Infrastructure Finance E-Book

Neil S. Grigg

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Editions
• Sprache: Englisch

Seitenzahl: 572

Veröffentlichungsjahr: 2010

Beschreibung

A comprehensive look at the emergence of infrastructure finance Just as infrastructure development acts as a catalyst for economic growth, it is also changing the landscape for potential investors and the burgeoning field of infrastructure finance. Infrastructure systems for transportation, utilities, and public works are essential for economic growth and have quickly developed into an emerging alternative asset class. Infrastructure Finance examines how the activities associated with updating and creating efficient transportation and communications, reliable and affordable energy, clean water, and other essential systems, have become a profitable financial endeavor. Recently, providing, operating, and maintaining infrastructure has advanced as a recognized and important investment sector that reaches beyond earlier business models. Infrastructure Finance puts this field in perspective and details what you need to know to succeed within it. * An informative look at infrastructure finance-an emerging alternative investment for all types of institutional investors * Dissects the central organizational and financial issues behind the revolutions that are occurring in infrastructure management and finance * Contains detailed guidance for navigating the dynamic field of infrastructure finance * Discusses infrastructure as arteries of life for a better world * Highlights infrastructure undergoing transformations to adapt to turbulent environments * Focuses on Green infrastructure to balance economic and environmental changes As infrastructure finance continues to grow in importance, you'll need to enhance your understanding of its essential aspects. Infrastructure Finance will provide you with the insights to achieve this goal.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Preface

Acknowledgements

CHAPTER 1 - An Introduction to Infrastructure Finance

WHAT IS INFRASTRUCTURE BUSINESS?

