Special Report: Investing in America's Infrastructure
By John Eckbert and Michael Rosendahl10 April 2009
America's current infrastructure offers a dim reflection of the past. The recently passed stimulus bill is expected to provide a short-term boost to the construction industry, and will address several infrastructure needs.
Exclusively for American Cranes & Transport, John Eckbert and Michael Rosendahl report that ultimately, a comprehensive approach to expand the much needed investment in infrastructure is vital to preserving this asset while ensuring future growth and global competitiveness.
America's history tells a story of innovation followed by periods of significant investment in technology and infrastructure that created competitive advantages for the United States in the global marketplace. In the 1950s, significant investments were made to create the US transportation networks, which became one of the nation's greatest assets.
Today, America's infrastructure is in poor condition, deteriorating rapidly, and in need of significant investment. Such neglect cannot last indefinitely, and the effort to restore these critical resources is a crane-intensive proposition, collectively representing $100s of millions in work for crawler, wheeled mobile and tower cranes.
Other more urgent funding priorities have squeezed out the important infrastructure allocations in state and federal budgets. Further, the purchasing power of the dedicated funding sources (mostly federal fuel taxes) have not kept up with demand, requiring an US$8 billion injection from general revenue funds into the Highway Trust Fund in September 2008.
These long-standing funding shortfalls are compounded by the country's current deep recession, severely reducing federal, state and local government spending on infrastructure at a time when it is needed most.
In an attempt to create jobs, stimulate the economy, and partially address the infrastructure funding problem, the American Recovery and Reinvestment Act (ARRA) of 2009 was signed into law on 17 February 2009. The stimulus package will provide a short term boost to the construction industry, although current levels will not compensate for the cutbacks from state and local spending.
Ultimately, a comprehensive approach to expand the much needed total investment in infrastructure is vital to preserving this asset while ensuring future growth and global competitiveness.
Numerous government and industry reports have outlined in great detail the increased utilization and deteriorating conditions of all aspects of US infrastructure. For example, the Interstate Highway System accounts for only 1.2% of the total miles of roads but carries 24.1% of the total Vehicle Miles Traveled (VMT).
In addition, over the last four decades, highway lane miles have increased by only 6% while VMT has increased by 194%. The overall decline of America's infrastructure is best represented by the recent grade of a "D" awarded by the American Society of Civil Engineers (ASCE) in their 2009 Infrastructure Report Card.
This grade encompasses 15 infrastructure categories that were evaluated by ASCE and reflects the current state after decades of underfunding. Of particular interest to the crane and transport industry, more than 25% of the nation's bridges are either structurally deficient or functionally obsolete.
Investment in the future
The current funding mechanisms used for infrastructure investment have failed to provide the intended benefits. The Federal Highway Trust Fund and Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) are both underfunded. The ASCE recently identified $2.2 trillion of investment over the next five years to repair and upgrade America's infrastructure to meet adequate conditions.
Corroborating this finding, the National Surface Transportation Policy and Revenue Commission estimated the annual investment required for the next fifty years at $225 billion a year to repair the current system and create the next generation of infrastructure required to sustain and ensure economic growth in the future.
Not only will sectors such as the crane industry benefit from a steady stream of construction projects, but the economy as a whole will benefit from the investment and efficiencies a refurbished infrastructure will provide. The Department of Transportation (DOT) estimates that for every dollar invested in infrastructure the economy receives $5.40 in economic return.
Despite disappointment over the lower than expected allocations within the plan, the ARRA does include an estimated $130 billion in spending for construction-related programs, $49.3 billion of which is devoted to the transportation sector. Additional allocations are made for energy ($30.6 billion) and water ($20.1 billion).
The ARRA requires that half of the bill's construction-related allotment be spent on "ready-to-go" projects vetted by the federal government by the middle of June 2009 as a way to quickly stimulate the economy and create jobs. Due to this stipulation, the states will quickly focus on prioritizing "ready-to-go" jobs.
The bill directs the DOT to take away any unused money and redistribute it to other states if a state doesn't commit at least 50% of its allotments within 120 days after the DOT apportions the money.
The DOT and Environmental Protection Agency funds will be distributed using currently established formulas while the Defense, Veterans and General Service Administration funds will be allocated based on contracts though the departments.
Even with a mandate to rapidly implement the stimulus package, the Congressional Budget Office estimates that only $34.8 billion, or 11% of the bill's $308.3 billion in actual appropriations outlays, will be used in the fiscal year ending 30 September 2009.
