Posting in Finance
The United States lags emerging nations in transportation, roadway, water and other infrastructure projects. A new report offers ideas for changing the investment model.
Earlier this week, I listened in on a seminar about trends in U.S. infrastructure investments, in particular investments in transportation project. The discussion centered on some research from the Urban Land Institute and Ernst & Young that shows (as you might expect) that the United States is trailing several emerging economies -- China, India and Brazil. That probably doesn't surprise you at all, given all the fighting going on about budget deficits and depressed real estate values and such. It didn't surprise me. But here is what we are up against:
- China plans to spend $1 trillion (yes, with a "t") on things including the 10,000-mile high-speed rail network planned by 2020. New airports, ports and subways are also on the planning boards. This is to be expected from the world's fastest emerging economy.
- India also has roughly the same number allocated: what makes its plans particularly interesting, according to the report, is the fact that the country is relying heavily on private money to help with this build out. Part of me is really excited by that idea but then I started thinking about all the sports stadium projects that "private" money has inspired, which winds up being shouldered by taxpayers.There's one really great example of that here in my own backyard in the form of the new Meadowlands sports stadium. But I digress.
- Brazil has an estimated $900 billion allocated for road, transit and water projects; it is being inspired by its preparation for both the World Cup and the Summer Olympics
- Even in the United Kingdom, which you could argue has been hurting just as much economically as the United States, has committed $326 billion to national infrastructure projects.
Meanwhile, infrastructure spending in the United States peaked as a share of the gross domestic product at 3.1 percent early in the 1960s. By 2007, it was 2.4 percent of GDP.
Let me say for the record that I know there is a big difference between the sort of spending that an established economy like the United States should be doing and what an emerging economy ala China, India or Brazil might be expected to invest. But the fact is, there is a lot of aging infrastructure in the United States and the nation doesn't seem inclined to do much about it. The mentality here is to cut as much spending as possible. Here's an observation from Howard Roth, the Global Real Estate Leader for Ernst & Young:
"For those who have read our infrastructure reports over recent years, one consistent finding is that the U.S. seriously lags behind the rest of the world in addressing its infrastructure issues. The U.S. is facing federal, state and municipal budget deficits, lacks any type of comprehensive national policy or the political will to develop a long-term approach to funding the significant maintenance needs of aging U.S. infrastructure, much less the modernization and greenfield development of critically needed new projects. We need to refocus our priorities; streamline the procurement process, attract private capital more efficiently, strategically invest in projects with national merit, and regain our stature as a global competitor. We need to take a page out of the playbooks of several nations around the world highlighted in our report, or we face the risk of serious deterioration of our country's economic and social well-being.
Constructively speaking, the hefty Urban Land Institute report, "Infrastructure 2011: A Strategic Priority," offers a number of recommendations for the United States to get out of its infrastructure mess. Here are 6 things that the report suggests would help address the problem.
- Prioritize repairs and maintenance over big-ticket capital projects (even though they don't make for sexy headlines). Pooling regional resources and encouraging help from the private sector could be effective. One example cited on the seminar this week was Envision Utah, which is pooling resources of more than 100 communities across the state.
- Develop a national strategy, prioritizing the things that make sense from a national standpoint. (Can you imagine the lobbying?)
- Remember to think urban. The reality is that the United States is increasingly metropolitan country with something like 85 percent of our population -- and our GDP -- focused there. Accordingly, that's where the most investment should be focused.
- Ensure long-term funding, which will in turn perk up the idea of private investments. The way money is currently allocated -- on an annual basis -- doesn't provide much confidence for private investors.
- Develop new funding models including (gasp) user fees for the people actually use the system and (gasp) local taxes. Another approach would be to establish infrastructure financing models.
- Plan ahead for maintenance. In other words, new projects shouldn't just account for the capital costs, they need to properly plan for the long-term maintenance.
It took the United States years to get to this point with respect to its infrastructure and it will take years to fix the problem. Let's just hope that it doesn't take another emergency the size of Hurricane Katrina to set the wheels in motion.
