May 1, 2012

Sluggish Connections

Crumbling infrastructure, gridlocked lawmakers, endangered Americans and a threatened economy: The slow move toward local and private solutions.

In the movie “Margin Call,” which depicts the sudden collapse of a major Wall Street investment bank, Stanley Tucci plays the firm's chief risk management officer. In a resonant soliloquy, he laments his fate after being fired: “You know, I built a bridge once. . I was an engineer by trade.”

Tucci's character, Eric Dale, uses the mathematical skills that brought him a bigger paycheck in finance to calculate out loud how the steel truss bridge he helped build over the Ohio River in 1986 had saved motorists traveling between Moundsville, West Virginia, and Dilles Bottom, Ohio, “1,531 years of their lives not wasted in a f*** car.” The movie's fictional investment bank, likely based on Lehman Brothers' demise in 2008, is gone. The real-life Moundsville Bridge still stands.

High finance and public infrastructure are seldom viewed as competing users of America's resources. But, whether the subject is brainpower or money, they are. They also share the disease of short-term thinking. Wall Street executives, playing high-risk games with other people's money, are obsessed with quick bonuses. Washington politicians, with eyes fixed on the next election, have relegated public infrastructure to a debate over immediate economic “stimulus.”

Construction materials suppliers have watched the apparent erosion of public commitment to public projects with chagrin. In January, the nonpartisan Congressional Budget Office estimated that by 2013 the U.S. Highway Trust Fund, based largely on an 18.4-cent per gallon gasoline tax and the source of most spending for road and bridge projects in America, will be unable to meet its planned obligations, let alone a concerted infrastructure upgrade program.

“You would have thought that when the I-35W Bridge went down in Minneapolis [in 2007, killing 13 people and injuring 145] that would have sparked a national debate about taking care of this,” says Robert Risser, chief executive of the Concrete Reinforcing Steel Institute in Schaumburg, Illinois. “You'd think that a bridge falling down and people dying would wake people up, but now it's ancient history.”

Franky Griggs, vice president and general manager of Nucor Corp.'s carbon steel plant in Birmingham, Alabama, a maker of concrete reinforcing bar, adds, “Whether or not we can sell a lot of steel products into the revitalization of infrastructure, we still need that infrastructure to transport raw materials to our facilities and ship our finished products.”

America's Infrastructure Grade: D

After the American Society of Civil Engineers, in a widely read 2009 report, assigned a “D” grade to the condition of the nation's public infrastructure, proposals to address the problem ran into overarching and competing political concerns: demands for immediate job creation because of the Great Recession and demands for less government spending as the solution to the nation's growing debt. In the stalemate, federal transportation and water infrastructure spending rose slightly and temporarily in 2009 and 2010, but receded in fiscal 2011.

The Moundsville Bridge in West Virginia,
from the movie “Margin Call.” One of
the movie's most poignant characters
laments, “You know, I built a bridge once.
… I was an engineer by trade.”

 The Moundsville Bridge in West Virginia, from the movie “Margin Call.” One of the movie's most poignant characters laments, “You know, I built a bridge once. … I was an engineer by trade.”

In February, the influential anti-tax group Club for Growth urged a “no” vote on highway bills pending in the House and Senate and called for a rollback of the federal gasoline tax. The U.S. Chamber of Commerce, in contrast, welcomed the bills and said it could support increased user fees, with a few stipulations, to maintain the purchasing power of transportation-related revenues. The 18.4 cents-per-gallon rate was first levied in 1993.

Despite political gridlock even among conservatives, a consensus is emerging among business and finance leaders, engineers, academics and public policymakers. They say the way forward in upgrading surface transportation is three-pronged:

  1. Get past the “pork barrel” complaint. Acknowledge the primary role of regional, state and local priorities in public infrastructure spending. Let the federal government provide a predictable funding source as well as expertise, coordination and, in effect, cheerleading on behalf of locally controlled projects.
  2. Distinguish projects that have particular appeal to private investors from those that require mostly or all public funding. Private investors and public-private partnerships are becoming an increasingly important funding source.
  3. Experiment more aggressively with matching long-term private investors, such as pension funds, with long-term infrastructure projects likely to yield a competitive return on investment over decades. But beware that public and private interests often clash.

All Infrastructure is Local

Analysts who assert that America's competitiveness is declining in the global economy frequently call for a national program of upgrading transportation infrastructure, including roads, bridges, ports and railroads.