INFRASTRUCTURE THEN AND NOW

A SYSTEM OF SYSTEMS

SECTOR STRUCTURE AND SIZE

ESTIMATING THE PER CAPITA COST

NEED FOR NEW APPROACHES

SUMMARY

PART One - Infrastructure Sectors and Investments

CHAPTER 2 - Models of the Infrastructure Sectors

CLASSIFICATION SYSTEM

INFRASTRUCTURE AND SERVICE ORGANIZATIONS

BUSINESS MODELS OF INFRASTRUCTURE SUBSECTORS

HOW INFRASTRUCTURE SYSTEMS SERVE THE BUILT ENVIRONMENT

MATRIX OF OWNERS AND USERS OF INFRASTRUCTURE SYSTEMS

INFRASTRUCTURE AND SERVICES: STRUCTURES AND EQUIPMENT

INFRASTRUCTURE SUPPORT SECTOR

SUMMARY

CHAPTER 3 - Infrastructure and the Constructed Environment

LAND USES IN THE BUILT ENVIRONMENT

GROWTH AND CHANGE IN URBAN AREAS

FINANCIAL ASSETS IN THE BUILT ENVIRONMENT

HOUSING FINANCE AS AN ENGINE OF DEVELOPMENT

COMMERCIAL AND CENTRAL CITY DEVELOPMENT

IMPACT FEES AND THE GROWTH-PAYS-ITS-OWN-WAY PHILOSOPHY

FUTURE CITIES AND INFRASTRUCTURE

SUMMARY OF ISSUES AND OUTLOOK

CHAPTER 4 - Transportation Sector

SECTOR STRUCTURE AND SIZE

ROAD AND HIGHWAY SYSTEMS

MASS TRANSIT SYSTEMS

AIR TRAVEL AND AIRPORTS

INTERCITY RAIL SYSTEMS

INTERCITY BUS TRANSPORTATION

WATER-BASED TRANSPORTATION

PIPELINES

SECTOR ISSUES AND OUTLOOK

CHAPTER 5 - Telecommunications Sector

WHY TELECOMMUNICATIONS IS AN INFRASTRUCTURE SECTOR

THEN AND NOW

SECTOR STRUCTURE AND SIZE

INTERNET

TELECOMMUNICATION COMPANIES

SECTOR ISSUES AND OUTLOOK

CHAPTER 6 - Energy Sector

SECTOR STRUCTURE AND SIZE

ENERGY TRENDS

ELECTRIC POWER INDUSTRY

NATURAL GAS INDUSTRY

PETROLEUM INDUSTRY

COAL INDUSTRY

NUCLEAR POWER INDUSTRY

RENEWABLES

ENERGY STORAGE

HYDROGEN ENERGY

SECTOR ISSUES AND OUTLOOK

CHAPTER 7 - Water and Wastewater Sector

THEN AND NOW

SECTOR STRUCTURE AND SIZE

FINANCIAL FRAME WORK OF THE SECTOR

FINANCIAL ISSUES

BUSINESS PROFILES

WATER INDUSTRY SUPPORT BUSINESSES

PRIVATIZATION IN THE WATER SECTOR

INVESTING IN WATER AS A COMMODITY

INDUSTRY POLICY AND REGULATION

COORDINATION IN THE WATER SECTOR

SECTOR ISSUES AND OUTLOOK

CHAPTER 8 - Waste Management Sector

SECTOR STRUCTURE AND SIZE

CATEGORIES OF SOLID WASTES

RECYCLING AND THE MATERIALS INDUSTRY

SECTOR ISSUES AND OUTLOOK

CHAPTER 9 - Infrastructure and the Construction Industry

THEN AND NOW

THE CONSTRUCTION INDUSTRY TODAY

ORGANIZATION OF THE INDUSTRY BY FUNCTION AND SECTOR

ORGANIZATION BY BUSINESS LINES

PROJECT DELIVERY AND FINANCE

CONSTRUCTION COMPANIES

SECTOR ISSUES AND OUTLOOK

CHAPTER 10 - Investor and Business Opportunities in Infrastructure

THEN AND NOW

BOND MARKET

STOCKS OF INFRASTRUCTURE COMPANIES

INFRASTRUCTURE FUNDS

INFRASTRUCTURE INDICES

COMMODITY MARKETS

MORTGAGE-BACKED SECURITIES

PRIVATE EQUITY AND INFRASTRUCTURE

THE INFRASTRUCTURE SUPPORT SECTOR

INFRASTRUCTURE INVESTMENT MEDIA

CORRUPTION IN THE INFRASTRUCTURE BUSINESS

INTERNATIONAL SPENDING PLANS

INVESTMENT ISSUES AND OUTLOOK

PART Two - Financing Infrastructure

CHAPTER 11 - A Scorecard for Infrastructure Performance

TRACKING INFRASTRUCTURE PERFORMANCE

WHAT SYSTEMS TO MEASURE?

WHAT ARE THE PERFORMANCE STANDARDS?

HOW MUCH DO THEY COST?

HOW READY ARE THEY TO PERFORM?

FINANCIAL AND ECONOMIC DATA ON INFRASTRUCTURE

INFRASTRUCTURE SCORECARD

SUMMARY

CHAPTER 12 - Financial Models for Infrastructure Organizations

GENERAL MANAGEMENT MODEL

GENERAL FINANCING MODEL

SECTOR FINANCING MODELS

HOW GOVERNMENTS CAN IMPROVE INFRASTRUCTURE PERFORMANCE

PUBLIC-PRIVATE PARTNERSHIPS

REGULATION

SUMMARY

CHAPTER 13 - Capital Markets for Infrastructure

CAPITAL REQUIREMENTS OF SECTORS

CAPITAL FLOWS OF INFRASTRUCTURE

CAPITAL STRUCTURE OF INFRASTRUCTURE SECTORS

SOURCES OF CAPITAL

INVESTMENT BANKING

SUMMARY

CHAPTER 14 - Revenues for the Infrastructure Sectors

FLOW OF REVENUES

RATE-SETTING FOR INFRASTRUCTURE-BASED SERVICES

RATE REGULATION

REVENUE AND COST OF SERVICE ANALYSIS

TAX REVENUES AND SUBSIDIES

INFRASTRUCTURE REVENUE BY SECTOR

SUMMARY

PART Three - Toward the Future

CHAPTER 15 - Opportunities and Risks for Infrastructure

INFRASTRUCTURE AS A POLICY SECTOR

INFRASTRUCTURE POLICY ELEMENTS

SECTOR ISSUES

TRANSFORMATIONAL ISSUES

APPENDIX A - Data Sources

APPENDIX B - Infrastructure Companies

APPENDIX C - Acronyms

References

About the Author

Index

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Copyright © 2010 by Neil S. Grigg. All rights reserved.

