America's Aging Infrastructure: Coming Apart At the Seams

David Fessler
by David Fessler, Energy & Infrastructure Strategist, The Oxford Club

America's Aging Infrastructure: Coming Apart At the Seams

by David Fessler, Investment U's Energy and Infrastructure Expert

Tuesday, May 24, 2011: Issue #1519

Over the last two years, America's motorists have developed a new driving skill: dodging potholes.

As a cyclist, I'm particularly aware of how bad the roads are near my home. But it's not just the roads and sidewalks that continue to fall apart.

Water lines, sewer lines, airport runways and bridges - much of what keeps our nation humming along - need to be repaired or replaced. And investors should look for ways to profit when a massive project to renovate our aging infrastructure takes place.

Transportation for America is a coalition of housing, business, environmental, public health, transportation and other industries. Its recent report, entitled The Fix We're in For: The State of Our Bridges, says that one in nine of America's bridges are in poor enough shape to be considered dangerous.

And which state had the worst ranking? I knew before seeing the report...

It's Pennsylvania, of course.

America's Aging Infrastructure is "Structurally Deficient"

While my state is the worst in the nation, bad roads and bridges aren't endemic to just Pennsylvania: This is a national problem. (See how your state ranks by clicking here.)

Trucking companies, along with the rest of American industry, are getting more and more upset. Why? Because bad roads increase vehicle repairs and add to delivery delays.

They're complaining to their Senators and Congressmen about the sorry state of America's roads and bridges. But with a budget battle over a soaring deficit looming in Congress, their words have been ignored.

As of last count, Transportation for America says 69,223 bridges are "structurally deficient." That means they need significant maintenance, rehabilitation, or complete replacement.

Congress insists it's giving states plenty of money to fix roads and bridges. But the reality is quite different.

  • The Highway Trust Fund is insolvent.
  • The federal gasoline tax that funds it hasn't been raised since 1993.
  • No politician wants to be caught suggesting that the tax be raised, either.
  • Even indexing it to the rate of inflation doesn't garner much support.

And what money is given to the states isn't always spent on roads. According to Transportation for America, states can transfer up to 50 percent of their federal highway funds to other projects.

No questions asked.

Maybe they should revisit this policy...

America's Aging Infrastructure Will Only Get Worse

The World Economic Forum published a report that places America twenty-third in terms of infrastructure quality. The ranking is heading south. It found that our roads, railroads, airports and port facilities were all judged inferior to those of northern Europe.

It's only going to get worse if something isn't done, and fast. The Census Bureau estimates that the population in the United States will grow by 40 percent over the next four decades. That's the equivalent of adding the entire population of Japan to the 311 million Americans here already.

Funding for roads never used to be a problem. During the twentieth century, the interstate highway system was created. Between 1956 and 1992, nearly 50,000 miles of four-lane or larger highways were built. At the time, it was the largest public works project in the nation's history. Times have changed, however, and the amount of money spent on roadways and other transportation infrastructure has steadily fallen.

Meanwhile, public spending levels on water lines and infrastructure also continue to fall. Look at the graph below, prepared using data from the Congressional Budget Office (CBO). Spending on transportation and water infrastructure as a percentage of GDP has been in near steady decline since the early 1960s. It now stands at about 1.8 percent of GDP.

Public Spending Levels on Infrastructure and Water Lines

(Source: Congressional Budget Office)

Europe as a whole spends about five percent of GDP annually on its infrastructure. China is on infrastructure-spending steroids, presently devoting nine percent of its GDP to its road, bridges, power lines and so on.

America is great at building roads, but it falls far short when it comes to road maintenance. The amount of maintenance increases along with the number of miles. The chart above shows maintenance spending has remained relatively constant over the last 50 years. That translates into many repairs that simply aren't being performed.

Just to maintain our system in its woeful state will take an additional $20 billion per year, according to CBO estimates. That's the good news.

According to a report published by the National Surface Transportation Policy and Review Study Commission back in 2008, America needs to spend at least $255 billion every year for the next fifty years. That will keep the system in good repair and fund necessary upgrades to keep up with population growth.

Who Stands to Benefit?

The simple answer is we all would, of course. But it's important to look for companies that provide the technology and manufacturing products and services to fulfill such a massive restoration project.

Companies like Caterpillar, Inc. (NYSE: CAT), Jacobs Engineering Group Inc. (NYSE: JEC) and Fluor Corporation (NYSE: FLR) would all benefit from increased equipment sales and engineering and construction services.

But Where Will the Money Come From?

Not the Federal Highway Trust Fund. America's tax on motor fuels is the lowest of any major country, and it hasn't been raised since 1993. As a result, the fund no longer has enough money to support the woefully inadequate spending right now. Congress has had to make several cash infusions, pumping in $30 billion just since 2008.

In contrast, Germans pay about 50 percent more to own and operate a car. The difference? Higher licensing fees, higher gasoline taxes and higher taxes on car purchases. As a result, the German transportation system is comfortably in the black.

According to the Brookings Institution, Germany collected road fees in 2006 that were 2.6 times the amount spent on building and maintaining them. Contrast that with America, which only collected 72 percent of the money spent on highways that same year.

The sad part is that infrastructure spending should be a non-partisan issue. But this is America, after all, where everything seems to have a political angle to it.

As our nation's roads, bridges and waterlines continue to fall into a deeper state of disrepair, America risks lagging even further behind in today's global economy.

Good investing,

Dave Fessler

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