Companies & Industries

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

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. According to Robert Poole of Reason Foundation, in its initial year of operation back in 1993, German Air Navigation Services reduced air traffic control delays by 25%.)

Another option is privatization. In his 2006 book, Street Smart: Competition, Entrepreneurship and the Future of Roads, former World Bank transportation economist Gabriel Roth, now a research fellow at The Independent Institute, discusses the "increasing interest in the United States and elsewhere in road privatization and alternative financing." Many such privately built and/or maintained highways already exist, from State Road (SR) 91 in Orange County, Calif., to the Dulles Greenway in Loudon County, Va., just west of Washington, DC. In April of this year, Pennsylvania Governor Ed Rendell announced the privatization of the Pennsylvania Turnpike. Chicago's Midway Airport may also be privatized. As public money becomes scarce, the trend is likely to continue.

A third option, of course, is to use some of the revenues from increased gasoline taxes, which I proposed in my energy policy letter, to finance infrastructure expansion and improvement. These are just some of the possible sources of revenue.

And just like energy independence (BusinessWeek.com, 9/28/08), infrastructure modernization and expansion provide the U.S. with a win-win opportunity: building a faster, better, more efficient, cleaner, more muscular, safer America will create jobs for both skilled and unskilled workers.

Let me be clear: I'm not talking about a "jobs program." Jobs programs, as we know them today, are political smoke and mirrors. I'm talking about a Rebuild America program that will require the talent, energy, and knowhow of millions of Americans and thousands of U.S. companies.

the national bank of infrastructure

During the Depression, when many of our bridges were built, the Works Progress Administration, better known as the WPA, employed as many as 3.3 million people. It built roads, railroad bridges, public utilities, and government buildings. And yes, it also engaged in countless make-work projects. Absent another depression, we don't need another WPA. But we do need a vehicle to organize the effort and move it forward intelligently.

What we also need is a national commitment, starting at the top.

Several members of Congress, Democrats and Republicans alike, have proposed creating a National Infrastructure Bank, an independent U.S. government entity similar in many respects to the World Bank. The NIB would be "tasked with evaluating and financing capacity-building infrastructure projects of substantial regional and national significance" and, for those deemed worthwhile, helping to arrange appropriate financing, ranging from direct subsidies and loan guarantees to long-term bond issues.

Overall, this would seem a wise idea, so long as the bank is adequately funded and doesn't become another vehicle for parceling out pork or become a slush fund for making sure that every congressional district "gets a piece of the action," as was the case with the hazardous waste "Superfund."

While the proposed NIB would not eliminate congressional earmarks that take place through the appropriations process, it could bring an independent outlook and much-needed discipline—a cost-benefit perspective—to the vetting process for major infrastructure projects. That would be a plus.

There is also the NIMBY (Not In My Backyard) hurdle to overcome. North Carolina, for instance, has proposed building a new Atlantic port about 30 miles south of the city of Wilmington. Local activists, however, using the slogan "No Port in Southport," have promised to kill the initiative. While local quality of life concerns are legitimate, Americans need to think as well about our country's needs. If endless delays mean its takes decades to build anything anywhere—new ports, refineries, nuclear power plants, wind turbine, electricity transmission lines—how will we maintain a competitive advantage and successfully compete in the global economy?

the lesson of india

Infrastructure is something most Americans take for granted until things go sour: high concentrations of pollutants show up in our drinking water; the antiquated air traffic control system burps, tying up air traffic around Chicago or up and down the East Coast; a highway bridge collapses; a portion of California finds itself in darkness during a blackout. In 2005, for example, every motorist "paid" an estimated $710 in lost time and extra fuel consumption because of traffic congestion, Everett Ehrlich and Felix Rohatyn noted recently in the New York Review of Books. They also noted that the country as a whole lost 1.8 million hours to flight delays in 2007. This hurts.

If you need a further lesson on the importance of infrastructure, look at India. Though India has virtually all of the necessary ingredients to become a manufacturing superpower—a huge low-cost labor force anxious to work, a highly educated English-speaking middle class, and extraordinary brainpower—its manufacturing sector is hobbled at every turn by the country's third-world transportation system and creaking bureaucracy. Companies have difficulty building the plants they need because it's a challenge to get building materials to the job site.

After a plant is built, they have trouble getting the raw materials they need for manufacturing to the plant. And they may have trouble getting adequate electricity. When they actually start manufacturing, they have problems getting the goods to market, either because the roads are inadequate or because the antiquated rules regarding the transport of goods across state borders can bring the process to a halt. It is not uncommon for a 300-mile trip to take three days because of red tape. And when they finally get the goods to one of the country's too few ports, there are more delays because the ports are overcrowded.

china: let 100 airports bloom

China is very different. The Chinese know how important it is to get from here to there. As a consequence, the country is in the midst of an infrastructure building boom, adding nearly 100 airports and 186,000 miles of roads, and investing a reported $200 billion in its railroads, according to Ehrlich and Rohatyn.

We will not be able to compete in the future if our infrastructure is inadequate. In the world of globality, where U.S. companies are competing with everyone from everywhere for everything, we need to claim every advantage within our grasp.

America's infrastructure can and should be second to none. But roads, bridges, ports, air traffic systems, and electricity production and distribution systems don't build and renew themselves. Washington must acknowledge their importance and set the renewal process in motion. We can't wait until our other problems are solved. Katrina, after all, was a catastrophic infrastructure failure (and incredibly expensive for the economy), as well as a political and management failure.

The cost—in lost productivity, declining competitiveness, and eroding quality of life—of not making this an Administration priority will be much greater to our country than the cost of doing what is needed and starting right away. Like many other problems, the longer we wait to address them, the more they will ultimately cost.

I apologize if I appear presumptuous, but perhaps a good place to start would be to use your inaugural address to announce a moratorium on earmarks and pork and redirect those funds to beef—that is, beefing up America's infrastructure. That will get Capitol Hill's attention. Then, maybe, our country can move forward intelligently.


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