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Infrastructure and Its Role in the U.S. Economy

The federal government is leaning toward the creation of public-private partnerships to finance much-needed improvements to the nation’s infrastructure, which is vital to the manufacturing sector as well as national security.

Q1 2018
Walsh Construction crew places beams for the bridge carrying Rte. 2021 over I-81 in Lennox, Susquehanna County, Pa. The bridge was replaced in September 2017 under the Pennsylvania Department of Transportation’s (PennDOT) Rapid Bridge Replacement Project, which is a public-private partnership between PennDOT and Plenary Walsh Keystone Partners (PWKP).
Walsh Construction crew places beams for the bridge carrying Rte. 2021 over I-81 in Lennox, Susquehanna County, Pa. The bridge was replaced in September 2017 under the Pennsylvania Department of Transportation’s (PennDOT) Rapid Bridge Replacement Project, which is a public-private partnership between PennDOT and Plenary Walsh Keystone Partners (PWKP).
Infrastructure is a hot topic these days. President Donald Trump recently met with state leaders to discuss the implementation of nationwide infrastructure improvements. Infrastructure is a critical economic and social issue for the U.S. Not only does a modern infrastructure system improve economic performance and create jobs at state and national levels, it also improves safety for the American public.

According to the American Society of Civil Engineers (ASCE) 2017 Report Card, the national grade for U.S. infrastructure is a D+ — the same grade the country received in 2013, indicating little progress has been made over the last four years toward restoring America’s infrastructure. For example, an estimated 17 percent of American dams — more than 15,000 — are considered high hazard, meaning failure would likely result in loss of life. About 11.2 percent of roads are in poor condition, resulting in vehicle damage, traffic delays, and billions of gallons of gasoline wasted.

Infrastructure is also essential for national security reasons, including being able to effectively support critical manufacturing industries. The U.S. Department of Homeland Security has identified several manufacturing sectors that are especially important for national defense or response to threats and disasters, including the energy, iron and steel, power transmission equipment, aviation and aerospace, and railroad rolling stock manufacturing sectors — all of which must be supported by modernized infrastructure.

Who Pays?
Everybody agrees the United States needs better infrastructure — the question is how do we pay for it? ASCE estimates that by 2025 about $4.5 trillion will be required to upgrade surface transportation, wastewater infrastructure, power plans, airports, waterways and ports, dams, solid waste facilities, levees, public parks, rail, and schools.

The Trump administration plans to release a new infrastructure proposal that is expected to move away from a “project-based” system in which the federal government provides funding for certain infrastructure projects. Instead, the plan will support the creation of public-private partnerships (PPPs), where states and private investors provide most of the funding for infrastructure projects. Any federal funding would serve as incentives to get private investors on board, or for special or “transformative” projects, such as high-speed rail.

The national grade for U.S. infrastructure is a D+ — the same grade the country received in 2013. American Society of Civil Engineers (ASCE) 2017 Report Card Although PPPs are popular in Europe for infrastructure upgrades, their acceptance in the U.S. infrastructure sector has been slow. According to PricewaterhouseCoopers (PwC), in 2015, only five PPP deals worth a total of $2.4 billion closed in the U.S. A big reason for this is that not all projects are attractive to investors, who are looking for long-term deals with lucrative returns. So even if an infrastructure project is critical to a region, it may not meet the return-on-investment requirements of investors and not get done.

Now, however, the U.S. government and investors are coming together on a broader range of projects. State governments are also getting creative in finding the investors they need to get their projects off the ground.

For example, Pennsylvania became the first state to bundle small projects into a big package in order to attract the interest of larger firms. “The Rapid Bridge Replacement Project bundled 558 bridges to create a deal worth $900 million,” states PwC. It was Pennsylvania’s first-ever infrastructure PPP project and highly successful, reducing project costs by 20 percent and completing construction faster than traditional procurement programs. In fact, it was so successful that Northampton County in Pennsylvania adopted a similar PPP structure to replace and rehabilitate many of its bridges.

“This PPP pipeline now stretches across more than 20 states, including many that have never closed a public-private partnership transaction before,” says PwC. “And more and bigger deals are taking place. Nine PPPs closed in the first three quarters of 2016, compared with five deals in all of 2015. And several were giant, including a $3.9 billion deal to redevelop and operate Terminal B in New York’s LaGuardia airport and Maryland’s $2 billion light-rail Purple Line.”

Leadership, However, Is Required
President Trump’s plan to stimulate $1 trillion in investment through PPPs has hit some uneven ground. “Recent comments over the role the private sector will play raise new questions as to how to close this gap,” notes Chris Heathcote, CEO of the Global Infrastructure Hub, an initiative launched by the G20 in 2014 with the mandate of growing the global pipeline of quality, bankable infrastructure projects.

Infrastructure is also essential for national security reasons, including being able to effectively support critical manufacturing industries. For infrastructure PPPs to really take off, the federal government must fully understand the underlying factors that affect the delivery of successful infrastructure projects, such as governance, regulatory frameworks, permits, and planning. “Although the U.S. is a strong performer in terms of rule of law and taxation policies for incentivizing investment, it falls short when it comes to planning, procurement, and contract management,” says Heathcote.

The U.S. can improve its performance in these areas by creating federal guidelines for procuring PPPs and dedicated PPP units. Another method is to better measure how its infrastructure currently performs. Heathcote believes that transparent, publicly available post-completion reviews — that check not only costs and schedule, but benefit realization — “would lead to a long-term improvement in delivering quality projects.”

Because roads tend to be state-procured, states need to be proactive in creating PPPs to efficiently fund new highway and bridge projects. However, most states cannot afford to do it alone — federal dollars are still usually required to make these PPPs a reality.

“One step would be to expand the Transportation Infrastructure Finance and Innovation Act (TIFIA) and Water Infrastructure Finance and Innovation Act (WIFIA) programs to provide further credit assistance for road, rail, and water projects and remove restrictions and disincentives for revenue-generating projects,” says Heathcote. “Asset-recycling, where the government leases existing infrastructure assets to private companies to then invest proceeds in new projects, provides an additional funding mechanism.”

Finally, Heathcote adds, more than funding, the federal government must provide leadership. “Not having a clear national infrastructure plan has adversely impacted the U.S. market before,” he says. “The government must take steps to reduce uncertainty over its current proposal, and chart a clear path forward. Doing so will enable all stakeholders to plan effectively and ensure they’re ready to answer the call when the time comes.”
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