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The Coming Infrastructure Revolution: Chapter 1

By Norman F. Anderson, President & CEO, CG/LA Infrastructure

Chapter 1: The Coming Revolution in US Infrastructure And Why it Needs to Happen, Now!

Some years ago I had the opportunity of visiting a country just as it began its infrastructure revolution.  They were quickly throwing out the old guys, bringing in young financial executives, and getting ready to turn construction companies into financially driven businesses.  As it happens, I was having lunch with one of the old guard, who was perplexed, angry and defeated. ‘Wait until they find out how little these finance guys know about infrastructure,’ he told me.  It was a wrenching moment for my luncheon companion, and for everything that he knew and – at least in the infrastructure world – believed in.  This kind of change has come to executives in China, Korea, Singapore, Spain, Australia and Canada – all countries at the forefront of the global infrastructure marketplace.

How does an infrastructure revolution happen?  Who makes these decisions?  It’s a country’s top political leadership, period.  The heads of the largest infrastructure firms were told three things:  (1) you need to get big, and you need to modernize, through acquisition and investment; (2) you need to turn yourselves into sophisticated financial entities; and (3) you need to build balance sheets that will allow you to invest in projects – put skin in the game – and you needn’t worry, we will make sure that you generate high margins.  This last point is important because, crucially, it became a key productivity driver – and, a critical piece of the story which we will get to in a moment, it created a big pipe export channel for the country’s infrastructure industry, and all of the goods and services that go into it.

Why should the US Act? Do we really need an infrastructure revolution?

Screen Shot 2013-07-09 at 7.50.12 AMThree critical features of any successful infrastructure build need to be kept clearly in mind.  But to get the process going you need a vision – a clear and compelling vision of the process and its benefits, one that is wholly shared by the political class and the population at large.  Without that there is no chance of moving forward.  Vision must come first, as it did  for the Interstate Highway System, the Clean Water Act or Roosevelt’s electrification drive.

Here is a way to think about the vision we need:  First, we need to dramatically increase infrastructure investment levels, tripling the current level of infrastructure investment – raising our level of investment in infrastructure not by 20%, but by 200%.

Second, we need to dramatically increase the productivity of that investment – clearly a dollar spent in the US on infrastructure yields nothing like a dollar spent in China, or Brazil, or even Europe, and so we need to systematically address the root causes of this problem.  Third we need to change our infrastructure matrix, triage the existing system so that we cease to be preoccupied with non-competitive assets, and build for the future.   Vision creates the discipline and the rules to make these decisions.

The graph on the previous page shows the impact of an increase in infrastructure investment on US GDP.  If we were to increase our level of investment to 4.5% of GDP (roughly 1980 levels) then US GDP would be $2.5 trillion greater in 10 years than it is currently projected to be.  That is over 12% greater!  Think of what that would mean in terms of jobs, per capita income, and opportunities.

A Healthy Level of Investment

Screen Shot 2013-07-09 at 12.21.17 PMLook at the critical metric of per capita investment.  Right now we are not investing anywhere near the level that we need to invest, or the level of investment in 1980.

Thirty years ago we invested $770 in infrastructure for each man, woman and child in the country.  That figure, controlling for inflation, has declined to less than $230 in 2013 – a prime reason for our declining global competitiveness, as well as our declining per capita GDP.

Note in the graph above that if we were to double our infrastructure investment level, going from 1.5% of GDP invested in infrastructure to 3% (a heroic number according to most people) per capita investment would barely exceed $500 by 2022.  Even at 4.5% we wouldn’t get back to 1980 levels until 2020.

So its urgent that we recalibrate how we think about an appropriate level of investment.  The target – after so many years of declining infrastructure investment – needs to be incredibly ambitious.  Note also that there is an extraordinary pent-up infrastructure demand in this country – not just for projects that we know about, like transit for our cities, or port dredging on the East Coast, but also for those ‘projects of the imagination’ that we can’t yet see, but that will serve as critical building blocks – technically, financially, imaginatively – transforming our competitiveness.

Another way to make this point:  Recall that during the last thirty year period of rapid globalization, we have been disinvesting in the area that is most critical to our ability to successfully respond – our infrastructure investment outlays have declined by something on the order of 80%.  In the race for competitiveness we are unilaterally disarming ourselves.

Creating Value, Globally

Screen Shot 2013-07-09 at 12.22.09 PMAnother extraordinary benefit of investing in a country’s major productive assets is the creation of outsized export capacity – the ‘big pipe,’ for goods and services that I mentioned earlier.  This point couldn’t be more important, because the world – not just the US – has been underinvesting in infrastructure for the last 20 years (indeed the lower and middle range of emerging economies have never invested at all).  The world is about to move into a tremendous infrastructure growth cycle – one in which US firms, and the US in general, are positioned poorly – at an increasing pace.(1)

The graph above shows the size of the US infrastructure market over the next ten years, from 2013 – 2022.  If we continue to invest at 1.5% of GDP (and given present attitudes it could be significantly less) the market will remain flat reaching only $200 billion by 2022.  This trend line would be disastrous: headcount might return to 2008 levels, but there would be virtually no incentive for innovation – let alone the kind of big thinking that drives the kind of technological, financial and competitiveness breakthroughs that we desperately need.

Investing at 3% of GDP (we could fully ramp up by 2016) the US infrastructure market would reach $500 billion, nearly equal the projected size of the European infrastructure market.  This would put us back in the game.  But note that it is hard to imagine reaching, let alone sustaining, a 3% level of infrastructure investment without excellence in project selection (Chapter 3), and dramatically increased productivity (Chapter 4) — the public, and the political system, simply wouldn’t support it.

So even though we currently invest only 1.5% of GDP in infrastructure, and are stressed to reach that level, we must figure out how to achieve a level of investment three times greater (Chapter 2).  The reason is that given the underinvestment of the last 30 years, and the pace at which the world has moved ahead of us, we are going to need to quickly reach and sustain that level just to begin to regain our competitiveness.  If we do that, however, then we will have created the industry players – the companies with strong balance sheets, and a track record of extraordinary performance – ready to participate in the coming global infrastructure build.  So when we talk about getting to 4.5% of GDP – which would create a US market of nearly $1 trillion by 2022 – we are talking about both roundly increasing per capita income in the US, and influencing and building great projects around the world.

A Word about this Exercise

The overall aim is to create an interactive discussion with infrastructure executives about how to grow the US marketplace, so that this market becomes ever more competitive in the incredibly fast-paced global environment.  Subsequent chapters will broaden the discussion.  I hope that readers will help with ideas and suggestions – as well as criticisms.  This is a work of imagination – imagining what we can do, what we must do, and what we should do, in order to re-build and modernize our country for the next generation.

Coming chapters include:

  • Chapter 2. Financing the Revolution
  • Chapter 3. What We Build
  • Chapter 4. The Productivity Issue
  • Chapter 5. Why Creativity Matters
  • Chapter 6. The Top 100 Infrastructure Projects in the US – Projects Strategic to Competitiveness

(1) Of the Top 50 international contractors only 3 are from the former infrastructure superpower of France, while 7 are from Spain.  More tellingly, 9 are from China; 6 are from Korea; and 11 from the rest of Europe.  Seven are from the US, with the vast majority of their work coming from within the US, and only 2 are from Japan.

_____

Please share your thoughts via comment or at nfa@cg-la.com. Download the PDF at: www.cg-la.com/documents/TheComingInfrastructureRevolution.1.pdf

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