This is a guest post by Steve Loranger, Chairman, President and CEO of ITT Corp.
As awareness of the need for infrastructure investment broadens, the natural question is, “How do we pay for it?” This question of who should foot the bill has been a major barrier to progress in the U.S. and other Western nations, as I mentioned in a piece I wrote for the Huffington Post about the importance of channeling infrastructure funding toward water and air traffic management systems. I believe the path forward is through partnerships among government, businesses, and consumers — a point I addressed at the Milken Institute Global Conference in April of this year.
For years, Western governments have been unable to provide the funds necessary to build and upgrade infrastructure at a sufficient level. During the Milken conference, Martin Koffel, Chairman and CEO of URS Corp, pointed out that over the past decade, China has invested 5% of its GDP in non-residential infrastructure, while the U.S. has invested less than 1.5%. This deficit may very well affect our ability to compete on a global stage.
During the past few years, some governments have begun to recognize the need for a renewed investment in infrastructure. Consider NextGen, the new GPS-based air traffic control system here in the U.S. This project is among the most ambitious and important aviation infrastructure investments in U.S. history, as evidenced by the massive investment the FAA is making to fund this wholesale revamping of the National Airspace System.[SButtonZ button="digg"]
But as national debts grow in Western nations, government financing of infrastructure is forecast to become even more challenging. I believe public-private partnerships play a key role. Here also, we can look to NextGen as an example. The program requires a long-term investment for which the FAA required a great deal of initial capital. To address this challenge, ITT is investing more than $200 million of its own capital to help make modernized air traffic a reality in this country. In exchange for that investment, the FAA has granted ITT the rights to manage the NextGen program’s ADS-B ground infrastructure during the next 10 years.
Consumers must also play a significant role. In regards to water, most Americans do not pay the full cost for their water consumption. In Germany, water tariffs are nearly three times the U.S. average and closer to the true cost-of-service. Until we are willing to raise tariffs — broadly — our funding structure will remain unsustainable. This inadequate investment for maintenance and growth is unfortunately not restricted to the U.S., and is a prime contributor to the growing global crisis of water scarcity.
Another issue raised at the conference was the process by which infrastructure projects are prioritized for funding. Failure to measure and demonstrate return on investment is one of the major speed limits in allocating government and private capital toward infrastructure investment. We here at ITT run our business such that every dollar of investment goes through a rigorous analysis that measures not only empirical returns and cash flows but also social benefits. Proposals for infrastructure projects should be measured by the same yardstick. Determining how to measure both the financial and social rates of return, from providing safe drinking water to having peace of mind when flying, is critical.
While these suggestions will certainly be challenging to implement, I am optimistic that through strategic partnerships, we can achieve a consensus on how to invest in these vital needs and unlock the right level of funding needed to enact change. This approach is critical. We need government and business and citizenry to work together so the critical networks in our skies — and under our feet — will meet the needs of generations to come.
Tags: Dire straits, Lets Get Funding
I believe that asset sales will become more and more common over time. Unfortunately, these gains will probably be spent on previous obligations. Federal, state and local governments have shown without fail to be unable do almost anything without a crisis at hand.
[...] ITT Corp. President Steve Loranger sees a model for infrastructure financing in his own company’s efforts to remake the air traffic control system: “To address this challenge, ITT is investing more than $200 million of its own capital to help make modernized air traffic a reality in this country. In exchange for that investment, the FAA has granted ITT the rights to manage the NextGen program’s ADS-B ground infrastructure during the next 10 years.” [...]
Privatization is also problematic in how does one ensure that a private operator spends what is needed to maintain – and expand – services. Didn’t we have a couple of privately owned toll roads that reverted to state control when the owners failed to maintain the road to a standard that the state used – I believe it was Illinois.
The only way that it could possibly work would be for the gov’t to basically issue franchise agreements that would be extended upon audits and inspections of the infrastructure to ensure that the public will receive the levels of service that are paid for.
Developing countries always spend more on infrastructure than developed ones.
1. You want an economically supportable, rational investment program and yet you advocate taking into account “measures not only empirical returns and cash flows but also social benefits”. That guts the entire notion of acting in accordance with a rational plan. Once you open the door to using plug-in numbers for social benefits, you are in la-la land. Good luck with that.
2. The reason why we underinvest in infrastructure is known to all and not mentioned by you. It is because constructing anything more substantial than a bird feeder requires navigating years of studies, red tape, buying off of ersatz community activists, and fending off lawsuits, even when a project has solid support. That’s why we don’t build, and all the rest is just obfuscation.
[...] a CEO explores how to pay for new infrastructure projects. (Infrastructurist) Filed under: Campaign Blog [...]
We spend 3% of the federal budget on transportation infrastructure of all types. That’s why we have bridges falling in the river.
Its easily affordable, we have just convinced ourselves that we shouldn’t spend a dime on anything other than entitlements and military.
Phoney-baloney public-private partnerships just promise to turn over highly valuable assets to politically connected investors at a discount. No thanks.
Total spending on roads in the US, at all levels of government, is just under $200 billion, which is about 1.3% of GDP. Railroad and aviation spending brings it up to about 1.5%, which is normal by developed-country standards. This 1.5% is nowhere near enough to maintain the network properly, but that’s because past generations overbuilt.
[...] Steven Loranger, Chairman, President and CEO of ITT Corporation asks the age-old question, how do we pay for it? He forecasts that government financing of infrastructure will become even more challenging in [...]
How do we pay for it? Maybe we need to change our focus not on more dollars, but in getting VALUE for what we already spend. The issue that never gets enough attention is the artificially inflated (read high) cost of infrastructure due to to government involvement. This plays out in laws like the Davis-Bacon act and artificially high costs of Agency oversight and incompetence. The Davis-Bacon act has repeatedly been shown to be a racist law that was passed to protect Unions. It greatly inflates the costs of every project it has dominion over (same for the SCA). On the agency side, the FAA has absurdly high pay rates and not just for controllers. Examine how many GS-13 and 14 level staff members there are (http://php.app.com/fed_employees10/search.php). Have you tried to work any project through this expensive bureaucracy? FAA failures on modernization have wasted billions, yet they want massively more pots of money?. Look at the eight-year-old ERAM project (the key to NextGen). A single sourced contract, ridiculously expensive and it does not work. We find this out after the FAA accepted it and deployed it to multiple facilities. Bottom line….no business, no individual just focuses on raw dollars, they focus on getting the most VALUE of each dollar spent. We need to do the same on infrastructure.