May 17, 2011
Like one man said earlyer in the conversation is we need to build to last like most uropean countrys do. Yes that means less work for contractores but it seems to be putting us more in deat to deal with such buessnes as before the war. If we wear not speanding billions on this war of gread and revenge we would be able to keep the contractors in buessnes like before so now we need to look at a salution on how we can make a road last 20 30 years with little to no maitenents. Bridgess as well need new technoligy to ride on its infrastructers
Why switch 'units' in the middle of the comparison? All the investments for foreign countries are given in US dollars, but when it comes to the US, the investments are given in percent of GDP. How much was the US GDP? The article doesn't say. And without that it is impossible make the comparison. Assuming a 2007 GDP of $14,062 billion (the best info I could quickly find, but its in 2011 dollars) then 2.4% would be $337 billion. That's about the same as the numbers given for the UK, but are those UK numbers are for just one year or spread over a decade? The article does not say. And notice that the numbers for China, India, and Brazil are "planned" expenditures, which may or may not actually come about, while for the US the numbers are for the actual amount spent -- in 2007, before all the recent "stimulus" spending. Why not compare more recent numbers for the US? The article doesn't say. How much did China, India, and Brazil spend in 2007? The article doesn't say. Persuasive articles are more persuasive if they are based on facts, not just emotions. "It took the United States years to get to this point with respect to its infrastructure [...]" Which is where? Infinitely beyond China, India, and Brazil.
1) Stop all the freak'n wasted money being spent on Imperial wars. 2) Stop sending money to Afghanistan, Iraq, Israel, etc. to build roads in THEIR countries when we do not spend the money here ! 3) As mentioned before 'our' road construction standard is 19th century. Build them to the standard required for the Autobahn !!
Good article. You touched on several really pervasive problems in US infrastructure and I would add this perspective from one the country's largest infrastructure budget items - education: 1. Planning needs to be professional. Most institutions simply don't have the professional managerial experience (college adminstrations are home grown in the institutions and have little background in professional management) or the skills to initiate or supervise educational infrastructure expenditures. For example, the local multi-million dollar state college jumped on the high tech band wagon (though they were technically clueless themselves) with a high tech center which was designed with built-in hard wired computer systems that were obsolete before the paint dried - and with no efficient way of replacing them without major refits. Now three years old, it's and embarrassment to anyone with an IT background. 2. Maintenance - Here in FL our colleges and universities have been empire building for the last 30 years. Part of the funding comes from egotistical alumni who want their names on new buildings and facilities. Great for capital investments, but unfortunately there is no money for operating maintenance and these structures are falling apart as we speak - many of with sick building syndromes and health threats to their occupants. Or, they are being maintained by private contractors which have might have questionable relationships with various local politicians. 3. In spite of all the recent negative political hype put on online learning institutions (more about corrupt educational loans), more and more performance results show that there is no way that traditional bricks and mortar institutions are going to compete with online education for the bulk of the population on a cost efficiency basis. If state educational institutions - and their faculties don't make the transition to the best and most effective online education techniques and technologies, they are going to find themselves in even an deeper economic hole when stimulus money runs out and they are competing head on with the most efficient cost education systems - which are and will continue to be online. The early signs of these trends are everywhere if one just looks into your local education system. 4. The excellent comment above focused on infrastructure fraud and incompetency, but the fraud and incompetency (cause by political cronyism) problem is symptomatic through out our political system. Until we develop a democracy that has stripped financial incentives from the election process and until voters are licensed and tested for knowledge of issues and candidates, we can expect a continuation of the corporate/political brothel that has manipulated this country's elections and run this country for at least 30 years or longer.
Nothing will be done on infrastructure this year, next year, the year thereafter etc. It is too expensive is always the right reason. Nothing will get done.
