Clam chowder, crab shacks, whale watching and sandy feet.
These are the thoughts evoked as the Sagamore Bridge looms into sight. The bridge is the main link between mainland Massachusetts and Cape Cod and for many years has heralded the start of sunny holidays on the peninsula.
The bridge was built between 1933-5, a time before the Cape Cod summer rush had become a regular feature and it has been refurbished and rebuilt several times since. Traffic jams are routine, especially in the approach to the bridge, and tailbacks of up to 25 miles have been known.
It is a familiar tale across the US. Much of the infrastructure was built many decades ago and the costs of repair and maintenance are growing rapidly. Back in 1925, the average age of the government-owned structures (which make up around 80% of the stock of the government’s fixed assets) was around 12 years, and today is around 28 years.
Could do better
This is not restricted to bridges to pretty holiday destinations.
Every four years the American Society of Civil Engineers (ASCE) produces a report card on the state of the nation’s assets – the latest in 2013 rated rail and bridges as C+, energy achieved a D+ and aviation, dams, roads, schools, levees, wastewater, hazardous waste and drinking water were all awarded an ignominious D. (C is mediocre, D is poor). Yes, modern maintenance techniques can improve the efficiency but ultimately the asset depletes and repair costs skyrocket.
The US electricity grid is also creaking with age. According to federal data, the US electric grid loses power 285 percent more often than in 1984, when the data collection on blackouts began. In the American Midwest, electric customers lose an average of 92 minutes per year to power outages, while customers in the Northwest lose on average a whopping three and half hours per year to downed power grids.
Many costs do not show up in the repair bill.
The US Department of Energy estimate that the poor electricity grid costs American businesses as much as $150 billion per year in disruptions. Traffic congestion is also a hidden cost to the economy with the average hours per year wasted in traffic per commuter up from 18 hours in 1982 to 42 hours in 2014 according to a recent report in The New York Times.
The ASCE estimated in their 2016 update report* that with current trends in investment spend, “from 2016 to 2025, each household will lose $3,400 each year in disposable income due to infrastructure deficiencies; and if not addressed, the loss will grow to an average of $5,100 annually from 2026 to 2040, resulting in cumulative losses up to almost $34,000 per household from 2016 to 2025 and almost $111,000 from 2016 to 2040”.
Why is this so? How is it that one of the most prosperous countries on the planet reached this parlous state?
The key is government spending on investment.
Essentially, federal, state and local governments spent twice as much on the nation’s infrastructure in the 1950’s and 1960’s relative to GDP than they spend today.
How so? The US economy, like many, many others has been cutting back. Since 2009, all the major economies have reduced public investment in infrastructure. Government spending cuts and austerity programmes following the 2008 credit crisis have resulted in global infrastructure spending growth of just over 1% in 2015. In a world where asset ages are getting longer and the population is growing, this is clearly inadequate.
Consultants McKinsey produced a report** earlier this year estimating that the world will need to invest $3.3 trillion annually (in constant 2015 prices) from 2016 through 2030 simply to keep pace with economic growth forecasts. In total this investment in infrastructure would cost over $49 trillion over the period.
Why aren’t governments investing in new infrastructure now?
Well, public sector debts are high and the priorities for most governments following the credit crisis was to cut expenditure rather than raise it.
This situation is thawing, however, as economies have been restored to an even keel, interest rates and bond yields, i.e. the cost of financing these projects, have fallen to historic lows and there are the opportunities for public and private partnerships to jointly fund and run the assets.
In addition, there is a growing belief that the extreme monetary easing policies, using programmes such as quantitative easing, have run their course and direct fiscal spending – like building roads - may be more effective in boosting economic growth.
As we see it, this growing theme offers significant potential for investment opportunities. The resilient nature of infrastructure company earnings combined with the increasing growth opportunities present an appealing risk/reward balance. What’s more, most of the revenues of infrastructure assets are linked to inflation which gives them extra protection if prices start to rise too.
This week we took the opportunity to invest in a global listed infrastructure fund in our model portfolios. The fund looks for undervalued infrastructure companies across the world and will be in an excellent position to benefit from this emerging theme.
Potholed roads and crumbling bridges are likely to be with us for some time but hopefully as governments wake up to the need for renewal we will be in a great position to capture some of the benefits in our portfolios.
**http://www.mckinsey.com/~/media/McKinsey/Industries/Capital Projects and Infrastructure/Our Insights/Bridging global infrastructure gaps/Bridging-Global-Infrastructure-Gaps-Full-report-June-2016.ashx
The information provided through the Equilibrium website is based on our opinion and is for general information purposes only. It is not, and should not be construed as financial advice.