US: Neglected nation
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Drew Galloway picks his way through the bowels of New York’s dingy and chaotic Penn Station, shouting above the din of passing inter-city and commuter trains. The legacy of flood damage to the pair of railway tunnels that connect Manhattan with New Jersey, coupled with record passenger demand, is imposing a mounting strain on America’s busiest railway terminus.
Eventually, says Mr Galloway, chief planner for Amtrak’s north-east corridor, the tunnels will have to be closed and refurbished because of corrosion, potentially casting the economically critical artery into crisis.
“We are in a race to get new tunnels in place and complete them before we see some very significant disruptions taking place here,” Mr Galloway says, surveying the subterranean spider’s web of railway lines running underneath the station, which serves 600,000 passengers a day, according to Amtrak.
Delayed by political dogfights and still beset by funding doubts, the project to shore up services into Manhattan by boring two new railway tunnels under the Hudson River took a step forward at the end of last year, as state and federal leaders backed a new plan.
There is, however, a very long climb ahead for what is arguably the most economically sensitive US transport project — a plan costing upwards of $7.5bn that is crucial both to New York commuters and to rail services across the north-east of the country.
It comes amid rising public discontent over the deteriorating state of large tracts of US infrastructure, and anger from both sides of the political divide on the presidential campaign trail. Bridge collapses, train derailments, fires and shutdowns on the Washington DC metro, drought in the west and an appalling lead contamination scandal in Michigan have highlighted the legacy of decades of underfunding, mismanagement and neglect.
The American Society of Civil Engineers yesterday projected a $1.44tn investment funding gap between 2016 and 2025, warning of a mounting drag on business activity, exports and incomes.
Politicians are demanding action. Hillary Clinton, the Democratic frontrunner, has called for a $275bn spending blitz, including the creation of an infrastructure bank, recalling past glories such as the interstate highway system and Hoover Dam. Donald Trump, the presumptive Republican presidential nominee, is bucking anti-spending dogma within the party by promising major programmes to renew infrastructure and create jobs — albeit without putting forward any detail on how to pay for them.
Without radical surgery, the decay in tunnels, railways and waterways will cost the US economy nearly $4tn in lost gross domestic product by 2025 as costs rise and productivity is impeded, according to estimates from the ASCE, dragging on a recovery in output that is the shallowest since the end of the second world war.
Faced with crimped public resources, President Barack Obama’s administration and some states have tried to fill infrastructure gaps by luring in private investment, including from public-private partnerships or P3s.
A number of states and municipalities have lifted petrol taxes to pay for roads and bridges, even as the federal petrol tax that serves as the backbone of transport spending nationwide has remained frozen since 1993. Many argue that the recent fall in oil prices presented the perfect moment to raise petrol taxes.
Without breakthroughs in a divided Washington, experts fear worsening decay. “A lot is riding on the election,” says Rosabeth Kanter, an academic at Harvard Business School and author of Move, a book on America’s infrastructure shortfalls. “We need political will.”
Inadequate infrastructure is far from unique to the US. Public investment has been trending lower as a share of GDP in economies including Japan, Germany and France in recent decades. The International Monetary Fund has implored governments with fiscal wiggle room to loosen constraints on investment to combat moribund growth.
Anxiety about the topic in the US has become politically explosive. Economists such as Lawrence Summers, former Treasury secretary and Financial Times columnist, argue that increased public investment on infrastructure would essentially pay for itself via improved growth. That is strongly contested by Republicans who want to cut the role of the state as they sabre-rattle over public waste and a national debt of $19tn.
The debate is being inflamed by a number of scandals involving decaying infrastructure, at a time when mounting demands are being placed on it by a population set to grow by 60m over the next 25 years. These include the contamination of drinking water with lead in Flint, Michigan, which has been repeatedly cited by Mrs Clinton on the campaign trail as she and other Democrats accuse the Republican governor of the state of neglecting vulnerable citizens.
Even in the heart of Washington, Memorial Bridge, a symbolic link between the north and the south of the US, might have to be closed to traffic early in the next decade if major repairs are not carried out. Around the country more than 61,000 bridges were deemed structurally deficient in 2014.
Last year US public capital investment, which includes infrastructure, was just 3.4 per cent of GDP, or $611bn, according to the president’s Council of Economic Advisers — the lowest in more than 60 years.
