Concrete Action

How President Obama can get more bang for America's infrastructure renewal buck.

In his State of the Union address, President Barack Obama elevated the issue of how the deteriorating state of U.S. infrastructure can compromise the nation's ability to compete for global capital and jobs. He put it this way: "Ask any CEO where they'd rather locate and hire: a country with deteriorating roads and bridges, or one with high-speed rail and Internet; high-tech schools; and self-healing power grids?" The answer, he noted, came from the CEO of Siemens America (which has brought hundreds of new jobs to North Carolina), who told the president that if America upgrades its infrastructure, they'll bring even more jobs.

There is nothing new about the sorry state of U.S. infrastructure. Years of underinvestment have taken their toll. In the World Economic Forum's rankings, the United States has dropped from 5th place for infrastructure quality in 2002 to 25th place today, behind many European and Asian nations including France, Germany, Singapore, and South Korea.

Perhaps the president's speech will finally focus public debate on infrastructure. And by posing it as an economic development priority, the president may be able to line up support for infrastructure investment.

The challenge is that infrastructure is expensive and requires the kind of long-term investment that raises deficits, rather than reducing them. Even if, as he says, business leaders are clamoring for airports and ports that can move their goods on time, roads and trains that can get their employees to work, and reliable electric grids and water and drainage systems that can withstand ever more frequent extreme weather events, the stalemate over fiscal reform in Washington does not make one optimistic that finding billions of dollars for infrastructure repair and upgrade will be possible.

But there is a way to square this circle. Improving virtually every aspect of how the United States plans, operates, and delivers infrastructure -- in other words, boosting infrastructure productivity -- could reduce the cost of necessary investment by 40 percent, or $290 billion a year, new McKinsey research suggests. Worldwide, these measures could save $1 trillion a year. President Obama's second term is an opportunity to make infrastructure productivity as well as infrastructure investment a national priority.

The imperative is urgent given the size of the need. Simply to maintain existing transport (road, rail, ports, and airports), power, water, and telecommunications infrastructure assets in the state they are in today and keep pace with growing population and economic activity, the United States needs to spend 3.7 percent of GDP on infrastructure every year. This is far higher than the 2.6 percent it has spent over the past two decades. Putting this in dollars and cents, the United States needs to spend an average of $720 billion every year between now and 2030.

There are three major ways to boost productivity and reap large cost savings. None of these are rocket science -- indeed, all are being applied successfully somewhere else in the world.

The first is to make better decisions about the projects chosen. Governments need to use precise selection criteria to ensure that proposed projects meet specific goals -- including a judgment on whether a project is deliverable in terms of land and finance being available. Then governments need to develop ways of evaluating projects to determine their costs and benefits, and prioritize projects in a systemic, rather than piecemeal, way. Chile's National Public Investment System evaluates all proposed public projects using standard forms, procedures, and metrics, and rejects as many as 35 percent of them.

The second opportunity is to streamline the delivery of projects and accelerate their completion. Speeding up approvals and land acquisition, a major reason for cost and time over-runs, can offer an easy win. As an object lesson in what not to do, take the construction of a U.S.-Mexico border bridge aimed at relieving congested cargo traffic lanes between El Paso and Ciudad Juárez. Construction has started in Texas, but not in Chihuahua -- and as a consequence, trucks entering the United States still have to wait for up to two hours at the border. There are similar issues with the cross-border Detroit-Windsor Bridge. By contrast, the state of New South Wales in Australia cut approval times by 11 percent in just one year by clarifying decision rights, harmonizing processes across agencies, and measuring performance. The United States needs to start structuring contracts to encourage cost savings; encourage contractors to use advanced construction techniques including prefabrication, modularization, and lean manufacturing methods; improve the management of contractors by introducing stringent reviews of progress at different stages of a project. Although the United States has had a fine record on productivity as a whole, there has been zero productivity growth in the construction sector for 20 years.

Too often, governments rush to build new infrastructure without thinking about how to maintain and use more of what they have -- thus, the third action area to prioritize is to boost the use of capacity in tandem with managing demand. "Intelligent" transportation systems, which squeeze more capacity out of existing roads and rail lines, can at least double asset utilization, typically at a fraction of the cost of adding the equivalent in physical capacity. Demand management through congestion pricing -- as London has done and which Los Angeles is trying with its HOT lanes -- is already proven effective and new traffic-monitoring technology is enabling even more effective and tailored approaches.

This is not to say that it will be easy. Delivering these large potential cost savings will require a significant improvement in the fragmented way the infrastructure sector is run. But there are examples of good governance we can look to. Let's highlight two. First is close coordination between infrastructure institutions: Singapore's Urban Redevelopment Authority, Land Transport Authority, and Development Planning Committee collaborate seamlessly to ensure that individual infrastructure projects work together. To combat traffic congestion, Singapore has set a target of public transport carrying 70 percent of peak-morning commuters and intends to limit increases in car ownership to only 1 percent by auctioning permits. It's no surprise that Singapore claims second place in the World Economic Forum's infrastructure quality ranking. Second, there needs to be clear separation of political and technical responsibilities. Hong Kong's Mass Transit Railway Corporation and Infrastructure Ontario in Canada both have the organizational autonomy to hire the talented people they need and to plan and implement projects without undue political interference.

As President Obama also noted in his State of the Union address, "It's not a bigger government we need, but a smarter government." Indeed. And there's a huge opportunity to get more infrastructure for less by being smarter about how to do it. Looking beyond the billions of dollars the United States needs to invest in new infrastructure to rethinking how it invests can shift the debate from pessimism and paralysis to a renewed belief in the possible -- and concrete action.

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The Case for TAFTA

Why Obama's call for a free trade agreement between the United States and Europe could be a game-changer.