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Library of Congress Cataloging-in-Publication Data:

Grigg, Neil S.

Infrastructure finance : the business of infrastructure for a sustainable future / Neil S. Grigg. p. cm. - (Wiley finance series)

Includes bibliographical references and index.

eISBN : 978-0-470-59727-9

1. Infrastructure (Economics)-United States-Finance. 2. Public works-United States-Finance. 3. Municipal services-United States-Finance. I. Title.

HC110.C3G75 2010

363.6068’1-dc22

2009037063

To public works and utility leaders around the world

Preface

Every society must work through its political system to decide how it will respond to the basic needs of its citizens. The needs begin with safety and security and extend to health, education, and opportunity for a good life. As a society becomes more affluent, the needs become open-ended and require public choices to avoid sinking under too much debt. Deciding how to meet it drives political debate about the allocation of resources and the roles of government, business, and individuals. While the debates proceed, it remains clear that infrastructure is a solid investment that is essential to meet human and environmental needs, whether they involve safe drinking water, effective transportation, pollution control, or public school buildings.

Now infrastructure finance is in the limelight because the nation is challenged to maintain its support systems during the financial crisis. Although the crisis is tough, it seems we have been here before, even if the problems were different, such as the oil embargo of the 1970s or the savings and loan debacle of the 1980s. Through these, our financial systems have held our economic system together.

The central issue in the debates involves shades of an old question: Does capitalism or socialism reign? If a society views infrastructure as purely a private good to be available only to those who can afford its services, life would be unfair and miserable for many, many people. If it views infrastructure-related services as purely tax-supported public goods, the result would be inefficiency, waste, and lack of public choice. So, the answer is somewhere in between: Infrastructure involves both private and public goods. The solutions are based on neither capitalism nor socialism but on a mixed approach.

Infrastructure decisions are not simple because, as society has become more complex, so have its infrastructure systems and the values and institutions that determine society’s choices. Gone are the days when a community could get by with a few narrow streets and a basic water system. Today, complex networks of infrastructure systems traverse cities and regions to provide networks of energy, water, transportation, and more. These are connected by cybersystems, and their reliability affects everything from national defense to the health of newborns.

One obstacle to effective decisions is that the definition of infrastructure can be arbitrary and create confusion. In this book we define it in a clear way as the built environment and its essential support systems for transportation, communications, energy, water, and waste management. Other essential systems, such as food, criminal justice, and public hospitals, could be included, but the six categories we focus on are distinctive as interrelated physical systems with many common attributes. Communications is a little different from the others, but its infrastructure is often colocated with other public facilities.

The financial details of the infrastructure subsectors embrace a surprising range of topics of national importance that include, for example, effects of the housing bubble, effects of gas price rises on travel, electricity and global warming, the crisis in water, disposal of nuclear wastes, massive aging infrastructures, and the war on terror. Each of these issues adds cost to infrastructure and affects its bottom line in one way or another. These topics are the subjects of best-sellers about the problems the world faces today, such as melting icebergs, the ravages of poverty, and the need for clean energy.

Financing these systems requires a substantial portion of the nation’s gross domestic product, somewhere around 10 percent if you define infrastructure as only basic support networks and around 20 percent if you include housing and commercial buildings in its definition. How these macroeconomic numbers are estimated is explained in Chapter 11 of the book.

Given the size and importance of infrastructure systems, it is natural that fierce debates will rage about how to pay for it. These debates focus on questions such as which systems to provide, how much to provide, and who will pay for them. Although these questions are debated at the policy level, they are mostly decided at the level of infrastructure management organizations, firms, and regulatory agencies.

The first part of the book explains the main infrastructure sectors, how they can be aggregated to form a composite sector, and how they offer investment opportunities. The second part presents a scorecard of statistics for the aggregated infrastructure sector and its constituents, introduces an overall financial model for the sector, explains its capital structure, and describes the sources of revenues for its subsectors. The final chapter explains current thinking about national policy, including public and private roles in improving infrastructure while dealing with an ongoing financial crisis.

Along the way, the book presents a number of brief profiles of public agencies, private infrastructure companies, and supplier firms. The profiles illustrate how the players participate in the infrastructure arena. They also illustrate how private sector players can work within the government-dominated infrastructure arena.