In the White House, the inability to do more to improve roads, bridges and other infrastructure is seen as one of the major policy failures since the crisis. Mr Obama last month bemoaned the absence of a major infrastructure programme from 2012 to 2014, when borrowing costs were low and the construction industry was short of jobs.
The administration included so-called shovel-ready infrastructure projects in its $800bn stimulus bill after Mr Obama took office, but the spending fell short of what was needed for repairs and to galvanise the economy.
Critics see it as a squandered opportunity. However, Jason Furman, chairman of the council, says Mr Obama made repeated attempts to get more money into infrastructure and was rebuffed. “Congress has been unwilling to substantially expand infrastructure investment — it is as simple as that,” he says.
There has been some progress. Last year Congress passed the first federal law in 10 years providing long-term funding for roads and other surface transportation. Yet the five-year, $305bn programme involved fiscal gimmicks, including an extraordinary raid on the Federal Reserve’s capital funds.
Given the ideological divisions over public spending, however, some experts are gloomy about significant progress after the election. “There has been systemic under-investment at a state and federal level for over three decades and I see no immediate prospect of that being reversed,” says Bill Galston of the Brookings Institution think-tank. He argues that a “mobilisation of private sector capital” is the most viable answer in an era of budgetary austerity.
The administration agrees: “We see a lot of potential with large sums of private capital on the sidelines looking for productive places to invest on one hand, and a significant US infrastructure deficit on the other,” says Anthony Foxx, transportation secretary.
One answer is P3 deals, where the private sector provides funding for construction and maintenance in return for a stream of revenue, in theory bringing in better cost and project management than under traditional public sector contracts.
The government last year created a one-stop shop for sponsors and funders to smooth the way for more complex deals. A tax change was signed into law to open the door to greater investment by foreign funds.
Moody’s, the credit rating agency, predicts that the US could become one of the biggest P3 markets. Major projects such as the overhaul of New York’s LaGuardia Airport are in the pipeline. For the time being, however, P3s remain a small slice of the infrastructure pie, featuring in just 60 projects around the country as of 2015.
The US market has lagged behind Canada and some European countries in part because local governments have long been able to raise money cheaply via tax-free bonds — although that market is only slowly reviving after the recession that ended in 2009. A third of US states do not have laws that would allow P3s to be used, and sceptics fear they can be a costly way of delivering public services if poorly structured.
“The P3 market is a way to tackle some of those large and complex projects, and we will see more of these,” says Jane Garvey of Meridiam, an investor involved in the Port of Miami Tunnel and other projects.
However, she says: “It is a misunderstanding to think that the private sector can solve it on its own. You have to have a revenue stream to pay it back. A strong federal programme is important.”
Greg Stanton, the mayor of Phoenix, Arizona, says many local leaders are tired of waiting for a breakthrough in Washington and are instead forging ahead on their own. He says he was accused of being mad when he ran for re-election last year on a platform that included higher taxes to pay for a municipal transport overhaul.
Yet a majority of the city’s population voted in favour of the consumption tax increase to fund a 35-year, $32bn plan that includes a tripling in the size of the city’s light rail system. While there is some federal participation, it is smaller than in previous projects.
“The relationship between cities and Washington is fairly broken and it is never going back to what it was in the past,” says Mr Stanton. “If we are going to advance as a city we need investment, and that will have to come much more from ourselves than directly from the federal government.”
Some 18 states have pushed through increases or reforms to their petrol taxes to pay for infrastructure since 2013, the Institute on Taxation and Economic Policy says. “We are seeing many more states taking the initiative, and finding and identifying revenue streams they can use for infrastructure; that is a big step forward,” says Ms Garvey.
Sitting in the depths of Penn Station, Mr Galloway of Amtrak says the plan to build new Hudson River tunnels and refurbish the existing ones — central to a broader regional transport overhaul called Gateway — will probably have to involve the private sector alongside state and federal backers. “When we look at federal funding sources it is very clear that all of them are heavily competed for by other projects,” he says.
An earlier version of the Hudson River railway tunnel was scuppered by New Jersey governor Chris Christie in 2010 — a controversial move that many saw as political. The new project’s advocates say it would be calamitous if this plan were to fail as well.
For the passengers whose trains rattle through this vital route into America’s biggest city, a huge amount is at stake. “We have to figure out a way to make this happen,” says Mr Galloway.