projects forward. Every state has unique regulations, along with budget and funding issues.

“Each state is different, but overall, you’ll see more states start to prioritize infrastructure spending because this will have long-run economic benefits,” said Ryan.

The projects are mostly funded through state and municipal bond issuances, or private activity bonds - user fees, special taxes or tolls provide the funding for these bonds. Caps on tax-exempt debt are based on state populations, and there’s an application process to access that debt. The creditworthiness of these bonds lies at the state, municipality or city, with the state or federal government acting as a backstop.

How would foreign materials or money affect US infrastructure plans?

“If you assume only the availability of US steel and concrete, the more limited supply will impact the assumptions made around delivery schedule and cost, and as such, the broader project structure,” said Klair. “If you introduce more flexibility into that supply chain through the availability of materials in greater volume and potentially also at a lower cost, it creates options for project acceleration and potentially enhanced cost-effectiveness.”

Despite the strong ‘Made in America’ mentality, using foreign materials would help projects finish on budget and schedule. Major international infrastructure firms have shown interest in investing in US infrastructure.

What are the real infrastructure needs?

State and local government agencies want to deliver on infrastructure projects because they promote economic health, but they may not meet the country’s needs in 20 years, without innovative upgrades and new technology.

On a more basic level, the country isn’t prepared for climate events impacting mobility, business operations and resilience. Repairs to retaining walls and levies are often reactive because weather is unpredictable.

Policymakers need to work alongside the private sector to break down the legislative and public perception barriers.

Trump signed an executive order on 15 August to streamline the permitting process and create a “one federal decision policy” (one lead federal agency will work with others to complete the permitting decisions and environmental reviews for a project). On the one hand, approvals for infrastructure needs will be sped up, but on the other, protections against climate change and sea-level rises have been rolled back.

Soon after the order, Houston was hit with over 50 inches of rainfall from Hurricane Harvey, Florida saw devastation from Hurricane Irma, and Puerto Rico is still reeling from the powerful Hurricane Maria. The damage is estimated at around $180bn (Harvey) and $100bn (Irma), but this number could change as floodwaters recede and rebuilding begins. Puerto Rico is facing the dire situation of rebuilding their electrical grid and washed out roads at a great cost.

Are American companies equipped for the challenge?

Despite Trump’s recent changes to exclude P3s from the infrastructure plan, there are benefits to these partnerships, as they provide private sector efficiencies, financing and fast delivery of product.

American companies are hesitant to participate in these projects because of the over-reliance on public funding and the lack of proper incentives. “Given the potential benefits of delivering large-scale infrastructure through a P3 model, as demonstrated by many major transportation projects, policymakers need to work alongside the private sector to break down the legislative and public perception barriers that are currently preventing these benefits from being realized,” said Klair.

Constructing an asset might take 20 years with federal appropriations or five to seven years with private financing; private sector firms don’t tend to offer fixed-priced contracts for projects with 20-year construction profiles.

While extended timelines can face greater risks from commodity prices, interest rates and inflation, the question of who will rebuild America for the future remains unanswered, for now.


About the author

Andrea Murad is a New York–based writer. Having worked on both Wall Street and Main Street, she now pursues her passion for words. She covers business and finance, and her work can be found on BBC Capital, Consumers Digest, Entrepreneur.comFOXBusiness.com, Global Finance and InstitutionalInvestor.com.

Topics

  • Business
  • North America

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