Report Examines Infrastructure Funding Woes, Development And Management Challenges

The United States’ relatively low investment in virtually all aspects of mobility-related infrastructure airports, public transit, railway systems, roads

The United States’ relatively low investment in virtually all aspects of mobility-related infrastructure Û airports, public transit, railway systems, roads and bridges Û is an emerging crisis that will compromise the ability of the nation’s cities to compete globally, according to a new report co-published by the Urban Land Institute and Ernst & Young.

Infrastructure 2007: A Global Perspective offers a comprehensive look at the status of current and planned infrastructure investment and development in a variety of categories in countries worldwide, with a particular focus on the U.S., China, Japan, India, and Europe. The first of its kind, the report discusses the evolving infrastructure market, including private and combined public-private systems for funding, construction, operations and management.

America is more of a follower and no longer a world leader when it comes to infrastructure, the report states. Other countries marshal vanguard strategies and provide the contemporary lessons for developing best practices in public/private finance, intermodal transport, congestion pricing and high- speed rail÷Too often (in the U.S.), projects focus on restoration rather than rethinking the model and finding possible efficiencies÷There is a tendency to invest in the infrastructure we have instead of the infrastructure we will need.

Varied attitudes and approaches to infrastructure investment are reflected in the report data, such as: 1) Japan has 2,000 kilometers of high-speed rail and is building about 300 more kilometers by 2020; China is planning to build more than 2,500 kilometers of high-speed rail by 2020; the U.S. has about 300 kilometers, but is building none. 2) As of 2000, 750-plus cars per 1,000 people were operated in the U.S.; the U.K. tallied just over 500 cars per 1,000 people; in China, fewer than 50 cars per 1,000 were noted, although this number is rising. 3) Two of the 10 most expensive, privately funded infrastructure projects worldwide are in France; the third most expensive is in the U.S.; none are in China.

Released recently at ULI’s Spring Council Forum in Chicago, the report was presented by ULI Vice Chairman Dale Ann Reiss, global director of real estate at Ernst & Young in New York City. According to Reiss, the private sector is going to play a significant role in what she predicts will be a global movement to build and modernize the world’s infrastructure. Anticipating a fundamental shift in the current business model, she observes, One thing in this report that is crystal clear to a [Milton] Friedmanian economist like me is that the private sector Û by virtue of both the capital it controls and the skill sets it exhibits Û is going to play an increasingly important role in the effective and efficient development of infrastructure here in the U.S. and abroad over the next 50 years. Public-private partnerships are here to stay and may well be the only viable way for governments to reach their infrastructure development goals.

Numerous worldwide trends and issues are discussed in the report, including:

Infrastructure as a competitive imperative

  • Mature economies with aging infrastructure networks face gargantuan bills for deferred maintenance on roads, water systems, dams and electric grids. Retooling costs more than many governments are willing to pay.
  • China boldly builds new infrastructure to support future generations. Spurred by a growing economy, India tries to keep pace and replace third-world transport systems with state-of-the art networks.
  • Australia, the United Kingdom, other countries in Western Europe and Canada are far ahead of the U.S. in using private financing structures to fund improvements. Eastern Europe, still reeling from communist neglect, requires a major overhaul.
  • In America, a yawning budget gap swallows initiatives to fund maintenance. Prevalent sprawl, poor planning, and car dependence pose ever greater challenges in meeting future needs. Retrofits and changing public behavior are wrenchingly difficult.

Expansion of infrastructure privatization

  • Infrastructure emerges as a new asset class for investors, with massive needs attracting large pools of private capital; double-digit returns are sought, but high single-digit returns are more likely, particularly for mature assets.
  • Various forms of public-private partnerships allow governments to retain control, transfer risk, and gain efficiencies from private operators.
  • In Europe, the stage is set for secondary markets wherein early-in investment banks sell holdings to longer-term pension funds that gain confidence in consistent track records for infrastructure investment returns.
  • India tries to lure private investors; meanwhile China is the only country with the luxury of relying on its booming economic engine to directly fund vast infrastructure development.

U.S.-specific issues and trends

  • Public skittishness will persist regarding turning over public franchises to for-profit operators.
  • Homeland security worries will hamstring U.S. airport privatizations, because the most tested operators have off-shore pedigrees, raising a red flag for security officials.
  • Reluctance to raise the federal gas tax threatens the viability of the Highway Trust Fund, now on course for insolvency by 2009. Adjusted for inflation, the tax has only one-half the purchasing power of 1965, undercutting federal contributions to highway repair and construction. Local sales taxes, property taxes have nowhere to go but up to help fill the gap.
  • Most new U.S. highways will be constructed as toll roads; states will finance them through bond issues and private concessions.
  • Congestion pricing lanes will gain momentum on urban highways, but congestion cordons or zones will have extremely limited use.
  • Emerging technologies, such as satellite tracking systems could be used to charge drivers based on miles traveled on specific roads; but Big Brother hang-ups could impede widespread use.
  • States may consider tolled truck corridors to facilitate movement of goods, as well as expanding freight rail corridors.

Included in the report is a ULI survey of 30 state transportation planning directors that reinforces the sobering outlook for U.S. infrastructure systems. Eighty-three percent of respondents said that the nation’s transportation infrastructure is not capable of meeting the nation’s needs over the next 10 years. They warned that 97 percent of roads, bridges and tunnels and 88 percent of transit/rail systems will require at least moderate improvement in the years ahead. An estimated $185 billion in additional funding will be required for road systems over the next five years alone, the report notes, stating, The state of deferred maintenance is so gargantuan nobody knows where to begin÷States have been putting off these issues to fund other needs÷People will still use roads until they can’t be used, and as long as the roads work, they can put it off.

The report points to privatization, already widely used in Europe and Australia, as gaining traction in the U.S., particularly in the construction, management and operation of toll roads, bridges and tunnels. Investment funds, sponsored by global investment banks, private equity firms, and institutional money managers are becoming a rapidly expanding source of private funding. The global investment pipeline, flush with cash, eagerly shifts some flows to the U.S. as Americans begin to realize the scope of future infrastructure requirements and the size of funding shortfalls, the report says, noting that 28 states have passed legislation enabling private market infrastructure investment. Yet, skepticism over how much control should be shifted to the private sector to date has kept private investment in check, the report notes. For instance, the survey of transportation planners found that while 37 percent predicted privatization would be a likely source of future funding, 44 percent said it would be unlikely. Seventy-three percent predicted higher user fees as a funding source, and 63 percent predicted higher taxes.

Solving U.S. mobility problems will require more than a greater commitment to infrastructure repair and construction, the report asserts. In addition to revamping funding mechanisms for construction and operations, long-term solutions must include rethinking land planning models so they are far less auto-dependent and offer multiple options for getting from one place to another. If driving continues to be the only practical transportation option in many metropolitan areas, no amount of infrastructure investment will be adequate, the report contends.

If infrastructure expenditures are comprehensively planned and integrated with regional land use, the lasting economic benefits can be enormous, propelling the nation’s growth for generations, the report affirms. The federal government, working with regions and states, will need to develop a clear vision for policy and integrate programs that link costs to use, and which drive efficiencies. Silos must be broken down between multiple layers of state and local road departments, transit agencies, planning boards and housing authorities÷It’s no coincidence that today’s dominant cities, prospering along global economic pathways, feature sophisticated and integrated infrastructure with multiple modes of transit to accommodate high volumes of activity and concentrated populations. Their infrastructure creates a competitive advantage÷The country needs a new model for how it plans and pays for infrastructure, including how it plans its communities. Û