But those closest to the ground are dubious of national solutions. The federal highway program, with one notable exception, has always been a pass-through system. Dollars are distributed to states on a matching basis. As a result, the critical factor in selling all elements of public infrastructure—designs, materials, construction and maintenance—is understanding the “mindset of the DOT (Department of Transportation) folks in the state” says Nucor's Griggs. “You have to stay local to stay competitive.”

Motorists driving across the South, from Texas to Alabama, he notes, see local control in the varying condition of roads and bridges. “It's a state-by-state decision,” Griggs said. “Some put more importance on infrastructure.” Annual per-capita highway spending varies widely by state, according to a 2006 report by the National Conference of State Legislatures. Delaware topped the ranking, with $905 per capita. California came in last, at $214. As Griggs suggests, driving from Texas to Georgia spans per-capita highway spending from $219 in Georgia (ranking 50) to $322 in Alabama (37th).

The latest Global Competitiveness Report by the World Economic Forum (WEF) found the United States slipped a notch in its road infrastructure ranking, to 20th among 142 nations from 19th in the previous report. France, Germany, Canada and South Korea were among major economies scoring higher than the United States in both years. The condition of U.S. ports was also worse, ranking 22 previously and 23 currently.

A competitive national transportation infrastructure in a global economy “reduces the effect of distance between regions, integrating the national market and connecting it at low cost to markets in other countries and regions,” the latest WEF report said.

Despite the theoretical appeal of a national infrastructure response, history suggests that decoupling infrastructure spending from local interests and politics is futile.

Abe and Ike: Dramatically Different Results

Abraham Lincoln's political career began with his appeal for “internal improvements” in Sangamon County, Illinois. “That the poorest and most thinly populated countries would be greatly benefitted by the opening of good roads, and in the clearing of navigable streams within their limits, is what no person will deny,” he told voters in 1832. When he won a seat in the legislature he pushed a statewide infrastructure spending program financed by an imprudent state bond scheme. In a poor state, with only $5 million in tax base, the program amassed more than $17 million in debt. Bonds issued for the spending traded at 15 cents on the dollar.

But a national highway program did not emerge until more than a century later, when President Dwight Eisenhower signed the first Federal-Aid Highway Act in 1956. The program was dubbed “National System of Interstate and Defense Highways,” as post-war Washington used the notion of national defense as a justification for road-building. The federal gasoline tax, first imposed by President Herbert Hoover in 1932 as a source of general revenue, was raised to 3 cents per gallon from 1 cent, and dedicated to road-building.

Since undertaking the interstate highway system in the late 1950s, ownership of America's public transportation capital stock has shifted from the federal government to state and local governments. Recent political outcry over “earmark” spending, specific projects sponsored by members of Congress apart from general appropriations, have lowered the profile of Washington politicians in infrastructure spending.

“The interstate highway system was the last time we had a very broad vision for our national transportation system. We haven't had much of that lately,” says Alison Premo Black, vice president of policy and chief economist for the American Road & Transportation Builders Association.

In the last decade, she says, only 26% of surface transportation infrastructure spending has been allotted for increasing road capacity for vehicles that ply the roadways. “There is actually very little new construction going on in this country,” Black said. “That is why we see the bottlenecks and congestion.” Moreover, economists say the contribution of transportation infrastructure spending to economic productivity has been declining since the 1970s. That's largely because money spent on maintenance and repair generates less labor productivity than capacity increases.

“Infrastructure building, rather than upkeep, is the key driver in terms of productivity,” said economic consultant Jeremy Leonard in a report for Manufacturers Alliance for Productivity and Innovation (MAPI) in Arlington, Virginia.

The Curious Economics and Problematic Politics of Potholes

So, your left front wheel drops 10 inches into a pothole at 40 miles an hour, flinging the hub cap onto the adjacent sidewalk. You curse loudly, drive home if you can, and, if you live in most major cities, call a government agency to file a claim for reparation.

You, sir or madam, have jarringly hurtled headlong into the problem, sometimes called, with neat alliteration, the politics of potholes

Of the billions of dollars experts say are needed to upgrade American and Canadian roads and bridges, dollars not spent quickly on pothole repair cause the greatest political pain.
After a newspaper investigation of potholes in Seattle, Washington, claims paid to motorists jumped 165% in 2011 from the previous year, to nearly $89,000. The Seattle Weekly, which published the pothole probe, dubbed Mayor Mike McGinn the “pothole baron.” In January, he told voters he had added an additional crew of “pothole rangers” to attack the problem.

Sounds good. But construction veterans would say McGinn has gone down a well-traveled road to nowhere. Basing a political response to potholes on the squeaky wheel theory diverts public resources from a more sustainable fix. Few politicians see roads as long-term assets, like a home, needing routine upkeep to prevent, well, potholes.

