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.