US Infrastructure: Invest for a Boom...

The dilapidated state of much US public infrastructure, ranging from airports to highways, can be shocking for a visitor arriving from Europe or Asia. As evidenced by the tragic bridge collapse in Minneapolis last year, this is not just hampering national productivity but is becoming a critical threat to ordinary Americans. Over 25% of road bridges nationwide need urgent structural reinforcement or replacement at a cost of $140bn according to State transport officials, and yet additional Federal spending on bridge repairs is set to be just $1bn this year (and even that paltry amount has been vetoed by the Bush administration). Basic physical infrastructure from waste water treatment and dams to the electrical grid has been chronically underinvested in the US for decades (much of the highway network has seen little more than patchup repairs since the Eisenhower era, power black outs have become increasingly common), and sadly it may take further disasters to spur radical political action. The total bill just to repair and replace existing transport infrastructure reaching the end of its design life (without adding meaningful new capacity) is estimated by the American Society of Civil Engineers at $1.6trn; yet total current investment by private and public entities combined is just 0.6% of GDP, against 3.5% in Europe and 9% in China. A Congressional commission in 2005 recommended spending of $225bn a year over 50 years (more than twice current levels) just on surface transportation systems. At a time when existing public transit systems are overloaded as ridership soars in response to $4 gas, the need for far more extensive urban transit systems is obvious. The conclusion must be that Americans will face higher taxes and user fees, an inevitability thay may accept only when they face mounting disasters; the deficit will also expand dramatically, perhaps hitting $1trn within a couple of years as predicted by Bill Gross among others. The private sector has had surprisingly limited involvement in owning and operating US infrastructure compared to Europe and Asia; many French highways have been built and operated as private toll concessions since the 1950's, and key airports and ports are privately owned, from the UK to China; the public-private partnership model is well tested abroad. The US will now have to play catch-up, and many prize public assets such as JFK and O'Hare airports, urban transit systems, tunnels etc may be sold off to raise funds for reinvestment; however the public sector will still have to directly finance the vast bulk of the necessary investment. After many years of private overconsumption and public underinvestment, the pendulum is set to swing in the opposite direction regardless of who sits in the White House next January. A wise candidate would make a virtue of this necessity, and offer voters a new 'New Deal' based on long overdue strategic public works spending rather than another stimulus to private consumption that just ends up leaking to foreign central banks. That derisory current spend of 0.6% of GDP will have to soar and I suspect reach European levels of closer to 4% within a decade, or the US economy will begin to seize up as critical system failures multiply. That spend will come directly from a structural reduction in consumption; on a medium term view, sell retailers and mall owners, buy exposure to construction equipment and engineering services. ETFs offering international exposure to infrastructure spend (many foreign companies will dominate the US market given their experience) include the SPDR FTSE Macquarie Global Infrastructure 100 (GII) and the PowerShares Global Water Portfolio (PIO). Despite the hundreds of billions spent on the 'War on Terror', the biggest threat to the infrastructure supporting the US economy isn't from any number of terrorist bombs but from simple wear and corrosion, which will prove far more devastating if left unchecked.

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