Robert Risser, chief executive of the Concrete Reinforcing Steel Institute in Schaumburg, Illinois, says the primary political and bureaucratic objective in road maintenance is “keep the phone quiet.” In other words, he says, patch roads to avoid complaints while you cruise toward retirement.

Pothole repair technology has not advanced much over the years. Congressionally funded tests in the 1990s found that the familiar “throw and roll” method of throwing patching material from a truck into the hole and compacting the patch with the trucks' tires remains the most efficient method, in part because it does not require higher-skilled road crew workers using more advanced spray injection methods.

Long-term road building solutions, which likely cost more up front than patches but extend the life of surfaces, don't enter into the equation. Rather, the common approach is expediency, also known as “fix the worst first.”

Unfortunately, such short-term thinking may be justified by cold calculation. That's because cost-benefit estimates of various road building and maintenance systems fail to give reliable answers. A discounted cash flow study by the Massachusetts Institute of Technology (MIT), for example, found life-cycle cost comparisons between concrete roads and asphalt roads did not pick a clear winner.

Concrete roads cost more to install but last longer than asphalt roads. But results depend on assumptions about the life span of a road, repair time, traffic delays, volatile prices of materials (especially oil, a major component of asphalt), environmental concerns and other factors. “Ultimately, this is very subjective,” MIT researchers concluded.

These doubts have fueled a perpetual debate between the asphalt and concrete industries about the comparative merits of their materials. Both groups have entrenched lobbies in state capitals and in Washington.

The road materials political road warriors, it seems, are more skillful in their prognostications than their associated highway engineers. According to campaign finance data compiled by the Center for Responsive Politics, the National Asphalt Pavement Association's political action committee and the competing Portland Cement Association usually favor Republicans—except in 2010, when both groups preferred Democrats.

That's odd, until you recall that the 2010 midterm election brought to Congress a cohort of Tea Party Republicans ideologically opposed to all government spending, including highway spending.

If road materials engineers could be as prescient as the industry's lobbyists, a long-term solution to the politics of potholes might be unearthed.

—by Bill Barnhart

But falling behind in upkeep and new construction results in the same outcome. After declining in traffic congestion during the 2008-2009 recession, “America is now back on the road to gridlock with a vengeance,” reported the latest annual National Traffic Scorecard, compiled by INRIX in Kirkland, Washington.

Local Control and Innovation

On the bright side, a wide palette of experimentation in designing, constructing and financing surface transportation projects has emerged in many states. One advantage of local control has been multiple crucibles of innovation.

For example, Massachusetts, Missouri and Virginia have been receptive to using light-weight aluminum decks on bridges in place of precast concrete, says Greg Osberg, director of aluminum bridge decking for Swedish aluminum extruder SAPA Group. SAPA wants to reintroduce aluminum bridge decks in North America. The first such deck was installed in 1933 as part of a renovation of the historic Smithfield Bridge in Pittsburgh, Pennsylvania, but the concept never gained traction against cheaper concrete decks.

This winter, SAPA placed a prefab aluminum deck on a rehabbed bridge near Sandisfield, Massachusetts. The installation took just 30 minutes and represents a pilot program that SAPA will use in presentations to local transportation officials around America and Canada, Osberg said. “Once you have a bridge in service, you have a DOT that will be the champion” of the project to other DOTs, he said.

In a similar vein, New York state highway officials are using jointed precast concrete paving slabs as a faster repair system instead of cast-in-place concrete, which needs to be cured on site. “This is not your granddaddy's concrete,” says Ty Gable, president of the National Precast Concrete Association in Carmel, Indiana.

Choices about repairing vs. adding new road and bridge capacity are complex. Mature nations such as the United States and Canada can't replicate emerging countries, notably China, in terms of greenfield transportation projects. Especially in metropolitan areas, traffic congestion is bad enough without the disruptions of major infrastructure redesigns.

Budget Trade-offs: Maintenance vs. New Construction

Moreover, not all road and bridge networks need a bottom-up redo. In a 2008 report, the CBO said project-by-project costs-benefits analyses are vital in planning infrastructure spending. Using Federal Highway Administration data, the CBO estimates maintenance to sustain current levels of highway service over a five-year period would cost 58% of the planned U.S. highway spending, but yield 83% of economic benefits compared to increasing highway capacity.

On the other hand, major upgrades around ports and rail hubs could ease congestion of commercial and passenger traffic and boost national competitiveness. The trick is deciding which projects fall into which category.

