Urban Infrastructure - Invest or Ignore? Infrastructure 2007: A Global Perspective Shows U.S. Lags Behind Asia, Much of Europe

New Report Looks at Evolving Market for Infrastructure Funding,

Development, Management

May 09, 2007, 01:00 ET from Urban Land Institute

    CHICAGO, May 9 /PRNewswire-USNewswire/ -- The United States' relatively
 low investment in virtually all aspects of mobility-related infrastructure
 -- airports, public transit, railway systems, roads and bridges -- is an
 "emerging crisis" that will compromise the ability of the nation's cities
 to compete globally, according to a new report co-published by the Urban
 Land Institute and Ernst & Young.
     Infrastructure 2007: A Global Perspective offers a comprehensive look
 at the status of current and planned infrastructure investment and
 development in a variety of categories in countries worldwide, with a
 particular focus on the United States, China, Japan, India, and Europe. The
 first of its kind, the report discusses the evolving infrastructure market,
 including private and combination public-private systems for funding,
 construction, operations and management.
     "America is more of a follower and no longer a world leader when it
 comes to infrastructure," the report states. "Other countries marshal
 vanguard strategies and provide the contemporary lessons for developing
 best practices in public/private finance, intermodal transport, congestion
 pricing and high- speed rail...Too often (in the U.S.), projects focus on
 restoration rather than rethinking the model and finding possible
 efficiencies...There is a tendency to invest in the infrastructure we have
 instead of the infrastructure we will need."
     The varied attitudes toward and approaches to infrastructure investment
 are reflected in different data provided in the report, such as: 1) Japan
 has 2,000 kilometers of high-speed rail and is building about 300 more
 kilometers by 2020; China is planning to build more than 2,500 kilometers
 of high-speed rail by 2020; the U.S. has about 300 kilometers, but is
 building none. 2) As of 2000, there were more than 750 cars per 1,000
 people in the U.S.; in the U.K., just over 500 cars per 1,000 people; in
 China, less than 50 per 1,000 (although this number is rising, it still is
 far less than the U.S.). 3) Two of the ten most expensive infrastructure
 projects worldwide involving private investment are in France; the third
 most expensive is in the United States; none are in China.
     The report, first released this week at the ULI's Spring Council Forum
 in Chicago, is being presented to ULI members by ULI Vice Chairman Dale Ann
 Reiss, global director of real estate at Ernst & Young in New York City.
 According to Reiss, the private sector is going to play a significant role
 in what she predicts will be a global movement to build and modernize the
 world's infrastructure. She is expecting a fundamental shift in the current
 business model that will change the playing field across the board. "One
 thing in this report that is crystal clear to a Friedmanian economist like
 me is that the private sector -- by virtue of both the capital it controls
 and the skill sets it exhibits -- is going to play an increasingly
 important role in the effective and efficient development of infrastructure
 here in the U.S. and abroad over the next 50 years," says Reiss.
 "Public-private partnerships are here to stay and may well be the only
 viable way for governments to reach their infrastructure development
     Numerous worldwide trends and issues are discussed in the report,
     Infrastructure as a competitive imperative --
       -- Mature economies with aging infrastructure networks face gargantuan
          bills for deferred maintenance on roads, water systems, dams and
          electric grids. Retooling costs more than many governments are
          willing to pay.
       -- China boldly builds new infrastructure to support future generations.
          Spurred by a growing economy, India tries to keep pace and replace
          third-world transport systems with state-of-the art networks.
       -- Australia, the United Kingdom, other countries in Western Europe and
          Canada are far ahead of the United States in using private financing
          structures to fund improvements. Eastern Europe, still reeling from
          communist neglect, requires a major overhaul.
       -- In America, a "yawning" budget gap swallows initiatives to fund
          maintenance. Prevalent sprawl, poor planning and car dependence pose
          ever greater challenges in meeting future needs. Retrofits and
          changing public behavior are "wrenchingly" difficult.
     Expansion of infrastructure privatization --
       -- Infrastructure emerges as a new asset class for investors, with
          massive needs attracting large pools of private capital; double-digit
          returns are sought, but high single-digit returns are more likely,
          particularly for mature assets.
       -- Various forms of public-private partnerships allow governments to
          retain control, transfer risk, and gain efficiencies from private
       -- In Europe, the stage is set for secondary market in which early-in
          investment banks sell holdings to longer-term pension funds who gain
          confidence in consistent track records for infrastructure investment
       -- India tries to lure private investors; meanwhile China is the only
          country with the luxury of relying on its booming economic engine to
          directly fund vast infrastructure development.
     Issues and trends specific to the U.S. --
       -- Public skittishness will persist regarding turning over public
          franchises to for-profit operators.
       -- Homeland security worries will hamstring U.S. airport privatizations,
          because the most tested operators have off-shore "pedigrees," raising
