Thought Leadership

Publish Date

Jan 29, 2020

Hoping for The Best, Planning for… The Best? How Investors Can Bring about The Renaissance of US Infrastructure

Jay Moody, Managing Director | Riz Shah,

Region: North America

January 29, 2020

For most of the 20th century, the United States was considered to have the most advanced infrastructure in the world, supported by the quality and integrity of its roads, railways, bridges, airports and utilities. It is astonishing that in the past few decades alone, the quality and integrity of U.S. infrastructure has considerably diminished. Despite the significant use of federal, state and local tax revenues to fund massive infrastructure projects, the American Society of Civil Engineers consistently and accurately evaluates U.S. infrastructure with scores that no aspiring student or their parents would accept. Why must this continue to be the case? (See our previous newsletter discussing US Infrastructure’s D+ grade from the American Society of Civil Engineers.)

Unfortunately, we are not in any position to rely on our national government to make tangible improvements to our crumbling infrastructure. Despite being the most bipartisan issue in the last national election – as of January 2020 – no material effort has been made to develop or enact a national infrastructure plan. We, therefore, continue to struggle with both sides of the infrastructure paradigm: with limited dollars, how do we effectively maintain our existing infrastructure while also taking concrete steps to construct new infrastructure?

Why investors are the key

Not very often do we find elected and appointed officials with varying degrees of financial acumen and numerous competing priorities as strong stewards of OPM (other people’s money). Every major federal granting agency and state and local entity struggles with the following:

  1. Selecting the right project to build
  2. Properly measuring and evaluating the financial, economic and strategic benefits of an infrastructure project
  3. Preventing the loss of value brought on by ineffective decision making
  4. Creating and preserving value by implementing consistent practices for procurement, engineering, construction and asset management
  5. Optimizing value through innovative solutions and delivery structures for infrastructure needs
  6. Avoiding making decisions for political reasons rather than financial reasons

Despite shrinking federal support for infrastructure, we remain cautiously optimistic of rising state and local infrastructure spending. Considering state and local governments’ historically poor track record of delivering projects on time and on budget, how much more can we expect of these governments if potential projects grow in size, scale, volume and complexity? We see non-public sector funding having the unique potential to fill in the infrastructure gap.

To bring about these changes, we must control what we do with our check books. Instead of continuing with what our government has historically done when selecting projects to fund (using qualitative positions rather than quantifiable data to defend and evaluate the potential benefit or rate of return of public sector funding), we must do the exact opposite: use our discretionary funding to select projects only if they have a positive and predictable return. This is exactly how we think when we open our own pocketbooks, and exactly how the private sector operates as well. This is what will bring about the infrastructure renaissance.

So how can investors drive this renaissance? By withholding their investment dollars unless and until the infrastructure project or program follows a Stage-gate Project Investment Approval Process, similar to the one shown below.

By requiring a structured, gated project approval process, projects will be selected based on their maturity of engineering, which will drive quantifiable and estimatable outcomes. Risks will be mitigated by placing control in the hands of those effectively able to mitigate risk to achieve those outcomes. The transparency that investors will require will enable other project sponsors to follow a repeatable path to success, which will attract a broader set of investors.

Equally important, we all know success begets success – once an investor can influence the success of a project, the same model can be adapted across other projects and project types. Successful projects will yield higher returns, encouraging investors to seek additional projects to develop across the country.

And the infrastructure renaissance begins…

“Transaction Counts by Infrastructure Subsector”. Source: Capital IQ