The U.S. Infrastructure and Why It's Such a Big Deal.

As an invited guest, I attended a virtual briefing yesterday (4/21) with Pete Buttigieg, White House Department of Transportation Secretary, who kicked off the Build Back Better briefing series with Small Business for America’s Future and Business Forward. The meeting was moderated by Birmingham Mayor Windall Woodfin. The briefing focused on the Administration’s plan for infrastructure in the American Jobs Plan and the recently passed American Rescue Plan. It was an excellent forum for business leaders to have a better understanding of the Administration’s plans and get specific questions recognized and answered. Why is infrastructure such a big deal? Why does it matter? 

While the increase of US infrastructure awareness and discussions continue, the fact remains that US is a global economic leader. In 2020, despite the economic impacts from the pandemic, the US still had the highest gross domestic product (GDP) of $20.8 trillion followed by China ($14.9 trillion), Japan ($4.9 trillion), Germany ($3.8 trillion) and India ($2.6 trillion) based on the report produced and released by Statistica at the end of Q1 2021. To put this in perspective, the Global GDP for 2020 was $75 trillion which means that nearly half of the worlds GDP is produced by the US & China. However, disturbing trends for the US in this report, reveals that China’s GDP will surpass the US in 2030, just 9 years away unless the US makes a change in its current trajectory.

The base of economic or GDP growth is built on infrastructure such as transportation, utilities, and digital technologies as critical components. The speed at which a country can move its goods and services significantly improves productivity. Conversely, poor, and declining infrastructure significantly slows down this movement and can cost the US billions in productivity losses. For example, traffic congestion delays alone could cost the economy $120 billion per year as identified in Henry Petroski’s book The Road Taken: The History and Future of America’s Infrastructure.

In yesterday’s briefing, Secretary Pete Buttigieg mentioned that there is an estimated $1 trillion dollars in backlog of infrastructure projects and the number one issue is that those projects need funding. Because of this backlog, our infrastructure continues to crumble as the published in the 2021 Report Card for America’s Infrastructure by the American Society of Civil Engineers (ASCE). The ASCE report reveals that our overall infrastructure grade or GPA is a C- which represents an improvement from the D+ rating in 2017. This marks the first time in 20 years that our infrastructure is out the D range and all of us know that there is a relatively small difference between a C- and a D+ , but it does represent positive progress.

There are 17 categories of infrastructure elements that could arguably be combined but the granularity helps us understand the nuances of our infrastructure strengths and weaknesses. For example, the 2021 grades range from a B in rail to a D- in transit. There were 5 categories improved: aviation, drinking water, energy, inland waterways, and ports and 1 category that slipped: bridges.   Overall, 11 category grades are still in the D range and a clear signal that the proposed infrastructure package is much needed to bolster our economy as we climb out of the pandemic.

While US public infrastructure definitions and investments have become recent topics of political debate, the fact remains that the US continues to lag behind its peers in the developed world with China leading the way.  According to the Global Infrastructure Hub’s Global Infrastructure Outlook, to close the infrastructure gap will require $97 trillion by 2040. Secretary Pete Buttigieg revealed yesterday that the US ranks 13th globally in infrastructure investment.

GDP growth and rising populations are driving the need for investment in infrastructure in the US and globally. The Global Infrastructure Hub estimated by 2040, global GDP is forecast to double from 2015 levels and the population of our cities will swell by 46% on average. The global population will grow by almost 2 billion and the global infrastructure gap will require $3.7 trillion per year in investments. If current US trends continue, the US will have one of the largest gaps in infrastructure spending and China is projected to have the greatest demand needing $52 trillion by 2040.

The proposed $2 trillion infrastructure bill will help close the growing gap. While spending is anticipated to occur over the upcoming 8 years, it is largely aimed at public funds, but private sector investments and public-private-partnerships (P3s) could help fill the investment gap and the interest is there. P3 partnerships typically are long-term and involve large corporations on the private side. Popular in many European countries, P3s have gotten off to a relatively slow start in the United States, but they are increasingly used for large-scale infrastructure and public works projects. Many P3 projects in recent decades have been extremely successful. For example, when I served as PMO Director of the Port Authority of New York and New Jersey, almost 10 years ago, I was involved and had oversight of The Goethals Bridge Replacement project, which at the time was the Port Authority’s first new major bridge replacement in more than 80 years and was the first surface transportation P3 in the Northeast Region. As the bridge was completed in 2018, it represented a $1.5 Billion, 40-year design-build-finance-maintain contract. 

A key element of P3 contracts is that the private party must take on a significant portion of the risk. Some analysts argue that the focus on using P3s and relying on private sector financing alone won’t address major gaps in the system, such as in maintenance, since those projects are unlikely to be profitable enough to entice private investors. However, in the Goethals Bridge example, we see that the P3 structure was a design-build-finance-maintain contract structure over a 40-year period, so it is possible. The Council on Foreign Relations Adjunct Senior Fellow Heidi Crebo-Rediker points out that the United States lacks a culture of private ownership of major infrastructure, which could pose enduring political barriers to efforts for privatization of transportation systems and public utilities.