As a caveat, I would like to emphasize that the company profiles are not presented to give investment advice. They illustrate ranges of choice among large and small businesses with different financial strategies and positions within the infrastructure sectors.

As a note on the sources used, many notes are included in the chapters, and Appendix A provides a list of principal data sources. For the most part, these have been noted when used, but in some cases a general source such as “Yahoo Finance” was consulted to obtain a single number, such as annual revenues. As that number is available from a wide range of sources, these are not always noted because doing so would add too much clutter to the text. Appendix B is a listing of infrastructure companies that were discussed in the text and can help the reader navigate quickly to them. Appendix C provides a list of acronyms and will help clear up the mysteries of infrastructure’s “alphabet soup.”

NEIL S. GRIGG

January 2010

Acknowlegments

This book spun out of my long-term interest in infrastructure management, which is expressed through a course in the civil engineering department at Colorado is State University. I would like to thank a number of people and institutions for the help I have received in the evolution of this course and the ideas behind this book. These begin with the professors at West Point, where as a cadet in about 1960 I discovered American City magazine, which where as a cadet in about 1960 I discovered Americans City magazine, which sparked my interest in city and public works management.

Later, the seed of the course was inherited at the University of Denver from Dr. Ron Hensen, who focused on city planning and transportation. At that time, the United States was implementing Great Society programs, such as New Cities and the War on Poverty, and was in the grips of the Vietnam War. The course began to take on land development topics to explain how developers negotiated with cities on infrastructure finance. As a consultant, I worked on infrastructure financial studies and gained an appreciation for capital and operations budgets and accounting. About the same time, I witnessed the birth of Denver’s transit system, which started with three small buses bought through a federal grant. It was interesting to see how transit required subsidies because of low ridership, even if people did not like to subsidize it.

My next eye-opener on infrastructure finance was in the North Carolina state government, where I had oversight responsibility for the Wastewater Construction Grants program, one of the largest public works financing programs of the day. I also witnessed the plight of small cities trying to finance their infrastructure without a tax base or the income to pay adequate fees.

By the 1980s, the “infrastructure crisis” had my attention. I participated in events organized by the American Society of Civil Engineers and the American Public Works Association on infrastructure policy and financing and I served as a consultant to the National Council on Public Works Improvement, which issued the first infrastructure report card. I also had several opportunities to work as an international consultant on infrastructure projects supported by development banks. These gave me a picture of the financial dilemmas facing developing countries, and I began to include development banking in the infrastructure course. Later, I noted that some countries had excellent financial and regulatory theories but could not implement them due to local politics, culture, and financial problems.

As the United Kingdom grappled with its infrastructure issues, I was impressed with how it imposed a regionalization scheme on the water industry. I thank Dr. Dan Okun, who was a leader at the University of North Carolina, for kindling my interest in this. With this scheme, the United Kingdom had created state water companies, which looked efficient to me at the time. However, the Thatcher government privatized them, as well as other state enterprises, and I was able to see sharp differences between public and private sector approaches. In a visit to one of the authorities, I noted how carefully they computed the condition of their buried assets as they prepared for their initial public offering.

After I returned to Colorado State in 1982 and reinitiated my course on infrastructure, I was appointed to the city’s Water Board and later to the city’s Transportation Board. These boards advise the City Council on policies and finance for utilities, street maintenance, transit finance, and related policy topics. I began to study financial modeling for utilities, rate studies, regulatory programs, and tools for financial analysis. Some of these topics were included in two 1980s books on urban water systems and on infrastructure management, both published by Wiley. I noted the divide between the financial approaches of engineer-managers and accountants, who did not seem to have a good handle on fixed asset management. Some of this problem was addressed in the 1990s by the Government Accounting Standards Board through its new statement GASB 34.

I had noticed the irony that engineers and rising infrastructure managers had much responsibility for finance, but as students they were taught next to nothing about it. In response, I increased the finance content in the infrastructure course to cover utility rates, taxes, and the bond market, among other topics. I was able to reach back in time to my economics professors at West Point, who required us to read the Wall Street Journal and to compile mock portfolios of stocks. This had sparked a lifelong interest in economics and finance, and I began using the Wall Street Journal as a teaching aid in my infrastructure course. A good share of the Journal’s content relates in one way or another to infrastructure.

