Imagine facing the following situation as the leader of your enterprise.
Owing to years of underfunding and neglect, a physical asset that’s a basic driver of your competitiveness and productivity is deteriorating.
By not repairing it, you’ve already experienced significant liability costs due to preventable deaths and critical injuries. Experienced engineers have publicly stated the situation will only worsen absent significant investment.
In addition, not repairing the asset will further erode your company’s efficiency and deteriorate its competitive position in an increasingly global market.
Furthermore, although cash flow is negative at present and your organization has far more debt than you want, you can borrow at close to zero percent interest rates and creditors deem your company as credit worthy. Additionally, the price of repair has never been lower owing to record excess capacity in the repair industry.
If you do not repair the asset, you are far more likely to build up more debt as your future economic performance will only decline, reducing the cash flow needed to pay down prior debt. Owing to the quirkiness of your industry, repairing this asset will not only improve your long-term competitiveness, as soon as you start the repair work, your output and financial returns will increase immediately.
Finally, if you don’t want to fully finance the repair with debt, you could partner with outsiders who would finance the most expensive parts of the repair in exchange for part of the cash flow generated directly by this part of your physical capital stock.
A savvy business leader would certainly say, “We must make the repair.”
Why then, in our growth-impaired US economy, are Republican political leaders, who represent a significant percent of our nation’s business leaders, saying, “We cannot afford to make needed infrastructure repairs,” when handed the same set of facts as I outlined above?
After reading about infrastructure banks and watching a CNBC special on America’s infrastructure, I believe that we must invest far more in public infrastructure, now. The following statistics the show producers presented were daunting.
- There are 70,000 bridges with the same structural deficiencies as the I-35 Bridge in Minneapolis that collapsed recently taking 13 lives. When asked if a collapse like this can happen again, the Minnesota DOT representative appearing on the TV show said, “Unfortunately, it will.” In total, 600,000 US bridges need repairs, including one-third of urban bridges that are rated “structurally deficient” and “obsolete.”
- One-third of American roads are in serious need of repair. And too many urban roads are too small for the traffic they bear. Shipping giant UPS estimates its fleet loses $100 million in profits for every 5-minute traffic delay across the fleet. In 2009, the US consumed an excess of $3.9B gallons of gas due to traffic jams. That’s only 2.2% more fuel than total 2008 fuel usage, but the “congestion premium” has increased steadily from .4% in 1982 as traffic became increasingly congested.
- Finally, thousands of miles of underground pipeline are in trouble and the estimate to bring levees up to standard runs $50B.
The final argument for infrastructure spending is economic. The US economy sits on the verge of a double dip recession as the European Union and US housing problems continue. Every $1B in US DOT spending, CNBC reported, generates 35,000 jobs.
Congress and the White House nevertheless are in loggerheads over infrastructure. We are on the 8th extension of a 2005 US-DOT plan and we have not increased the gas tax (used to repair roads and bridges) since the early 1990s despite growing fuel efficiency.
It’s time we stop making infrastructure spending a political football in a defeating game of black and white thinking. Democrats think any government spending is smart spending while Republicans conclude the opposite. Caught in between, our infrastructure is crumbing like any road would be built on such a shaky foundation. Infrastructure spending is smart government spending.
As part of a recent client assignment, I was fortunate to hear the economic forecast of Ken Simonson, the Chief Economist of the Association of General Contractors. According to Simonson, the anticipated drop in public infrastructure spending (as the 2008-11 federal stimulus ends and state governments deal with budgetary issues) is frightening given the disrepair of US infrastructure and how a spending drop will worsen construction industry employment. The 2007-2011 loss of construction jobs was already alarming. We are steadily losing human capital in the construction industry. When public infrastructure spending increases, which it will some day, our money will flow to China and other nations with stronger infrastructure capabilities and we’ll experience considerable inflation in construction wages.
Waiting for the next election to resolve infrastructure spending is waiting too long. Penny-wise is pound-foolish in the case of infrastructure.