Saturday, December 7, 2024

Who will fund the looming infrastructure investment gap?

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Major infrastructure funding packages passed by Congress have significantly narrowed the country’s chronic infrastructure funding gap, but new challenges like extreme weather and the uncertainty of future federal spending levels means the gap could widen again over the next two decades, bringing with it significant drags on the U.S. economy.

That is the message from the American Society of Civil Engineers in a report released Monday that analyzes the economic impacts of national infrastructure investment through 2043.

The report, which comes out as the White House celebrates infrastructure week across the country, suggests on the funding front that it will take a mix of federal, state, local and private money to narrow the gap.

“Much has changed since the last Failure to Act report, especially at the federal level,” said ASCE president Marsia Geldert-Murphey Monday at a conference in Washington, D.C. accompanying the release of the report, which previously had been named Failure to Act.

The 2021 Infrastructure Investment and Jobs Act and 2022’s Inflation Reduction Act together injected $580 billion into the country’s transportation, water, energy, and climate infrastructure markets from 2022 to 2026, the group said.

The packages “stopped the gap in its track,” Geldert-Murphey said, calling them “a tremendous step forward.”

“The name Failure to Act no longer felt appropriate,” she said, so the ASCE’s latest report is dubbed Bridging the Gap to reflect positive progress on addressing the country’s decades-long infrastructure gap.

The report examines the investment gap under two scenarios: Congress continues IIJA funding after its 2026 expiration and into the next decade, or “snaps back” to pre-IIJA levels, which would have a “cascading” negative impact, reducing household income, manufacturing and the GDP.

It’s going to take a mix of public and private money to narrow the country’s infrastructure funding gap, said the American Society of Civil Engineers president Marsia Geldert-Murphey as the ASCE unveiled a report analyzing the future gap.

ASCE

From 2024 to 2033, the ASCE estimates $7.4 trillion of infrastructure needs, with $15.2 trillion needed through 2043.

Even if Congress assumes the IIJA and IRA as baseline funding levels in the future, it won’t cover all the needs amid a shifting infrastructure landscape that includes work-from-home trends, extreme weather and the energy transition, the ASCE said.

The question of funding

“The gap is not the full responsibility of the federal government,” Geldert-Murphey said. “We need states and local governments to prioritize the built environment, and we need eager participation from the private sector.”

On the state and local side, governments need to ensure they have the room to take on debt to fund projects, said Darren Olson, chair of the ASCE Committee on America’s Infrastructure.

“States and local governments need to make sure they have the funding there; that they’ve got the capacity there, to keep up with this sustained federal investment,” Olson said.

And “the private sector certainly has a role to play in this, whether with public-private partnerships or [private utilities],” he said. And “finally, the engineers: it’s up to us to innovate both in how we use technology and advocate for policies.”

Terry Smith, CEO of Smith’s Research and Gradings, pointed out the size of the municipal bond market as the engine of local infrastructure finance. The muni market becomes, with principal and interest, a $12 trillion market, Smith said.

“That’s the investment in infrastructure by states and cities,” he said. “That’s $300 billion a year to keep it going.”

On the private side, the latest survey from the Global Infrastructure Investor Association shows that the U.S. ranks number one as the world’s “most attractive investment destination,” according to the Global Infrastructure Investor Association, which released the biannual survey Monday on the heels of the ASCE report.  

“International investors have particularly ranked the U.S. for the attractiveness of its digital and renewable energy infrastructure sectors,” the GIIA said. “Sentiment has also turned more positive for investing private finance in the transportation sector, including airports, tolled roads and bridges, railways, and seaports.”

Barriers to private investment include “lack of clarity on funding models, a lack of visibility on future project pipelines, and further streamlining of permitting processes that enable quicker decisions and get improved infrastructure up and running faster,” the GIIA said.

Speaking at an ASCE panel Monday, GIIA’s senior U.S. advisor David Quam noted that the U.S. is “built on municipal finance – on bonding and borrowing – and the rest of the world does it differently.”

For years, the U.S. ranked fourth or fifth among infrastructure investors, he said. But the IIJA and IRA have “shifted all the momentum back to the U.S.,” he said. “There’s an opportunity to bring private investment because the federal government is back in the game,” he said. “There’s an appetite now – we’re building, we’re investing, we’re repairing.”

Private investors are eager to “partner with state and local governments because in the long-term this gap can’t be closed at the federal level,” Quam said. “It needs to be closed at the federal, state, and local and private level. It’s the only way to get there, and that spells opportunity.”

The Army Corps of Engineers has increased its use of P3s particularly in the flood risk mitigation area, said Edward Belk, the Corps’ Director of Civil Works, on a different panel. Belk cited the Fargo-Moorhead project, which won the Bond Buyer’s 2022 Deal of the Year, as the Corps’ largest P3 to date.

“There’s trillions in private capital on the sidelines and this gives us the tool to deploy some of that capital,” Belk said. “P3s are not for the faint of heart,” he added, but “we’re excited about the authority that Congress has given us.”

Washington Transportation Secretary Roger Millar said private investment gives governments another tool but “that’s not funding, that’s financing.”

“A lot of the P3 stuff is ‘You’re borrowing money from the bond market why not borrow from us?’ or ‘If the private sector could manage, we would be more efficient,'” Millar said, “and that’s fine, but it’s not making the difference.”

More lucrative moves come from concepts like adding value to land from transportation projects, as the state did in downtown Seattle, he said.

Quam said private capital makes sense for “maybe 15% to 20% of the projects. But finding that 15% to 20% becomes part of the long-term solution to start filling the gap.” Ensuring the deal works for both sides is key, he said. “The industry has learned that a good deal creates another good deal – a bad deal and you don’t get another one.”

Investment gap by the numbers

The ASCE analysis estimates that from 2024 through 2043, $15.2 trillion in infrastructure investment is needed to bridge the gap across five sectors: surface transportation; energy; drinking water, waste and stormwater; airports; and ports and inland waterways.

From 2024 through 2033, needs total $7.4 trillion of infrastructure. If Congress maintains current spending levels, it will bring $4.5 trillion in investment, covering 60% of the needs and leaving a $2.9 trillion gap.

If Congress reverts to pre-IIJA funding levels, the investment will cover less than 50%, leaving a gap of $3.7 trillion. The difference between the two scenarios is almost $800 billion through 2033.

The difference between the two scenarios through 2043 reaches $2 trillion through 2043.

The ASCE found that manufacturing and the finance and real estate sectors the most impacted by deficient infrastructure.  By 2033, the manufacturing sector would lose $1.15 trillion due to inefficient infrastructure if funding reverts to pre-IIJA levels, compared to $877 billion if funding levels remain. 

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