Crumbling Infrastructure Driving Demand for Talent: Part 1
Regardless of who is sitting in the oval office next year, the federal government is likely going to be forced to spend billions to rebuild and improve the nation’s decaying infrastructure. In fact, the American Society of Civil Engineers forecasts that $1.6 trillion needs to be invested in U.S. infrastructure over the next five years. The country needs to wake up to the dire state of its infrastructure, according a new report co-published by the Urban Land Institute and Ernst & Young. “The status quo increasingly looks like a precarious option — relying on existing networks and systems will only hamstring future growth and compromise sustainability. This country simply cannot afford to keep treating infrastructure as an afterthought,” the report states.
The old ways of financing and constructing public facilities through bonds and taxes, however, just aren’t equal to the task. Increasingly, investors and politicians alike see privatization as a viable alternative. Now, a number of firms are looking to capitalize on opportunities in infrastructure. Amid the trend, executive search firm, A.E. Feldman, says infrastructure finance jobs are opening up for candidates with backgrounds in investment banking as well as experience in analyzing and executing structured financings. The most sought after candidates are those with experience in infrastructure transactions and environmental engineering.
Decaying Infrastructure
The Federal Transit Administration says $21.8 billion is needed annually over the next 20 years to maintain and improve the operational capacity of transit systems. The Federal Highway Administration says $131.7 billion and $9.4 billion is needed respectively every year over the next 20 years to repair deficient roads and bridges.
The U.S. needs to overhaul its outdated regional infrastructure planning process and create a viable federal framework, or face compromising its ability to compete in a global marketplace, according to the Urban Land Institute and Ernst & Young.
“Unfortunately, the infrastructure debate in this country only moves forward when catastrophic examples occur of the state of our bridges, roads, airports and water systems,” said Mike Lucki, Head of Ernst & Young’s Global Infrastructure Services Group. “If we are going to address this issue and be in a position to challenge rampant economies such as China over the next few decades, we have to take a much more considered and holistic approach and not wait for another structure to collapse. We need to create a mindset to have the will to build,” Lucki adds.
The U.S. has at least a $170 billion annual funding gap in addition to its outmoded land use and infrastructure models, according to the Urban Land Institute and Ernst & Young. Making matters worse, the gap is currently widening and it could balloon over the next few years as local and state governments experience “revenue shrink.” The report warns that America is headed for a crisis in the next 10 years if nothing is done.
Public-Private Partnerships: PPPs
Infrastructure is considered by most investors to be long-term, inflation proof, and run contrary to business cycles. The rising need for more and updated infrastructure coupled with continuing volatility in other asset classes is opening the door to private investment in public infrastructure - or public-private partnerships (PPPs).
These arrangements enable the private sector to finance, design, construct, and sometimes operate and maintain, public facilities infrastructure assets and services that traditionally have been provided by government. Proponents of PPPs say the potential benefits include cost reductions, better design, faster construction and better performance. Deloitte reports that more than 25 states now have PPP-enabling legislation on their books.
Governments traditionally realize cost savings of 20-50% when the private-sector is involved in providing services, according to the National Council of Public-Private Partnerships (NCPPP). The NCPPP also contends that during periods of economic slowdown, government revenues are frequently not sufficient to meet spending demands. By developing partnerships with private-sector entities, governments can maintain quality services despite budget limitations. The group states that the average American city currently works with private partners to perform 23 out of 65 basic municipal services.
Infrastructure funds — private vehicles set up to invest in infrastructure assets — currently hold an estimated $400 billion in capital for investment, states the Urban Land Institute and Ernst & Young. The report states that this, combined with broader adoption of the PPP model, could alleviate much of the current strain on public coffers caused by the need for radical improvement in local, state and regional infrastructure.
“It is increasingly clear that the infrastructure funding gap will need to be addressed with public/private partnerships,” says Dale Reiss, Global Director of Real Estate at Ernst & Young in New York City. “If the U.S. fails to embrace this model, it could lead to our economy falling behind more of our global competitors.”
Infrastructure Policy
The U.S. needs a better policy for undertaking public-private partnership transactions, according to the Urban Land Institute and Ernst & Young.
Chris Dodd and Chuck Hagel, introduced The National Infrastructure Bank Act, back in August 2007. The legislation establishes the National Infrastructure Bank, which as an independent entity of the government tasked with evaluating and financing capacity-building infrastructure projects.
The proposed infrastructure bank might provide a solution to a weakening economy by funding job programs related to rebuilding infrastructure, according to the Urban Land Institute and Ernst & Young. The report states, “A jobs program can be a means to an end, a powerful tool for economic development, funding future infrastructure to increase employment and improve economic competitiveness.”
Global Competitors
“It is clear from the experience of other countries that public private partnerships (PPPs) are an essential tool in planning, building and maintaining vital infrastructure,” said Lucki. “Failure to fully embrace this model in the U.S. could lead to our economy falling behind more of our global competitors,” he adds.
The report contends that the U.S. could learn a thing or two about financing its infrastructure needs from China.
“Frankly, the U.S. has been coasting when it comes to infrastructure spending, especially when compared to growing economies such as China which spends about nine percent of GDP on vital infrastructure,” said Dale Anne Reiss, Global Leader of Real Estate, Ernst & Young.
Bottom Line
“Current approaches to land use, infrastructure and energy efficiency will likely determine and possibly reorder the next generation of winners and losers — countries, companies, investors, and peoples,” notes the Urban Land Institute and Ernst & Young.
