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Investors can put US on the road to redemption

As the worlds largest economy frets about funding infrastructure upgrades, the idea of an investment bank is gaining traction, writes Mathew Murphy.

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.


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