Challenge for the Next President: Infrastructure

In the second of four articles, Boston Consulting Group's Harold L. Sirkin argues that the next President must weigh the costs of infrastructure investment against the costs of inaction

An aerial view shows the collapsed I-35W bridge on August 4, 2007 in Minneapolis, Minnesota. Five people were confirmed dead and 8 others missing following the August 1 bridge collapse during rush hour. MANDEL NGAN/AFP/Getty Images

By Harold L. Sirkin

Dear Senators McCain and Obama:

One of the great advantages the U.S. has enjoyed over the years, until recently at least, has been our extraordinary infrastructure: more than 500 primary airports; some 3.9 million miles of public roads, including nearly 43,000 miles of interstate highway; 120,000 miles of major rail; 2 million miles of oil and natural gas pipeline; and more than 300 ports, ranging from those at both coasts to ones at the Gulf of Mexico to those of the Great Lakes and other inland waterways.

These facilities, which handle more than 4.7 trillion passenger miles of travel and 3.7 trillion ton miles of domestic freight each year, have given the American people the mobility they enjoy and have enabled commerce to flourish. But we've been shortchanging ourselves by not keeping them up, a process that should be ongoing and constant. And we're starting to pay the price.

We all know it will be important for the next President to set ambitious goals for his Administration. It will also be important to have an implementation strategy to help us get there from here.

As the financial headlines remind us daily, the next President will have to answer two important questions: How much will his proposals cost, and where will we get the money? Given the obligations Washington just assumed to stem the financial meltdown and with the economy at a standstill and jobs being lost, it will be critical to weigh every decision against the cost, the availability of funds, and the probable payoff.

Using this cost-benefit lens, let's discuss America's sadly deteriorating infrastructure.

the $1.6 trillion question

Every budget every year devotes tens of billions of dollars to infrastructure projects and improvements. But we're not spending enough. And sadly, as was acknowledged during the debates, much of what we do spend gets wasted on local pork-barrel projects with no national or even regional significance.

Most of the assets we categorize as infrastructure are involved in some way in getting goods and people from here to there: roads, bridges, ports, waterways, rail, transit systems, airports, air traffic control, and so forth. Other things legitimately categorized as infrastructure include the electric power grid, dams, drinking water systems, and wastewater and hazardous waste facilities.

The most widely cited estimate of the cost of updating America's infrastructure was produced by the American Society of Civil Engineers (ASCE). ASCE estimates that it will take $1.6 trillion over the next five years to get us where we need to be. There are two problems with the ASCE estimate, however. First, the organization is not a disinterested third party. Its members have a vested interest in infrastructure spending because some portion of every dollar spent goes directly or indirectly into their pockets. The second problem is that the estimate includes items that don't belong in an infrastructure budget, such as public parks and recreation ($3.3 billion over five years), and schools ($268 billion).

So for argument's sake, let's say we need $1.5 trillion over five years.

Expanding and modernizing America's infrastructure should be seen as an investment, not as consumption. Infrastructure expenditures we make today are intended to work for us for 30 to 100 years. Investing in infrastructure creates value for the economy that increases our competitiveness.

needed: a mix of revenue sources

And new highways, ports, airports, bridges and other public facilities still need to be paid for in this tough economy. Where will this money come from?

A variety of options are available, either "pay-as-you-go" or long-term financing such as bonds or private ownership. We will certainly need to use a mix of all of these.

First, there are user fees, such as tolls that we pay to use certain highways and bridges. Or fees to use air traffic control systems: a host of countries including Australia, Canada, Germany, Great Britain, Latvia, and New Zealand have shifted the burden from the taxpayers to direct users, "commercializing" their operations. (There could be other benefits as well.