Rebuilding America: The Road Ahead

For anyone concerned about the state of the country's transportation systems, the December 2015 passage of the Fixing America's Surface Transportation (FAST) Act—the first bill of its kind in more than 10 years—must have come as qualified good news. The nation's roads, mass transit systems and passenger railroads are in dire need of repair and modernization, and the new law provides $305 billion in federal funding over five years. Yet that money may only represent a small down payment on what is actually required, and it doesn't address deficiencies in other vital parts of the American infrastructure.

The list of problems is long—and growing. A third of roads are in poor or mediocre condition1. Every two minutes, a water main breaks somewhere, flooding streets and leaving taps dry2. Portions of the power grid were built as far back as the 1880s, leaving it vulnerable to outages and cyber attacks3. Freight and passenger delays on the nation's congested railroads cost the economy an estimated $200 billion a year. (The freight bottleneck in Chicago is so bad that it can take a train more than a day just to pass through the city.4) And one in nine of the nation's 607,000 bridges is "structurally deficient," according to the American Society of Civil Engineers' 2013 Report Card for America's Infrastructure.⁵

The ASCE details these and other woes in that report card, issued every four years. In 2013, the engineering group gave the U.S. infrastructure an overall grade of D+—up from a D in 2009, mostly thanks to federal stimulus spending after the financial crisis. But during the past 50 years, not nearly enough has been invested in large-scale projects that benefit the public good. Since 1964, spending on public nonresidential infrastructure as a portion of gross domestic product (GDP) has been declining steadily and is now at record lows.⁶

Wanted: $3.6 Trillion

Other spending priorities and economic problems partly explain the neglect, says Chris Hyzy, chief investment officer for Bank of America Global Wealth & Investment Management. This was especially true during the 1970s and '80s, when inflation was high, global tensions led to a costly defense buildup, and the savings and loan crisis cost the federal government $124 billion. Moreover, past recessions have strained municipal budgets and left many public works projects on the drawing board.

The United States now needs to invest $3.6 trillion in infrastructure by 2020, according to ASCE estimates.⁷That's a staggering number, and it clearly goes far beyond the funding in the FAST Act. But spending the money could bring clear economic benefits, says Karin Kimbrough, head of Macro and Economic Policy at Merrill Lynch Wealth Management. "Infrastructure investments are the engines of growth," she says. In the short term, dollars spent on new bridges, tunnels or roads raise employment, which in turn increases consumer spending—or what's known as the "multiplier effect." Large public works projects create good-paying jobs for engineers and construction workers, who are then more likely to buy cars or remodel their homes. And improved infrastructure ultimately boosts productivity by allowing corporations to make and transport goods more efficiently, and get commuters where they're going on time.

Meanwhile, the cost of not acting—of failing to repair or replace deteriorating infrastructure—could be crippling, sapping $3.1 trillion in GDP from the American economy and leading to a loss of 3.5 million jobs by 2020, according to the ASCE.8 "But how do you find the money?" asks Adie Tomer, a fellow at the Brookings Institution who studies infrastructure. "That's the trillion-dollar question."

Private investors could provide an important part of the answer. From buying the bonds that state and local governments issue to finance construction projects, to investing in the stock of companies in several key industries that do the work, there could be opportunities for both steady income and growth for investors who support the rebuilding of America.

Local Solutions for a National Problem

The U.S. government has a long history of financing the nation's infrastructure, from the early post roads carved out to distribute mail to the Interstate Highway System, created by an act of Congress in 1956.9 The latter, one of the greatest public works projects in history, transformed the culture and economy of the United States by increasing the flow of people and goods throughout the nation. But the federal Highway Trust Fund, which pays for highway and bridge construction and maintenance, as well as for mass transit, has teetered on the brink of insolvency for years. The FAST Act directs an additional $70 billion into the fund during the five years the law covers. But Congress chose not to raise the money by hiking the federal gas tax, which hasn't seen an increase since 1993, and that decision could lead to additional shortfalls down the road.¹⁰ Yet despite such ongoing issues, Anna Kaminskaya, Engineering & Construction analyst with BofA Merrill Lynch Global Research, believes that momentum in Washington is heading in the right direction—and that motion has enabled legislators finally to craft a workable transportation bill. "Congress wants to show it can get things done," says Kaminskaya, "and this bill is a good start."