In fiscal 2010 spending will rapidly increase to an estimated $110.7 billion in appropriations-related outlays.
The investment in infrastructure will favour the larger cranes, but work should be spread over the crawler and hydraulic categories with tower cranes potentially benefitting as well. Crawler cranes with lifting capacity over 200 US tons will gain from the road and bridge work.
Hydraulic cranes will benefit primarily from the investment in new roads. Tower cranes could also profit from the increased investment in span bridges.
Unfortunately, investment through the ARRA will not accomplish the critical task of fully revitalizing infrastructure in the US. The stimulus bill will only cover a small portion of the total investment needed to repair, maintain and improve the country's infrastructure.
The crane industry will experience ARRA's impact in holding onto contracts that would otherwise have been lost or delayed by constrained state DOT budgets. As the data demonstrates, there are substantial needs in all parts of the country as are the dispersion of projects and budget shortfalls.
This combination demonstrates the national nature of the issue and substantiates the need for increased spending.
The states are currently suffering due to massive budget shortfalls, and have been forced to retrench and cut back expenditures with many construction projects being delayed or cancelled. A portion of these otherwise delayed or cancelled projects can now be funded by stimulus plan dollars.
The states will divide $27.5 billion to build and repair roads and bridges, which is substantially less than the $64.3 billion in projects that were deemed "ready-to-go" by the American Association of State Highway and Transportation Officials (AASHTO). A significant and necessary benefit provided in the ARRA is the elimination of the 20% matching funds states have traditional provided.
Without this provision most States would have been unable to supplement the federal dollars being invested resulting in lost construction spending.
Through the ARRA, a number of states will receive enough funding to reduce budget shortfalls and implement "ready-to-go" projects. California is the largest beneficiary, receiving $3.9 billion in ARRA funds which helped the California Legislature to pass a balanced budget on 25 February 2009.
Another big winner is Texas, which has a 2010 projected budget shortfall of $3.5 billion and received $2.8 billion in stimulus funds, financing nearly 50% of their "ready-to-go" projects. New York received $2.8 billion, mostly for roads and bridges while its budget shortfall currently stands at $13.7 billion, leaving a significant gap in the state's budget.
While federal, state and local spending is part of the answer, the government will also need to look towards public-private partnerships (PPP) to provide new sources of investment. Investment in infrastructure funds has continued to grow.
This has created a willing investor with much needed capital that needs to be put to work. More than $80 billion has been raised for infrastructure funds since 2004 with many others currently seeking financial backing. Active groups in this sector include Alinda Capital Partners with more than $5 billion in capital to invest in this sector and the Kohlberg Kravis Roberts & Co. which raised $10 billion in 2008 to invest in infrastructure globally.
Dedicated private investment funds are not the only participants in PPPs. Corporations have undertaken these partnerships with federal agencies, states and municipalities providing the investment and management needed to grow with demand.
PPPs have begun to spread throughout the United States with about 26 states undertaking these initiatives with both financial and corporate partners. Recent examples of PPPs in the US include the leasing of the Chicago Skyway to Cintra-Macquarie for $1.8 billion and construction of the Hudson Bergen light rail for $1.1 billion, which combined the resources of New Jersey Transit, New Jersey DOT, Federal Transit Administration, Washington Group International, and Itochu Rail Car and Kinkisharo USA.
The legislation passed by Congress and signed into law by the Obama Administration does provide a jolt of spending towards a gaping and ever increasing demand for infrastructure investment. The ARRA's impact on the crane industry, while helpful, is not of the magnitude once anticipated.
The process of passing the ARRA has shined the spot light even brighter onto the importance of American infrastructure and the funding required to fix it, leaving the door open for subsequent infrastructure initiatives by the administration.
To maintain its global economic prominence, America will need to develop a long term strategy and funding mechanism for fixing and expanding its roads, bridges, ports, waterways, waste water, and power supply. The pending demand for crane services continues to build as these inevitable expenditures are delayed and deferred.
A steadily growing level of investment in infrastructure will provide benefits throughout the economy, which will lead to new growth in all segments of the construction sector. A comprehensive plan will benefit not only crane companies and the construction sector, but the economy as a whole.
John Eckbert and Michael Rosendahl are investment bankers at PCE and manage the firm's efforts in the crane, construction and infrastructure sectors.