You want to fix the USs infrastructure problems? Fix just a few flaws of the common flaws in the US governments handling of infrastructure. Here are just a few examples from my favorite project, Bostons Big Dig. A site supervisor coordinated the theft of several large steel beams removed from the old Central Artery and sold them for over $2 million. What did he get when he got caught? No jail time. No probation. He did not have to return the money, but the state seized his 401k worth $100,000. Bechtel/Parsons Brinckerhoff, a lead contractor on the project, bought and resold the same North End lot of land being used for equipment storage 7 times costing the project a net loss of over $20 million while earning huge profits for the real estate company handling the sales. Over 22,000 faulty lights installed in the various tunnels all have to be inspected and temporarily repaired because a faulty design caused the mounts to start rotting and dropping off the ceiling after just 4 years. For safety reasons they will all have to be replaced within the next 24 months. The tunnels had over 2,000 leaks when opened causing flooding issues that forced the road to close a few times. There are still over 200 leaks that have not yet been repaired that cost millions a year just to pump the water out. Over 1,000 feet of safety rail within the tunnels, designed to protect tunnel workers walking on catwalks, was poorly constructed contributing to the death of 6 people since the tunnel opened. All of it must be replaced. 2 sections of concrete roof panels collapsed and killed an innocent woman because an unapproved design was used to suspend them inside the tunnel. Thousands of panels had to be removed and reattached. All of this mayhem and death, but no one has gone to jail. On a $14 billion + project, the price tag is still climbing with all of the repairs, that was almost a decade late in completion, B/P B and other contractors have paid less than $500,000,000 in combined fines and they still get hundreds of millions of dollars in state transportation contracts each year.
FOR THE US TO CONTINUE ITS GLOBAL LEADERSHIP, WE MUST INVEST IN OUR INFRASTRUCTURE. WE NEED TO INVEST SOME OF THE STIMULUS FUNDS, IN COMBINATION WITH A JOINT VENTURE OF GOVERNMENT AND PRIVATE SECTOR INVESTMENTS, AND USED THE COMBINED FUNDING (i, e, it will Cost up to $300 Billion), TO BUILD AN INTELLIGENT INFRASTRUCTURE SERVICES FOR: ENERGY AND TRANSPORTATION SYSTEMS, E-HEALTHCARE, E-GOVERNMENT, E-COMMERCE, E-EDUCATION, LAW ENFORCEMENT, BIO-SURVEILLANCE, SOCIAL NETWORKING, ENTERTAINMENT, ETC. PLEASE SEE: www.21stcenturyinfrastructure.blogspot.com www.21stcenturycommunications.blogspot.com www.globalhealthcarenetwork.blogspot.com GADEMA K. QUOQUOI PRESIDENT & CEO COMPULINE INTERNATIONAL, INC.
Since China is doing so well, let's first adopt their policy of if you don't work you don't eat. Then there would be plenty of money that was formerly spent on entitlements.
...with taxpayer & consumers in mind, we'd agree with this. Unfortunately, most are conceived for the benefit of others than the best interest of citizens in general: Politicians that like seeing their names attached to big, expensive things Construction companies, and their vendors The bureaucracies that manage the projects Public sector unions Private sector unions As mentioned above, the result is typically ill-conceived projects over-budget and under-quality. That's great for the above special interests, but bad for the citizens who are then stuck with a substandard project and ongoing expense. The biggest flaw with infrastructure projects in this country is the "fund-it-and-forget-it" nature of project funding. Projects are sold as costing a certain amount, with little to no consideration made towards maintenance and deprecation costs. So we build stuff and let it deteriorate until it's a crisis again. Successful private industry doesn't do this; they consider maintenance and deprecation up-front as part of the total cost of ownership. It shouldn't be an expensive surprise to anyone that stuff needs to be maintained and sooner or later wears out.
Getting the private sector involved in infrastructure renewl would be the best way to relieve the burden on the government
Not many people would argue that the U.S. needs more and better-targeted infrastructure spending, but this report (or at least the posted summary) in an attempt to be persuasive uses the same tactic many used-car salespeople do: comparing large, lump sums for the competitors (10 year funding plans overseas) with low, low monthly payments (or percentage of GDP) for the people they're "selling" to. The numbers all might add up, but it has the effect of making it next to impossible to actually compare what's going on.
Part of the $1 trillion to be spent in China will be spent on rebuilding thousands of miles of faulty high speed rail that is already failing because of shoddy work. Their HSR trains are already running slower because of bad construction methods. See the "China's high-speed rail: speed at expense of safety" thread on this site. They have already spent over $375 billion on the shoddy HSR infrastructure they have now.
Build to last. On many European highway projects the contractors must provide a 30 year or longer guarantee on the work. Translation = free repairs for shoddy work so the contractors work harder to do a good job. Europeans also tend to have stricter cost controls with real penalties for over runs and delays. Even with the higher standards most European highway projects still cost about the same as a comparable US project, but last substantially longer with less maintenance.
