In this heated election year, we can expect to hear candidates calling for more investment in public infrastructure. It’s a campaign perennial, popular among both policymakers and the public, to promise to create jobs and boost the economy by building roads, highways, mass transit systems and more.
The hard part is following through on those promises. Tight government budgets and partisan gridlock have resulted in years of inaction and delay on building and maintaining the critical projects that make America run. These aren’t new problems; the dynamic of underinvestment in infrastructure stretches back over several decades.
But that’s no excuse to allow this dynamic to continue. It’s time to get serious about investing in infrastructure again-and America’s capital markets can play a vital role in making that happen.
Why invest in infrastructure now?
There are good reasons to get serious about infrastructure investment now:
The need is serious. In 2013, the American Society of Civil Engineers’ (ASCE) published its quadrennial “infrastructure report card” awarding a “D+” grade to the U.S. infrastructure system. The ACSE estimates that by 2020, the U.S. will need to invest $3.6 trillion to upgrade roads, rail systems, airports, water systems, power grids and other public infrastructure. Delaying that investment will only make it more expensive as costs increase and the existing infrastructure deteriorates even more with time.
Low interest rates make building now cost effective. Economist Paul Krugman argues in The New York Times that we should take advantage of the current low interest rate environment to address the “obvious infrastructure deficit.”
“It has never been cheaper to address that deficit,” Krugman writes. “Government borrowing costs are at record lows; markets are in effect pleading with the government to borrow and spend. So why not do it? It’s completely crazy that public construction as a percentage of GDP has declined to record lows even as interest rates have done the same.”
It’s a boon for a still-sluggish economy. Economist Mark Thoma of the University of Oregon and analyst at CBS MoneyWatch, makes the case that “America needs to begin rebuilding its infrastructure now, not later,” emphasizing the broader economic benefits.
“First, investment in infrastructure can improve productive capacity and increase America’s economic growth rate, which has been slow in recent years due to falling productivity,” he writes at CBS News’ Moneywatch. “But investment in infrastructure could help reverse this trend.
A role for investors
Those experts emphasize the important role government plays in leading infrastructure financing and construction. But don’t overlook the critical role that private investors play in making it all possible.
A recent Bank of America Merrill Lynch (BOAML) report, “Rebuilding America: The Road Ahead,”suggests investors will make an equally important contribution to the mission of restoring the nation’s infrastructure framework.
The report points to the Fixing America’s Surface Transportation (FAST) Act, passed by Congress in December to provide additional federal funding for infrastructure projects, as a good first step. But it points out that the FAST Act’s $305 billion in funding over five years is “only a small down payment” on what’s needed. The question is where the rest of the needed investment will come from.
“Private investors could provide an important part of the answer,” the BOAML report notes. “From buying the bonds that state and local governments issue to finance construction projects, to investing in the stock of companies in several key industries that do the work, there could be opportunities for both steady income and growth for investors who support the rebuilding of America.”
Importantly, the BOAML report seeks to look beyond the world of scarce federal funding to seek out new local solutions for funding infrastructure. They point toward promising financing options through public-private partnerships and through municipal bond issues (munis).
The U.S. is somewhat unique in the world in that most of the responsibility for financing infrastructure lies with state and local governments. Munis are the most important tool states and localities have for financing infrastructure projects. State or local government entities issue municipal bonds to fund projects such as highways, water and sewer systems, mass transit, hospitals, airports, harbors and other vital public projects.
In 2014, public spending on transportation and water infrastructure projects was an estimated $416 billion, according to the Congressional Budget Office, with three-fourths of that total coming from state and local governments. Most of that funding was financed through municipal bond issues.
Project Invested has frequently examined the role capital markets can play in building, rebuilding and maintaining infrastructure. We’ve looked at how municipal bonds can build exciting new projects that bring big benefits to local communities, and how those same investment vehicles can help communities rebuild after tragedy strikes. The evidence is clear that capital markets can and should be part of the solution when it comes to kick-starting U.S. infrastructure spending.
Investing in infrastructure is a conversation Americans need to have. In the months to come, candidates will likely make the case for how they would encourage greater investment in infrastructure, benefitting the economy and providing another example of the vital role the capital markets continue to play in building U.S. cities and communities.