As U.S. President Barack Obama opens his second term, America's trade policy is showing signs of life. The United States is negotiating the Trans-Pacific Partnership (TPP) agreement with 11 countries in Asia, and at Tuesday's State of the Union, Obama announced the launch of negotiations with the European Union for a transatlantic free trade agreement -- call it TAFTA -- to connect the world's largest markets. European leaders greenlighted the talks last Friday, hoping a deal could jumpstart export-led growth -- German Chancellor Angela Merkel says she wishes "nothing more." But the forthcoming battles with protectionist agricultural lobbies and entrenched regulatory differences from autos to pharmaceuticals risk giving the two sides cold feet and diluting the deal to a TAFTA-lite negotiated "on one tank." A deal without substance would be an epic lost opportunity: Much like the North American Free Trade Agreement (NAFTA) launched in 1994, TAFTA represents a game-changer in the global trading system that is in a deep crisis after 12 years of fruitless Doha Round talks.

In 1994, the world trading system looked very different. The United States, Canada and Mexico launched NAFTA in January, pressuring Europeans to ink the 123-country Uruguay Round, which made extensive cuts to tariffs and non-tariff barriers and established the crown jewel of the global trading system, the World Trade Organization (WTO). The mantra of free trade was spreading on the back of the so-called Washington Consensus across the emerging world and post-communist bloc. America's export wars of the 1980s with Japan had drawn to a close, and Eastern European countries were joining the EU, forming a giant single market for trade, investment, and production. The world economy blossomed, with trade and investment growth rivaling 20-year highs. America's Internet-fueled growth would eliminate unemployment and help balance the budget in 1998 for the first time in three decades.

As the world's first serious free trade agreement, NAFTA consolidated U.S. export lobbies that would press for further deals in the Americas and Asia, inspired a wave of FTAs around the world, and created a template for a comprehensive, gold-standard deal that would be copied in subsequent U.S. FTAs and in countless of FTAs signed by Latin American countries.

Today, the setting is different. The multilateral trading system is flailing, as the United States, EU, India, and Brazil remain at loggerheads over liberalization in agriculture and manufactures, and developing countries fear opening their markets would only cause a surge in imports from China, WTO member since 2001. With Doha on a deathbed, trade negotiators focus on smaller free trade deals. Since NAFTA, well over 200 FTAs have been struck, connecting such couples as Chile and China, Japan and Mexico, Korea and the EU, and the United States and Singapore. The result of the FTA frenzy is more liberalization, but also more complexity. The labyrinth of distinct rules and regulations in the FTA "spaghetti bowl" is a daily headache to multinationals, small exporters, and customs the world over.

The world economy too is a gloomy place. Unlike the economic renaissance of the 1990s, the hallmark of today's global marketplace is profound uncertainty and fierce competition for the marginal dollar -- and the foul practices it can spawn. Countries are manufacturing competitiveness in the quick, easy, and dirty way -- currency devaluations and quantitative easings that risk widening global imbalances and the U.S. trade deficit, the familiar precursor of protectionism. Insidious non-tariff trade barriers, such as the "indigenous innovation" policies employed by China, are proliferating as countries privilege domestic producers at the expense of domestic consumers and free trade pledges made by world leaders.

The troubled world economy needs a circuit-breaker. TAFTA could be is just that.

First, a substantive TAFTA will help jumpstart economic growth in the U.S. and Europe, which in turn will drive emerging markets' trade and growth. Erasing non-tariff barriers would add 0.7 percentage points to the EU economy and 0.3 percentage points to the U.S. economy, according to the Dutch consultancy Ecorys -- not bad for economies forecast to grow at 0.2 percent and 1.8 percent, respectively, this year. And when the global economic pie expands, the siren calls of currency manipulation and protectionism are held at bay.

Second, just like NAFTA did with Europe in the Uruguay Round, a deep and comprehensive TAFTA can force a return to the Doha table of cantankerous emerging markets -- Brazil, China, and India, which torpedoed the deal in 2008, and set the tone and template for global trade rulemaking.

Third, TAFTA promises to recreate the global trading system. Much like the United States, the EU has deals with Mexico, Canada, Colombia, Peru, Korea, Australia, and Chile, and it is currently completing bilaterals with Singapore, Malaysia, Vietnam, and Japan -- all likely future TPP members. Once wedded to each other, the United States and EU could next weave all these common deals into one mammoth FTA. Outside this giant TPP-TAFTA trade zone would remain India, Brazil, and China -- which as a result should have every incentive to join. In this scenario, the agonized multilateral rounds are moot: Rather than pie-in-the-sky, big-bang deals at the WTO, world trading powers will have arrived at a multilateral deal from bottom-up, through knitting together the various FTAs -- and along the way also sorted out the FTA spaghetti bowl that NAFTA helped inspire.

Fourth, a deep TAFTA is miracle water for the U.S.-EU relationship, which turned antagonistic last year as the United States failed to offer aid to Europeans at the IMF, Obama and Merkel locked horns on fiscal policies in the eurozone, and America's attention kept shifting to Asia. TAFTA is a remedy like no other: Economically, it allows the United States and Europe to help each other grow and recover without spending a single stimulus dollar; strategically, it enables Washington and Brussels to reassert leadership in the world economy they have built together, and it undercuts Beijing's divide-and-conquer tactics.

After a tiring slog of four years through insipid growth, sky-high unemployment, and soaring debts, the United States and Europe will have a chance to reignite growth and remake the world trading system they have championed for seven decades. As in 1994, special interests are drawing policymakers' eyes off the ball. TAFTA offers President Obama a chance to make history. He's laid out an ambitious goal. Now it is time to make it happen.