Saturday, November 01, 2008

Infrastructure Insanity — Part IV

In 1919, a young Army Lieutenant Colonel traveled with a convoy of Army vehicles on a cross-country trip from Washington D.C. to San Francisco for the purpose of establishing the viability of the nation’s highway in the event of a military emergency. He wrote, “The road is one succession of dust, ruts, pits and holes,” also reporting of impassable and unstable sand and wooden bridges that cracked beneath the weight of the trucks. Even more telling was the startling revelation that in Illinois the convoy “started on dirt roads and practically no more pavement was encountered until reaching California.” Not surprisingly, the trip took 62 days.

As reported in Mother Jones magazine, “37 years later, this same Army officer, Dwight Eisenhower, as President of the United States, completed a quest inspired by this youthful journey and by his World War II observations of Germany’s autobahns, to build a national road system for the United States.”

It was in 1956 that Eisenhower signed the Federal Aid Highway Act that some called “the greatest public work project in human history.” Mother Jones describes it as calling for “the federal and state governments to build 41,000 miles of high quality road across the nation, over rivers and gorges, swamp and deserts, over and through vast mountain ranges.” Despite his reputation as an old-style fiscal conservative, he considered this interstate highway system so vital to the public interest, he authorized the federal government to assume 900 percent of the huge cost. Despite the significant expenditure, think of the beneficial consequences of this action in terms of job creation, economic impact, and productivity enhancements.

Costs Are Astronomical

In spite of the mammoth undertaking that resulted in our current interstate highway system as well as our local roads and bridges, a 2006 report on the “Status of the Nation’s Highways, Bridges and Transit,” estimated the cost to just maintain that existing infrastructure at $78.8 billion annually through 2024. But that’s just the beginning. The cost to improve highways and bridges would exceed $131 billion annually.

With the current financial crisis now facing us, including a probable recession; an existing astronomical $10 trillion debt plus the half a trillion deficit for the current year; the $10 billion a month expenses in Iraq; our exploding under funding for Social Security, Medicare and Medicaid; will there be any degree of political will to fully fund our infrastructure needs? There may be a solution, but first let’s address the American Society of Civil Engineers (ASCE) Report Card on the various Infrastructure categories.

The Report Card

As indicated in last month’s article, Roads received a grade of D, Bridges a C, [Public] Transit (that recently became one of the fastest growing categories) a D+, and Aviation (that has deteriorated sharply from 2005) a D+. Drinking water received a D- (federal funding is less than 10 percent of what is needed), and Wastewater, where systems discharge billions of gallons of untreated sewage into U.S. surface waters each year; Navigable Waterways also received D- (50 percent of locks are obsolete despite the fact that one barge can move the same amount of cargo as 58 semi-trucks at one tenth the cost).

“D” grades were assigned to Schools, and in what seems to be almost criminal neglect, a 2006 survey from the American Federation of Teachers noted that nearly 1,000 teachers and school staff members “reported persistent problems such as falling ceiling tiles, poor lighting, crumbling exterior walls, asbestos, severely overcrowded classrooms and hallways, freezing rooms in winter, and extreme heat in summer.” That all sounds like a third-world country. The ASCE estimated that a quarter of a trillion dollars is required to bring the nation’s school buildings up to “good” shape. A “D” was also assigned to Hazardous Waste where 1,237 contaminated sites were listed, with a possible listing of over 10,000 more.

The outlook for oil independence depends to a great extent on our ability to hook up the potential alternative energy systems to the National Power Grid. However our existing electricity transmission system is aging and a 2007 report stated, “Without additional resources, many parts of the nation, especially California, the Rocky Mountain states, New England, Texas, the Southwest, and the Mid-east could soon fall below the target capacity margins for power generation transmission.” The result is a “D” rating.

As indicated earlier in this series of articles, the above grading information is now three years old and will not be updated until 2009. The $1.6 trillion required to fund our infrastructure needs is more likely to approach $2 trillion in the report due in 2009. The following quote describes the problem most succinctly: “…the federal government has failed to provide the leadership it alone can supply. Federal spending on infrastructure, corrected for inflation is actually lower that it was in 2001 despite the [until recently] growing economy, the well-known disrepair, and obsolescence of our assets, and the rising costs of their inadequacy. And this level of spending, as a share of GDP [Gross Domestic Product] is much lower than it was two decades ago.”

A Possible Solution

That quote was from a remarkable article in the October 9 th issue of New York Review of Books, co-authored by Felix G. Rohatyn, investment banker, former ambassador, and a central player in the 1975 plan that saved New York City from bankruptcy. Expounding on the above criticism, he explains, “This public penury is lamentable, but if it conceals a second and perhaps even more fundamental problem with public policy; not only do we fund infrastructure inadequately, but the policies we have in place are incapable of funding the needed projects or creating the incentives to manage correctly what’s already been built. This is the unseen and ultimately more critical part of the infrastructure – the extent to which our spending programs are misdirecting our investments away from the best opportunities.”

In order to resolve these intrinsic problems, Mr. Rohatyn co-chaired, along with former Senator Warren Rudman, a Commission on Public Infrastructure at the Center for Strategic and International Studies in Washington D.C. to outline a new and different approach to selecting, financing and managing infrastructure. Last year, the commission produced a consensus report, and a bill to enact its approach, the National Infrastructure Bank Act of 2007, has been submitted by Senators Chris Dodd (D, Connecticut) and Chuck Hagel (R, Nevada). A companion bill has been presented in the House of Representatives.

The intent is to establish a bank similar to the World Bank, one that would replace the current unstructured and basically chaotic programs for highway, airports, mass transit, water projects, and other infrastructure projects, “streamlining them and folding them together into a new entity with a new culture and purpose. Any project seeking federal participation over a set dollar threshold would have to be submitted to the bank. A chief executive would be appointed by the resident and be confirmed by the Senate.”

As expressed in Mr. Rohatyn’s own words: The central idea “is to establish a National Infrastructure Bank, an institution that would be similar to the World Bank, a private investment bank, or any other entity that evaluates project proposals and assembles a portfolio of investments to pay for them.” He continues, “The purpose of the Bank would be to use federal resources more effectively and to raise additional funding. We propose this bank because we believe that markets for capital do work and can be harnessed to solve the critical shortfall in funding infrastructure.” Mr. Rohatyn explains that the bank would have a board of directors that included key Cabinet officers, and members appointed by both the executive branch and congressional leadership; its chief executive would be appointed by the president and confirmed by the Senate. Presumably, with this entity in place the haphazard and politically manipulated earmark type monetary allocations would be eliminated from the infrastructure process.

It is generally acknowledged that not only have our infrastructure imperatives been severely neglected in the past, but based on the extremely bleak existing economic conditions, the outlook for necessary infrastructure outlays will also worsen. It is therefore, seeing that the Infrastructure Bank Plan might be gaining traction. Particularly heartening is the fact that Barack Obama has also embraced the proposal.

There is however, another phenomenon already taking place that could revolutionize how infrastructure is funded––one that could completely change the financing dynamics, but one that has also initiated a great deal of controversy. This is a process called PPP, ˆP3’s, or Public-Private Partnerships. It could affect us right here in South Florida. Next month’s issue will discuss the pros and cons.


Post a Comment

<< Home