The Infrastructure Arms Race

Chris Heathcote, chief executive officer, Global Infrastructure Hub

Against the backdrop of the recent World Bank and International Monetary Fund Annual Meetings in Washington DC, the Global Infrastructure Hub (GI Hub) hosted a breakfast featuring Martin Klepper, former Executive Director of the US Department of Transportation’s Build America Bureau.

At this event and in discussions throughout the week, a key theme emerged: countries around the world are in a competitive sprint to establish leadership in today’s expanding global economy, and the US is losing that race thanks to its aging infrastructure and no clear plan for modernizing its networks.

While there is general acceptance that the US needs to step-up the pace to modernize its infrastructure, there is a fair amount of uncertainty about how to accomplish this.

The challenge

Thriving, efficient and reliable infrastructure is an economic necessity. Yet globally, infrastructure spending through to 2040 is forecast to come up $18trn short of the $97trn required to meet the world’s infrastructure needs, according to the GI Hub’s 2017 Global Infrastructure Outlook.

While all 50 countries evaluated in our report are facing a shortfall in spending, the US is the biggest culprit, with a $3.8trn investment deficit – 90% of which should be earmarked toward roads.

Two main reasons have emerged:

• Politically, a lack of focused attention has watered down efforts to advance infrastructure development. Although President Trump was elected as “the builder” and has proposed a $1trn investment in infrastructure, these plans are sliding down the agenda, behind issues such as tax reform and healthcare.

• Funding questions remain unanswered. In the current climate, it is politically untenable to raise federal tax dollars for infrastructure investment, so President Trump’s early plans involved P3s. But there are doubts about whether the Trump administration believes in the value of P3s. It’s clear the US needs to explore a variety of funding options.

The path forward

In a global economy, it serves the US well to consider the infrastructure development and funding options that have been deployed in countries like China, Australia and Canada, where federal governments have become more active as lenders and in influencing and incentivizing procurement.

China is estimated to account for 30% of global infrastructure spending to 2040, a total of $26trn. And yet it barely has any spending shortfall.

Key to China’s success has been the China Development Bank, which invests considerably more than most federal banks – exemplifying a centralized approach to overseeing infrastructure priorities.

The US can start to dig itself out of its “last place” status by taking three key steps:

• Encourage revenue-generating P3s through user-pays models. Roads are the most critical piece of infrastructure requiring attention. If the US can mirror Canada’s approach by linking highway tolls with traffic trends, it can encourage more travel in off-peak periods, spreading out congestion and ultimately achieving more efficient use of the asset. That may seem like a tall order, but when you consider that the most effective US examples of infrastructure – energy and telecommunications – both use a similar user-pays model, the approach starts to make sense.

• Expand the concept of the federal Build America Bureau, a centralized financing and expertise resource, by creating additional centers of excellence at the state level. The Build America Bureau was established just over a year ago as the largest infrastructure bank in North America, helping both public and private organizations identify development financing sources and get approved for credit in a one-stop shop.

But with such variance in needs from state-to-state, clearly there’s a role for state-level centers of excellence to complement the federal bureau.

• Create a long-term infrastructure plan – independent from the political process – to guide future progress. In Australia, a 15-year infrastructure plan was developed by an independent body containing 78 specific recommendations for projects to prioritize and funding pathways. This guides infrastructure prioritization at the federal level and is a way of determining – independently – where infrastructure spending most makes sense based on today’s needs.

The Rust Belt’s transformation needs to be considered. Where and in what industries is the US’s best potential for future growth? What infrastructure is needed to enable that growth?

What is the most effective means for doing that? Documenting a long-term infrastructure plan based on these answers is vital for the US to maintain its competitiveness.

Creating the right infrastructure model for the US is not a simple task, nor will rapid solutions be possible. But stalling in search of the perfect approach is not a viable option. No single nation has solved all its infrastructure challenges.

With the US currently coming in dead last, demonstrating the biggest gap between future infrastructure need and projected spend, it’s time for immediate action to reverse its failing trajectory. As the world’s biggest economy, the US can be a leader – if it wants to be.