Under the 2009 American Recovery and Reinvestment Act stimulus spending and its extensions, the U.S. Department of Transportation allocated more than $2 billion for innovative transportation infrastructure projects. TIGER (Transportation Investment Generating Economic Recovery) grants are intended to reward new ideas, not maintain the status quo.

Forty percent of the 2011 awards went to commuter transportation projects and 20% were earmarked to intermodal projects, intended to expedite the movement of freight from ship to rail to truck. TIGER grants targeted at modernizing the commercial supply-chain infrastructure represent a tiny fraction of the approximately $50 billion allocated in 2012 for roads and bridges by Congress. But supply-chain modernization attracts private expertise and money that can boost state and federal dollars.

“We need to move the focus of the dialogue toward strategies that support the real managers and users of infrastructure,” says Professor Michael Garvin of the Myers-Lawson School of Construction at Virginia Tech.

The Alameda Corridor, a $2.4 billion, 20-mile surface transportation project linking rail cargo access to the ports of Los Angeles and Long Beach, California, illustrates the high end of user-centered infrastructure. Conceived in the early 1980s, the project turned into a revenue-producing operation in 2002. In 1995, the federal government designated the project a “high-priority corridor” and lent $400 million to the local entity developing the project, the Alameda Corridor Transportation Authority.

The bulk of revenue used to repay the federal loan and bonds issued for the project are paid by container fees on railroads using the corridor, vastly reducing the need for direct government grants.

It seems fanciful, but the Alameda Corridor illustrates an emerging theme among designers of the largest infrastructure projects: the bigger the project, the less of a role required for government “pork barrel” spending. Road, rail and port users plus private investors, working through specialized public bodies, may be better able to get the job done. “Does this mean the federal government has no role?” says Garvin. “Of course not. Its role ought to be focused on policies that promote inter-regional coordination and strategic use of limited discretionary funds.”

Still, the vast numbers of surface infrastructure projects carry price tags in the millions of dollars or less, not billions. Most will not offer a revenue stream to bond holders or private-equity investors, through tolls or other fees. They rely principally on per-gallon state and federal gas taxes. Despite a temporary boost from federal stimulus spending, state and local highway budgets are strapped for cash as people drive less and cars become more fuel-efficient.

In the bulk of repairs and upgrades, federal dollars spent by state officials remain the answer. But in addition to government money, transportation infrastructure projects also require long-term commitment, not the month-by-month extensions of spending authority Congress has barely managed to enact recently.

Shovel Ready, What's That?

“There's really no such thing as shovel-ready projects,” says Gable. The work requires months and often years of planning, he said.

Simply maintaining the questionable present status of the nation's roads and bridges requires at least a 20% increase in annual federal funding and, just as important, a five- or six-year commitment, says Roger Ferch, president of the American Institute of Steel Construction in Chicago, Illinois. “That's what we need to start maintaining the status quo, but I was told it was hopeless.”

Amid the uncertainty of federal funding, state infrastructure banks have provided some measure of stability. Authorized under the latest multi-year federal highway bill, for 2005-2009, more than 32 states have set up infrastructure banks to provide low-interest loans to supplement whatever grants a road project can obtain. As a renewable resource, renewed by repaid loans, infrastructure banks have been less vulnerable to state cut-backs.

The governors of Pennsylvania and Virginia have proposed earmarking revenues from the sale of retail liquor licenses to fund infrastructure banks. Despite budget woes, Hugh McGowan, manager of Pennsylvania's bank, says Gov. Tom Corbett has held the existing state contribution to the bank steady at $30 million. “It has not been touched,” McGowan says. “It is special funding from the governor.” The money is lent at a below-market rate of 1.65% for up to 10 years.

There's a certain perversity in the notion that buyers of liquor would help pay for roads. But the idea of pension funds and other long-term investors investing in infrastructure seems to make sense.

Fine-Tuning 'A Perfect Investment'

Toll roads “are a perfect investment for pension funds,” says Professor Raymond Levitt, a professor of civil and environmental engineering at Stanford University and director of the university's Collaboratory for Research on Global Projects. The obligation of pensions to pay benefits typically extends for decades. “You're going to get back, over 30 years, an inflation-adjusted return because you can raise tolls or other fees.”

Such a sanguine view of highway tolls is not shared by many people. Levitt says builders and users of surface infrastructure need to view the projects as a service, not a road. There is less objection to paying service providers a fee, he says.

“There is a worldwide trend that infrastructure can be owned by governments but it doesn't have to be designed, built, operated or financed by governments. More and more infrastructure is being developed privately and sold to government as a 30-year service,” Levitt said.

