As the worlds largest economy frets about funding infrastructure upgrades, the idea of an investment bank is gaining traction, writes Mathew Murphy.
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 are considered wanting. This is just a snapshot of the creaking and crumbling infrastructure that the United States 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 just to bring things up to scratch.
So while China opened the worlds longest sea bridge and added a line to the largest high-speed rail network this month, the infrastructure in the worlds 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? Firstly, there was the global financial crisis, which knocked the wind out of the US economy back in 2008.
Rising national debt and moves to slash spending do not bode well for the Obama administrations 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.
So where does the government look to stump up the money to repair and replace crumbling infrastructure? Why not Wall Street?
The current profit reporting season is showing bumper results. Companies now have more than a trillion dollars on balance sheets in the US and a further trillion situated elsewhere around 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 last year. That was up 13 per cent on 2009.
Monish Kumar, BCGs 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 last year, 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 the Australian federal and state governments to build other required infrastructure.
There is no reason to believe the same is not possible in the US. So what exactly is needed to mobilise these funds?
A national infrastructure bank is an idea that has been floated numerous times before but now has bipartisan support through the BUILD Act proposed by the 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 partner with regional governments and present a proposal to the so-called IBank. It would assess the projects credentials based on things like the publics acceptance and its ability to generate enough revenue to provide returns for investors.
Loans of up to 50 per cent of the projects cost could be extended, instead of grants, which are more costly for the taxpayer, and 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 most believe is conservative. On those numbers, the bank could be self-sustaining in three years.
Those who support the concept of an IBank include the US Chamber of Commerce, the AFL-CIO (Americas union movement) and heavyweight private equity firm Kohlberg Kravis Roberts. The roll call of backers seems to indicate that there are both jobs to be created and money to be made through the venture.
The 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 the country 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 countrys infrastructure challenges as a high priority.
An IBank is a good start.
Frequently Asked Questions about this Article…
How big is the US infrastructure problem and what does it mean for investors?
The article highlights a large gap: the American Society of Civil Engineers’ 2009 benchmark said fixing transport, aviation, rail and water would need about US$2.2 trillion over five years. The report gave many categories a grade of D, notes more than a quarter of bridges are structurally deficient or obsolete, and points to tens of thousands of dams in need of attention. For investors, that scale signals a long-term need for capital across many sectors (roads, bridges, water, energy) and therefore potential opportunities if financing and policy frameworks are improved.
Why hasn’t Wall Street already poured more money into US infrastructure projects?
According to experts in the article, private capital has been reluctant because perceived risks are high and expected returns are often too low. Public–private partnership structures can be complex, regulatory hurdles (especially projects spanning state lines) make planning difficult, and post‑2008 fiscal pressures and debt concerns have constrained government support. Funds often prefer emerging markets like China and India where returns can be higher.
What is a national infrastructure bank (IBank) and how would it work for investors?
An IBank is a proposed independent federal entity—board members appointed by the president and confirmed by the Senate—to evaluate and support infrastructure projects. Rather than grants, it would provide loans of up to 50% of a project’s cost, require borrowers to hold reserves against bad debt, and earn revenue from upfront fees and interest-rate premiums. The IBank would assess projects on public acceptance and their ability to generate revenue and investor returns, which could make private investment easier to mobilise.
Could an infrastructure bank realistically multiply a small government commitment into large private investment?
Proponents quoted in the article argue yes. Senator John Kerry, cited in the piece, suggested an IBank could turn US$10 billion into as much as US$640 billion over 10 years and potentially be self-sustaining within three years. Backers include major business and labour groups and private equity firms, indicating both jobs and capital could follow if the model attracts investors.
What role can US pension funds play in financing infrastructure projects?
The article notes US pension funds are a promising source of long-term capital. At the end of the previous year the 100 major government employee retirement schemes had about US$2.64 trillion in value. Experts say pensions have historically been bond-heavy but are increasingly diversifying into real estate and infrastructure, which could free up public finances and provide the stable, long-term returns these funds seek.
What kinds of projects would the IBank consider and what criteria matter to investors?
The IBank would look at revenue-generating projects that have public acceptance—examples mentioned include toll roads and highway upgrades. Key investor criteria in the article are a sound economic model, appropriate legal safeguards, a credible revenue stream to repay loans and provide returns, and transparent, independent assessment to avoid political “pork‑barrel” decisions.
What are the main risks everyday investors should know about with infrastructure investments?
Risks called out in the article include regulatory and permitting complexity (especially across states), long project timelines, potential low returns relative to risk, structural complexity of public–private partnerships, and credit risk that can create bad debt. Experts stress that without proper economic models and legal protections, private capital will be cautious.
As an investor, what policy developments should I watch to know if US infrastructure investing is becoming a real opportunity?
Monitor progress on the BUILD Act and any legislation to create an IBank, signals that the federal government will engage Wall Street, comments from major institutional investors (pension funds, private equity), and concrete pilot projects approved with clear revenue models. Those developments would indicate whether private capital is likely to be mobilised at scale.
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