Analysis

US infrastructure’s trillion dollar challenge

Infrastructure in the US needs trillions of dollars of investment to repair and renew it and that brings significant challenges for government and the industry, says Trevor D'Olier-Lees.

Bills for maintenance, repair and renewal in the US infrastructure sector amount to the billions, and even trillions, of dollars, putting pressure on federal and municipal budgets. Yet the need for infrastructure funding, however pressing, is old news. As a recent S&P Global Ratings whitepaper, Developing US Infrastructure in an Era of Emerging Challenges: Observations from Key Sectors, explains, added pressures are now facing government officials. Infrastructure needs to remain competitive in an age which demands more projects that are both environmentally sustainable and digitally innovative.

The report shows that a variety of tools exist in the market that could help overcome these challenges. With a track record built across the globe, these may have the potential to help federal and municipal governments modernise US infrastructure.

Sector-by-sector observations

S&P’s report took a look at a selection of key infrastructure sectors across the US, from roads, bridges and airports, to water and power, and highlighted some significant statistics. For instance, some 56,000 bridges in the country are structurally deficient. Across the transport sector, as much as $1.1 trillion worth of funding needs are outstanding.

Even supporting that most crucial of sectors, water, seems a considerable task. The Environmental Protection Agency (EPA) estimates some $655bn will be needed on repairs to pipelines and other facilities over the next 20 years. The American Water Works Association suggests the figure could even be as high as $1 trillion.

Additional challenges

If finding the funds for American infrastructure wasn’t enough of a challenge, new issues have cropped up.

For a start, the market may witness growing demand for environmentally sustainable infrastructure projects that can mitigate the drivers of climate change - by cutting down on greenhouse gas emissions - or at least for updates to make infrastructure more resilient to the adverse effects of global warming, such as flooding.

Developments may also need to factor new and potentially disruptive technologies into their design, so that cities might remain economically competitive in the digital age. US road networks may need to accommodate a rise in self-driving vehicles, and airports may need to modernise to account for greater traffic brought on by the growth of more fuel-efficient planes.

Existing tools in the market that could help

Where will governments find the means of overcoming these challenges? S&P’s report explores existing tools in the market that have been used to help channel private-sector capital to support repairs and development, as well as utilise innovative expertise to manage emerging challenges, while keeping in place public-sector oversight.

First up are public-private partnerships (PPPs). These have been used as a way for state and local governments to transfer long-term operational risks to the private sector, and to embed lifecycle thinking and technological innovation. Having already been used for the development of roads, it may be that PPPs could also apply to the water, social and airport infrastructure sectors.

The bundling of smaller infrastructure ventures into larger, aggregated assets - whether through corporate roll-ups, the securitisation of municipal assets, or the bundling of loans in state revolving funds - could provide another option. Since infrastructure is, by its nature, capital intensive, scale is an important factor in achieving cost-efficient financing. 

Governments could thus use PPP bundling to help attract the attention of large, institutional investors. S&P’s report notes that, having been applied to bridges, courthouse infrastructure, schools, police facilities and service stations in North America, bundling as a financing tool is gaining momentum. Yet significant room for growth remains and the water sector, for one, might be a key beneficiary.

A role for the government

Finally we have the role of government in shaping a supportive regulatory environment for infrastructure development. Tax incentives and subsidies have driven substantial private capital to the growth of the renewable energy and battery storage industries, for instance. 

Since 2005, when the Energy Policy Act was passed - which created a 30% investment tax credit for selected solar units - what was then an underutilised resource in the US has achieved rapid growth. While regulation and oversight have crucially remained in government’s hands, such methods have helped the power grid transform to meet the growing need to be sustainable.

New infrastructure challenges will doubtless continue to emerge. But with the right tools, the public and private sectors could work together to address them effectively.

Click here to download Developing US Infrastructure in an Era of Emerging Challenges: Observations from Key Sectors.

Trevor D'Olier-Lees is a senior director in S&P Global Ratings’ infrastructure practice.