There is growing momentum to consider infrastructure as an asset class from an investment strategy due to the strong demand for infrastructure investments and a deep need for infrastructure capital. This is not a new theory as pointed out in the article Infrastructure as asset class: a brief history Infrastructure, by George Inders. The article reveals that infrastructure as a dedicated asset class was actually invented in the 1990s in Australia, spreading to Canada and Europe in the early 2000s, followed by the US and other regions. In a low interest-rate environment, and positive investment characteristics, such as long-term, stable cash flows, downside resilience, low correlation to business cycles, partial inflation-hedge, are potentially attractive to investors. One of the challenges for private investments includes the disruption in emerging technology trends which changes consumer preferences, and market prices requiring long-term investment strategies to become more flexible. 

For example, Gartner’s Top Strategic Technology Trends for 2021, noted three primary trend groups: people centricity, location independence and resilient delivery. People centricity: people are at the center of all business and they must have digitalized processes to function efficiently in the new normal. Location independence: requires a technology shift to support a new version of business, because the pandemic has shifted where employees and businesses physically exist. Resilient delivery: the ability be resilient from an act of God, pandemic, or a recession, as the risk of volatility exists.

I do want to bring your attention to one new acronym that is trending and discussed in the report: IOB, or the Internet of Behaviors. IOB captures the “digital dust” of people’s lives in the form of collected data to influence behaviors. This quite naturally is daunting for its social and ethical implications

According to The State of U.S. Infrastructure published earlier this month by the Council on Foreign Relations, transportation will require the largest share of funding needs. On Friday, April 16th, the Office of Management and Budget (OMB) submitted to Congress the President’s $1.52 trillion discretionary funding request for Fiscal Year 2022, which includes $25.6 billion for the U.S. Department of Transportation (USDOT). 

The 2019 DOT Bureau of Transportation Statistics identifies that America’s airports carry the most passengers with an estimated 20 percent of all arrivals and departures delayed in 2019 which is a signal that aviation infrastructure being overburdened. The Airports Council International-North America (ACI-NA), believes the sector’s funding requirement right now, never mind over eight years, to be $115.4 billion, as that is the price of the “necessary project backlog” that has built up within an industry that generated pre-pandemic levels of $1.4 trillion that is more than half the administration’s total infrastructure package. ACI-NA has consistently proposed a need for such spending levels, in excess of $100 billion, over the past few years.   Of the $621 billion proposed in the Infrastructure package, $25 billion is allocated for airports.

In the New York City area, there is a $15 billion plan to redevelop the JFK (JF Kennedy) Airport while the LGA (La Guardia) Reconfiguration is in progress with a price tag of $8 billion and EWR (Newark)airport is in progress with a $2.7 billion replacement of Terminal A.

In today’s (4/22) Financial Times article by Mamta Badkar, heading states: “US airlines say ‘worst behind us’ as vaccines fuel recovery” The author points out that passenger numbers are at their highest levels since the pandemic began. For example, the current month of April of this year, the US Transportation Security Administration has screened an average of 1.38 million passengers a day, but it is still far below the 2.3million passengers a day in the same period in 2019.

However, I do believe we are heading in an optimistic and positive direction. As the US has administered 216 million vaccines doses and has fully vaccinated 87.6 million people there is growing economic optimism as we pull out of the pandemic in 2021. The Investor's Business Daily (IBD), TechnoMetrica Institute of Policy and Politics (TIPP)or IBD/TIPP Economic Optimism Index released in April of this month shows continued consumer and improved trend of confidence and optimism.  The IBD/TIPP Economic Optimism Index in the US rose 1.8 percent to 56.4 in April of 2021, a new high since February 2020 before the Covid-19 shutdown.

I am incredibly optimistic that the infrastructure funding will help boost the economy, bring more jobs as we get more vaccinated people to climb out of the global pandemic. Personally, I am extremely excited to receive my second Pfizer vaccine shot today.

Fredrick is global consulting executive. With over 25 years of experience in large and mega infrastructure projects across transportation, technology, construction, finance sectors, he is an industry expert with domestic and international clients. Fred has also served as an Assistant Professor at Syracuse University’s Utica College, and in Adjunct Professor roles at New York University and the University of Phoenix. Fred has a degree in engineering, an MBA, is a certified by the Project Management Institute in Project Management (PMP), Risk Management (PMI-RMP) and Scheduling (PMI-SP) and is also a certified management consultant (CMC). As an accomplished and successful peforming artist and consultant, Fred's unique approach in perfecting the art and science of business consulting consistently adds client value.

Fredrick Redd, VP Operations, PACO Group Inc., fredd@pacogroup.com