Yet as important as federal spending on infrastructure is, more than three-quarters of the cost of building and maintaining the nation's roads, railways, airports and water systems comes from state and local governments, which typically issue municipal bonds to come up with the money.¹¹ (For more about investing in municipal bonds to support infrastructure projects, see "Bonds That Build Roads.")

Could the Private Sector Help?

One way for municipalities to spread the risk of funding infrastructure projects is to work with a nongovernment partner. Public-private partnerships, or PPPs, already common in other countries, enlist companies to build or manage toll roads, bridges or wastewater treatment facilities. The outside companies can contribute financing, expertise and efficiency to the projects, and profit by collecting tolls and other user fees. The Obama administration has proposed allowing PPPs to issue municipal bonds as a way to promote construction of new airports, seaport facilities, mass transit, solid waste disposal, sewer and water projects.¹²

CIO Chris Hyzy talks to Ron Insana about much-needed infrastructure spending that can lead to an era of smart transit and economic growth.

However, it's not clear how much of a role PPPs will play as part of the long-term infrastructure solution, says Christopher J. Wolfe, head of the Merrill Lynch Chief Investment Office. If infrastructure catastrophes mount, "the conversation about privatization could move along faster," says Wolfe. Yet he also wonders whether Americans may be uncomfortable with the idea of private sector management of infrastructure. "There's a long history in this country of community-based financing for the public good," he says.

Casey Dinges, ASCE senior managing director of public affairs, agrees that PPPs aren't always popular. For instance, commuters often complain about the high cost of using privately managed toll roads. Still, according to Dinges, some drivers in Virginia appear to approve of the state's new HOT (high-occupancy toll) lanes on busy I-495 and I-95, built and operated by an Australian firm. Significant numbers of commuters opt for the new lanes, which help them avoid bottlenecks and make for more predictable travel times, according to state officials.

The Search for Smart Solutions

While finding the financing presents its own set of challenges, advances in technology are creating new questions about how to fix America's aging infrastructure.

Consider the national power grid. Major investment in new power lines would seem to be called for to connect homes and businesses with big power plans. Yet a push for alternative energy sources and improving technology could change the way electricity is produced and sold. Homeowners and companies in many areas are finding it can be cost-effective to install solar panels on their roofs and make their own power—and even store it—selling unused juice back to the utilities. "The nature of electricity transmission and storage may fundamentally change," says Wolfe.

For investors, uncertainty about how the U.S. infrastructure will be rebuilt can make it difficult to know where to put your money. A boom in projects would have some obvious beneficiaries, such as engineering and construction firms, notes Hyzy. The same is true for companies that provide pipelines and storage tanks for the oil and natural gas industries. Railroads will be busy moving construction materials. And commodities, which have been in what Hyzy calls a "stupor cycle," could be reinvigorated. "The importance of copper, cement, aluminum and iron ore starts to rise again when there's a credible movement toward rebuilding the infrastructure of America," he says.

The Need for a Clearer Vision

Important questions remain. Will Congress pass legislation loosening restrictions on the export of liquefied natural gas? For example, Congress' decision (at the close of 2015) to end the 40-year-old ban on most U.S. crude exports means a new network of pipelines, increased rail capacity and new or overhauled ports may be needed, says Hyzy. Electronic infrastructure—including the so-called Internet of Things, which is creating a vast automatic network of interconnected devices—could make America more productive, but only if networks expand to keep up with exploding demand. "We have an enormous gap between what technology is about to allow us to do and what our infrastructure can handle," says Hyzy.

For Tomer of the Brookings Institution, this leads to a question that goes beyond how to pay for what needs to be done. "I think it's more important to ask: What should we be investing in? And what are we trying to achieve with our investment?" he says. The clearer the goals of infrastructure repairs and improvements, the more likely there will be support for spending the money, particularly in the form of voter-approved bond measures. "When people understand what they're getting in return, they're more willing to pony up for those shared investments," says Tomer. A common vision for a rebuilt America may be the key to bridging the infrastructure-investment gap.