The Infrastructure Stimulus – What Is Right With Private Investment?

“He Who Stops Being Better Stops Being Good,” Oliver Cromwell

Infrastructure projects – airports, water, transit, waterways, highways, tunnels – are endlessly fascinating. As project people like to say “if you’ve seen one project, you’ve seen one project.” This bespoke-ness makes scale and speed difficult. Right now as we urgently push toward three critical objectives, a vibrant economic recovery for our country, long-term personal safety for ourselves and our families, and enhancement of the U.S.’s global leadership position, we have a big challenge – we must have an investment model that is infinitely more robust than the one we have now.

It’s not just the money. JFK Terminal 1 is nothing like the Cadiz Water Conveyance Project, which in turn has nothing to do with the Baltimore to Washington MagLev project – much less with the Dallas/Houston High Speed Rail project in Texas. But these public works all have one thing in common – their ownership is creative, addressing our country’s infrastructure deficit outside of the normal public finance channels. Robust private investment in our infrastructure, adding energy and creativity to the current public model (now and for the next 3-5 years operating at a 30% deficit) will save the day, and bring new solutions, discipline and genius to the design, construction and operation of the structures we need.

Three frameworks make this point, and would create deep and wide channels for private investment to flow into our infrastructure challenges. Let’s be extremely clear, we must have increased private investment – starting at $100 billion/year and increasing to at least $200 billion within three years, since it’s a question of both financial resources and creativity. This is not the public sector’s role, since structural forces – the nature of money, the pace of technology, the poverty of government and the power of our own expectations – are driving us in a different direction. We need to give things a hard shove, to move us forward as swiftly as possible.

1. Investment in Stranded Public Assets/Land Value Boosting. The value of public sector assets in the U.S. is $33 – 40 trillion (nobody knows exactly, the country doesn’t have a balance sheet). Investing in these assets is a strategic necessity. In large part these are infrastructure assets, the average age of which is more than 60 years old, including transit stations, airports, reservoirs (there are 128 reservoirs in the U.S. with more than 1,000,000 acre feet of capacity, many owned by the Army Corps of Engineers or the Department of the Interior). Business needs to be able to freely access these assets, invest in them, and – by boosting the value of a transit station, an airport, a reservoir, and the land around it – revitalize our assets, our national wealth.

By bringing in private investment we quickly bring fresh new minds to the challenge, better utilizing assets that are now unnecessarily draining resources, transforming old and decrepit relics of the past into assets that are fresh, shiny and vibrantly useful for a new generation.

2. Investment in World-Class Operations/Performance Contracting. The biggest unseen infrastructure challenges in our country – weighing down our budgets, and depressing our creative minds – have to do with replacing the guts of our water and transit utilities with efficient motors, valves, pumps and pipes — along with sensors, AI and analytics, the brains of modern infrastructure. In transit alone the modernization deficit is more than $120 billion, and it is double that in water and wastewater.  “Health” and “mobility” are what citizens most expect from their infrastructure, and they are both constantly starved of resources. As the director of one transit system told me ‘I spend my time fixing 40 year old things that had a thirty year lifespan.’ And this disproportionally affects the disadvantaged. Our failure to invest in innovation for our water and transit utilities is a ticking time bomb. The solution channel is performance-based investment, allowing private companies to do the diagnostics, invest in the equipment and technology, and optimizes operation, so that these critical assets operate as efficiently as possible, providing safe services, at world-class levels. 

Think of one additional fact: we need a boom of new technology to make our transit systems safe – where will that come from, and why not an investment tax credit (ITC) to make that happen as broadly and quickly as possible?

3. New Model Investment/The “Razor Blade” Model. Maybe the most interesting new channel of all is the razor blade model, explained to me most recently by Sunil Suri of the Menlo Companies, delivering a high value asset for free – a home, a school, a clinic, a transit car – and then collecting revenue from consumables. Taking the transit example, a system’s rolling stock doesn’t need public investment, when private investment – at $2 million per car, for forty years – would revolutionize both the business model, and the cars? These smart assets provide revenue potential limited only by our imaginations – data, entertainment, safety, intelligence – that the public sector has little comparative advantage in providing – not to mention pay for – while the private sector can provide and obsessively optimize.

There are no U.S. rolling stock manufacturers, Chinese firms have recently won major bids in Boston, Chicago and Los Angeles. Under a different investment model who doesn’t think that an Elon Musk wouldn’t emerge to build smart, transformational, rolling stock in the U.S.?  

We talk endlessly about infrastructure investment, but we resolutely refuse to crack open projects to see which investment should be public, which private, and which might be open to competition. This is not a property issue, it is a performance issue. As Nobel Prize winning economic theorist Ronald Coase would have argued, we need to focus on that which will result in more efficient management and operation, and an overall better result, and then do that.

The daunting case of transit networks in the U.S. is the case in point. More than 10 billion transit trips are taken per year in the U.S., heavily subsidized, woefully inefficient. Who does not think that we could revitalize our country’s transit by opening up the sector to all three of the investment channels described above: let the private sector transform stations into rent-providing offices, shops and entertainment facilities – brand new living spaces; let engineering and technology companies invest in the guts of the transit authority operational systems at their risk, and for their reward – brand new experiences; and let our investors, technology companies and manufacturers bring their creative brains to the vehicles that are, after all, the only reasons for transit systems to exist – brand new businesses.

The public sector is no longer able to make these investments, and shouldn’t have to make them. Our public sector needs to be an extraordinary strategic manager of the infrastructure market place, more like a great orchestra conductor – it is not necessary to know everything, play every instrument, or buy instrument, its the music that counts.   

We have to do it, and we have to do it urgently, for economic recovery, public safety, and so that we can be better. As the eternally wise Yoda said, “Do or do not. There is no try.”