          a red flag for security officials.
       -- Reluctance to raise the federal gas tax threatens the viability of
          the Highway Trust Fund, now on course for insolvency by 2009.
          Adjusted for inflation, the tax has only one-half the purchasing
          power of 1965, undercutting federal contributions to highway repair
          and construction. Local sales taxes, property taxes "have nowhere to
          go but up" to help fill the gap.
       -- Most new U.S. highways will be constructed as toll roads; states will
          finance them through bond issues and private concessions.
       -- Congestion pricing lanes will gain momentum on urban highways, but
          congestion cordons or zones will have extremely limited use.
       -- Emerging technologies, such as satellite tracking systems could be
          used to charge drivers based on miles traveled on specific roads; but
          "Big Brother" hang-ups could impede widespread use.
       -- States may consider tolled truck corridors to facilitate movement of
          goods, as well as expanding freight rail corridors.
     The sobering outlook for U.S. infrastructure systems is reinforced by a
 ULI survey of 30 state transportation planning directors included in the
 report. Eighty-three percent said that the nation's transportation
 infrastructure is not capable of meeting the nation's needs over the next
 ten years. The respondents warned that 97 percent of roads, bridges and
 tunnels and 88 percent of transit/rail systems will require at least
 moderate improvement in the years ahead. An estimated $185 billion in
 additional funding will be required for road systems over the next five
 years alone, the report notes, stating "The state of deferred maintenance
 is so gargantuan nobody knows where to begin...States have been putting off
 these issues to fund other needs...People will still use roads until they
 can't be used, and as long as the roads work they can put it off."
     The report points to privatization, already widely used in Europe and
 Australia, as gaining traction in the U.S., particularly in the
 construction, management and operation of toll roads, bridges and tunnels.
 Investment funds, sponsored by global investment banks, private equity
 firms, and institutional money managers are becoming a rapidly expanding
 source of private funding. "The global investment pipeline, flush with
 cash, eagerly shifts some flows to the United States as Americans begin to
 realize the scope of future infrastructure requirements and the size of
 funding shortfalls," the report says, noting that 28 states have passed
 legislation enabling private market investment in infrastructure. Still,
 skepticism over how much control should be shifted to the private sector
 has, so far, kept private investment in check, the report notes. For
 instance, the survey of transportation planners found that while 37 percent
 predicted privatization would be a likely source of future funding, 44
 percent said it would be unlikely. Seventy-three percent predicted higher
 user fees as a funding source, and 63 percent predicted higher taxes.
     Solving the mobility problems in the U.S. will require more than a
 greater commitment to infrastructure repair and construction, the report
 notes. In addition to revamping funding mechanisms for construction and
 operations, long-term solutions must include rethinking land planning
 models so they are far less auto-dependent and offer plenty of options for
 getting from one place to another. If driving continues to be the only
 practical transportation option in many metropolitan areas, no amount of
 infrastructure investment will be adequate, the report contends.
     "If infrastructure expenditures are comprehensively planned and
 integrated with regional land use, the lasting economic benefits can be
 enormous, propelling the nation's growth for generations," the report
 recommends. "The federal government, working with regions and states, will
 need to develop a clear vision for policy and integrate programs that link
 costs to use, and which drive efficiencies. Silos must be broken down
 between multiple layers of state and local road departments, transit
 agencies, planning boards and housing authorities...It's no coincidence
 that today's dominant cities, prospering along global economic pathways,
 feature sophisticated and integrated infrastructure with multiple nodes of
 transit to accommodate high volumes of activity and concentrated
 populations. Their infrastructure creates a competitive advantage...The
 country needs a new model for how it plans and pays for infrastructure,
 including how it plans its communities."
     About the Urban Land Institute
     The Urban Land Institute (http://www.uli.org) is a nonprofit education
 and research institute supported by its members. Its mission is to provide
 leadership in the responsible use of land and in creating and sustaining
 thriving communities worldwide. Established in 1936, the Institute has more
 than 36,000 members representing all aspects of land use.
     About Ernst & Young
     Ernst & Young, a global leader in professional services, is committed
 to restoring the public's trust in professional services firms and in the
 quality of financial reporting. Its 114,000 people in 140 countries pursue
 the highest levels of integrity, quality, and professionalism in providing
 a range of sophisticated services centered on our core competencies of
 auditing, accounting, tax, and transactions. Further information about
 Ernst & Young and its approach to a variety of business issues can be found
 at http://www.ey.com/perspectives. Ernst & Young refers to the global
 organization of member firms of Ernst & Young Global Limited, each of which
 is a separate legal entity. Ernst & Young Global Limited does not provide
 services to clients.

SOURCE Urban Land Institute