IBank the start to repairing America

IT IS a country where road traffic doubles every 28 years but one where it would take 370 years to double existing lanes. A nation in which more than a quarter of bridges are either structurally deficient or obsolete. It has 85,000 dams, although many of those too are considered wanting. This is just a snapshot of the creaking and crumbling infrastructure that the US is faced with repairing and replacing. It is a problem that the American Society of Civil Engineers said in its benchmark 2009 report would take $US2.2 trillion of investment over five years to bring things up to scratch.

While China this month opened the world's longest sea bridge and added a line to the largest high-speed rail network, the infrastructure in the world's biggest economy continues to come up short.

The average score in the engineers' report for areas such as transport, aviation, rail and water is a D. Energy infrastructure was the only area to improve, and even that only mustered a D , up from a D in 2005.

No one argues about the need to boost infrastructure in a country that the World Economic Forum ranks as 23rd in terms of those with the highest-quality infrastructure, a ranking that has slipped steadily in recent years.

So what is holding the US back?

First, there was the global financial crisis that knocked the wind out of the US economy in 2008.

Rising national debt and moves to slash spending does not bode well for the Obama administration's capacity to fund job-creating infrastructure projects.

Infrastructure experts say the quagmire is due in part to the regulatory nightmare of planning big-thinking projects across state lines.

Where does the government look to stump up the money to repair and replace crumbling infrastructure?

Why not Wall Street?

The current reporting season is showing bumper results. Companies now have more than a trillion dollars ($A931 billion) on balance sheets in the US and a further trillion elsewhere in the world. Boston Consulting Group said in its recent asset management report that the global value of professionally managed assets rose by 8 per cent to $US56.4 trillion in 2010. That was up 13 per cent in 2009.

Monish Kumar, Boston's global leader of asset and wealth management, says despite the increased funds sloshing through the system, little of it will find its way into infrastructure. "It is good to say invest in toll roads, repave the highway system, whatever, but until there is the proper economic model with the appropriate legal safeguards I am not sure you will see money stampeding in," he says.

What Kumar means is that the risks are too high and the returns are too small. Not to mention the often complex structure of public-private partnerships. He says funds that want to get involved in infrastructure investment will first look at emerging markets like China and India where they can make more money for their clients.

Felicity Gates, managing partner and co-head of Citi Infrastructure Investments, says US pension funds are the most likely source for much-needed investment.

Indeed. At the end of 2010, the US Census Bureau said the value of the 100 major government employee retirement schemes had increased by $US138 billion to $US2.64 trillion.

"American pension funds have not been as diversified historically as others," Gates says. "Many had significant investments in bonds but that is starting to change and they have been looking at things like real estate and now infrastructure."

Gates points to the Australian Council of Infrastructure Development report from some years back, which showed that if just 16 per cent of the infrastructure backlog in Australia was picked up by the private sector, it would allow significant investment by pension funds and allow financial headroom for Australian federal and state governments to build other required infrastructure.

There is no reason to believe the same in not possible in the US.

What is needed to mobilise these funds?

A national infrastructure bank is an idea that has been floated several times but now has bipartisan support through the BUILD Act proposed by failed presidential candidate Senator John Kerry and others.

Essentially, board members of the infrastructure bank would be independent, appointed by the President and confirmed by the Senate as a way of preventing pork barrelling.

If private investors wanted to invest in a project, they could join regional governments and present a proposal to the so-called "IBank". It would assess the project's credentials based on things like the public's acceptance and its ability to generate enough revenue to provide returns for investors.

Loans of up to half of the project's cost could be extended, instead of grants, which are more costly for the taxpayer, and project borrowers would be required to put up a reserve against potential bad debt.

The bank, the same as any other, would make money from upfront fees and interest-rate premiums.

Such a bank, Kerry says, could turn $US10 billion into as much as $US640 billion over 10 years, a figure many believe is conservative. On these numbers, the bank could be self-sustaining in about three years.

Those who support the concept of an IBank include the US Chamber of Commerce, the AFL-CIO (America's union movement) and heavyweight private equity firm Kohlberg Kravis Roberts. The roll-call of backers seems to indicate there are jobs to be created and money to be made through the venture.

Former president Bill Clinton is another supporter, telling CNBC last week that "every manufacturing job you create tends to create more than two other jobs in other sectors of the economy".

For the government to make the IBank a success it needs to engage Wall Street and sell the infrastructure story. If that money is not mobilised then the US will fall well short of the $US40 billion that the Boston Consulting Group estimates it will need to invest over 20 years for the US to stay globally competitive.

Unless the US economy truly is mirroring the fall of Rome, then it will need to be nimble and savvy in addressing the country's infrastructure challenges as a high priority.

An infrastructure bank is a good start.

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