Steve Loranger

Financing new infrastructure

Chairman, President, and CEO of ITT Corporation, Jun 22, 10.

Tagged with infrastructure, economics, finance, transportation policy

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 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.

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.

Full story: We Need New Infrastructure. So How Do We Pay For It?
Source: The Infrastructurist, June 21, 2010

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