If we cut welfare entirely we would still not have even close to enough to fund infrastructure. And we'd have to spend more on police and prisons to boot (far more expensive than welfare)! Having unemployed and poor people is a cost of capitalism. You can't have one without the other. There is a cost to having poverty and unemployment, if you don't pay for it up front, you pay for it later (and usually it costs you more). If we want to be able to make crap-loads of money in a free market, we have to accept that there will be a cost to having the necessary underclass. If we privatize that cost, it will mean more hidden and higher costs to the individual.
John, you are so on point with your analysis. I'm not trying to plug my are of study, here, but all that you mentioned about "including the costs of depreciation in the total cost" is taught in most public administration/public policy schools across the nation. One of the problems with our systems of government is -- I hate to say this -- the department heads, commissioners and directors are hired from the private sector. They have no or very little PUBLIC sector finance training. If you look at France and Germany, many of their departmental leaders -- it is my understanding -- MUST have public policy/budget training or must have graduated from a good public policy school before being nominated or hired. Naturally, this does not gaurantee 100% success, but it is a good place to start because most people concerned with policy are clueless when it comes to public budgetary planning.
But the fact is that the Interstate system, and the road ways work for us. There are always ridiculous projects that garner ire of citizens, but the fact is that the net benefit is far greater than the "cost" of stupid bridges to nowhere. With a privatized transit system, there would probably be far fewer dumb projects, but also far less construction in general, and anything that isn't immediately profitable will be left to decay even if it results in reduced economic growth and increased crime and disenfranchisement of citizens as a result. If we use our bodies as an analogy, the only way to stop producing waste is to stop eating. It is a cost-benefit analysis. So far there are few if any proven examples of privately funded infrastructure to trust that this system would be markedly better in every way than the current government-funded system.
Where is the profit in private investment in infrastructure? Infrastructure pays for everyone to get where they need to go, and to help make sure goods can get to market quickly, efficiently and inexpensively. There are always boondoggles with government projects, but the tradeoff is that you get more built. All you need is a net improvement from the expense. With private investment, there is a greater fear of failure and greater aversion to risk, so you are probably likely to get less investment in general, or the cost of transit and transport becomes too expensive for lower income individuals and small businesses.
This just sound to easy. There are just to many golf outings in highway construction and too much campaign money to be spread around.
Instead of turning to crime, the people on welfare could get jobs, add value to our economy, and raise everyone's standard of living -- which is how capitalism actually works. Or do you really believe that everyone that is currently on welfare is a criminal?
You are assuming that no people on welfare are criminals because they live on government money and have no need to supplement it?
...but then again, schools teach all kinds of lessons that are quickly abandoned in the "real world". And as educated as the doers in the bureaucracy might be, the final decision makers, the politicians, usually are not. It's a lot easier to get funding for a project if you can sell it for $100-million (the cost of just building it) versus $200-million. (the cost of building it, maintaining it for the expected life, and then preparing to replace it) The $100-million is all it cost to get your name on it and make the locals happy. What happens when it wears out will be someone else's problem.
Yes, the interstate highway system was a tremendous success. Once and a while, the government does get something mostly right. But do remember, the interstate highway system was conceived primarily not as a system to promote interstate commerce and make it easier to go on vacation, but as a military preparation for the Cold War as a system to quickly deploy military assets domestically, and to have a nation-wide network of ready-made places to land aircraft. (Eisenhower was tremendously impressed with the German autobahn system, and how it aided Germany's military deployments during WWII) If it were not for the impetus of the paranoia of post WWII America, it would be interesting to see how the Interstate Highway System would have evolved otherwise. And again, why is the system regarded in such a state of disrepair now? For the reasons I already mentioned above; governments inability to wisely allocate resources. Maintaining old highways isn't as sexy as building new ones. There's little status in having a repaved road named after you. I don't make these points to argue that highways would necessarily be better built and maintained as private enterprises. The reality is that often what is needed or best in terms of infrastructure is not economically viable as stand-alone private ventures. I just make these observations to point out that if we want a true efficient, sustainable, and worthwhile public "investments", we as citizens need to demand a higher standard. We can't afford "business as usual" anymore.
Technology@, you are right, but I think most government agencies need to partake in better training on how to utilize and plan public budgets. There is an art and science to it that is really fascinating. I wish more people would study public budgetary finance in college.