Last fall, the $227 billion California Public Employees' Retirement System (CalPERS) announced it had earmarked up to $800 million for investments in California infrastructure over three years. Once derided as dangerously undiversified and corrupt, investments by public pension funds in the local projects has become the latest trend in infrastructure finance. Consortiums of investors, designers and contractors are making unsolicited and comprehensive infrastructure proposals to state and local governments, a reverse of the traditional government appropriation and bidding process. The result is termed a public-private partnership, or P3.

The Allure of P3

“Because of the delays we've had (in government funding), you're starting to see [P3s] more and more,” says Raymond Steege, senior vice president and global sector leader of transportation and infrastructure at AMEC, an international engineering and project management company based in London. “It's pretty well established in Canada and overseas.” P3s merge design, construction and operation into a single team, a distinct difference from typical government projects, which separate the design and bid process, Steege said. “In a P3 design-build process, there is tremendous partnering going on.”

The collaborative approach saves time and encourages cost-saving innovation, says Stanford's Levitt.

On the other hand, P3 projects with private investors have fewer ties to local communities than traditional infrastructure development. In fact, institutional investors can place their chips anywhere in the world they see compelling risk-adjusted returns. A well-attended investment conference earlier this year in Cartagena, Colombia, focused on that nation's infrastructure needs. The upgrade of the Panama Canal, scheduled for completion in 2014, has spawned widespread interest in trade-related infrastructure projects in the Western Hemisphere.

But there is no escaping local political concerns. For example, a 10-mile stretch of privately operated express lanes built on the median strip of the State 91 Freeway between California's Riverside and Orange counties was sold to the public Orange County Transportation Authority. Private investors abandoned the toll road in 2002 after residents learned the contract for the express lanes included a “no compete” clause prohibiting California from improving adjacent roads that might compete with the toll road.

Last December, the Georgia Department of Transportation abruptly canceled a $1.1 billion toll road upgrade to I-75/I-575 north of Atlanta, after Gov. Nathan Deal objected to a provision in the deal that, as in the case of the State 91 Freeway in California, would have restricted competing road improvements. The project, called the West by Northwest Corridor Project, had been under development for 10 years.

Three P3s were on the short list for the work. In total, the bidders lost millions in sunk costs connected to their bids, says AMEC's Steege, whose firm belonged to one of the bidding teams. It was the second time the project, which was initially an unsolicited proposal by private investors, was canceled, AMEC's Steege says. In planning P3 projects, “you've got to decide is this real or is this not real,” he says.

Looking Forward

The experience of all players in infrastructure development—transportation agencies, contractors, suppliers and maintenance providers—shows that one thing is real: the need for time to plan. In January, the American Road and Transportation Builders Association posted a continuously updating “gridlock clock” counting the days since the last multi-year federal highway funding bill expired in 2009.

Despite the group's obvious self-interest in road projects, the clock symbolically is ticking on a drain of talent and investment resources to projects in other parts of the world. CalPERS made headlines in 2010 when it purchased a 12.7% equity interest in the London Gatwick Airport for $155 million. Deadlock has prompted AMEC to divert its infrastructure talent to other nations, such as Chile.

“The reality is we look for projects elsewhere that are ready to go,” says Steege. “Any time you have an opportunity to do work outside the U.S. with personnel in the U.S., given where the economy is right now, that's a good thing.”

Meanwhile, the national commitment to infrastructure remains embroiled in election-year politics. And there is no change in the long-running erosion of engineering training. In the latest report, for 2008-2009, 25.6% of master's degrees in the United States were business degrees, predominately MBAs, second only to 27.2% in education degrees. Just 5.3% reflected advanced engineering degrees. The level of engineering masters dropped from 7.3% in 1970-1971, while the level of MBAs climbed from 11.5%.

Still, there's hope. Stanley Tucci's Eric Dale, in his 90-second monologue—an eternity in today's Hollywood short-attention-span filmmaking—explained the essence of infrastructure. In an interview with Entertainment Weekly, Tucci said, “The numbers are very real to the character, but still they're an abstraction. I mean, he's probably close to a savant, but there's a true emotionality there.”

The film character beautifully captures the “emotionality” that so many Americans feel about their country's roads and bridges, ports and terminals. We want them to be the best, and we understand they must be if we are to stay competitive in a global market. The serious question is whether public-private partnerships, and local and national governments, are up to the task.

Bill Barnhart, a Chicago-based financial writer, was a business editor and columnist for the Chicago Tribune for 30 years. He is the author of MSCI's 100th anniversary history, “Links in the Long Chain.”