By 2009, when the book was being prepared, the housing and economic crisis was in full bloom, and the government was applying infrastructure stimulus tools. Having studied the lessons of the Great Depression, this was like a living laboratory to give me insight into the differences between public sector and private sector infrastructure developments. The Obama administration initiated a number of Keynesian tools, and infrastructure investment was a core part of the package.

So, it is a long story as to how the book evolved, and I appreciate very much the valuable help I received along the way. I also benefited from the support from Wiley staff members Bill Falloon, Executive Editor, Finance and Investment, Meg Freeborn, who served as Development Editor during manuscript design and preparation, and Melissa Lopez, who handled production editing capably. I appreciate their counsel on the development of the book and moving it from concept to completion.

CHAPTER 1

An Introduction to Infrastructure Finance

The business of infrastructure will always be vibrant because without basic systems such as transportation, energy, and water, neither the economy nor society can function. No matter how you define it, infrastructure is a large and important business sector. When defined broadly, the infrastructure business includes buildings, transportation, energy, water, telecommunications, and waste management as well as the cross-cutting construction and environmental businesses. When it is defined narrowly, it focuses on the construction industry, which is a vital and important sector of the economy.

Two compelling issues drive the need to finance infrastructure systems. The first is that the systems provide the physical basis for life, whether safe drinking water, energy to stay warm, or other essential services. The second issue is the business of infrastructure, or the functioning of the private sector and government organizations that provide and sustain the essential structures, equipment, and services of infrastructure.

This chapter introduces infrastructure as a business and identifies its main issues. Chapter 2 explains how infrastructure is a composite sector and introduces its subsectors. After a chapter about each of the subsubsectors, a summary chapter presents a range of investment opportunities. The remaining chapters in the book explain the capital and operating finances of infrastructure and identify the driving forces and trends that will shape its sectors in the future.

WHAT IS INFRASTRUCTURE BUSINESS?

Having a clear definition is the key to analyzing the “infrastructure business.” As the reader will see, people define infrastructure in different ways. To view it as a business, you must focus on its financials. The definition can be fuzzy, so it is even more important to specify what infrastructure includes.

Much of the interest in infrastructure is focused on the construction industry, but infrastructure involves more than construction. One business letter, the Infrastructure Investor (2009), wrote that infrastructure “covers the man-made facilities that ensure any economy can operate” and that it includes transportation (railways, roads, and airports), utilities (energy generation and distribution, water, and waste processing, and telecommunications), and social infrastructure (schools, hospitals, and state housing).

Our definition varies from this, but the idea is the same. Investments in infrastructure target basic facilities that meet the needs of society and the economy. One variation is the attention we give to the built environment itself, with its emphasis on residential and commercial buildings. If these are not included in the infrastructure sector, then a major share of construction spending is missed. Another important part of our approach is that we distinguish between infrastructure and operation of infrastructure-related services, which is important in analyzing the sector.

In the chapters that follow, the reader will see that infrastructure is a composite of sectors such as construction, transportation, energy, and water, among others. Why should anyone be interested in this composite sector when its parts, such as transportation or electric utilities, can be analyzed separately? Surely these parts are large and complex enough to deserve their own analysis. The answer is, of course, they are large and deserve their own analysis, but they have common attributes that lend themselves to analysis of the composite sector for the purposes of investors, public sector managers, and policy makers.

Investors are now being presented with new infrastructure stock funds and are told that infrastructure is an attractive sector because it is essential and solid at a time when other sectors are changing rapidly. This can seem like a new investment opportunity, and it does have new facets. However, much of what is offered comprises systems that have been around a long time.

Public sector managers are confronted with complex decisions, such as how to solve traffic congestion or when and how to renew aging infrastructure systems. Facing these issues, policy makers—such as local government elected leaders—face funding decisions that may dwarf their other financial decisions.

The general purpose of the book is to pose and answer questions that will help these three groups: investors, public sector managers, and policy makers. For the policy makers, the book opens a discussion of new forms of public-private cooperation and mechanisms to make government more efficient and responsive to public needs. For the public sector managers, it explains the financial structures and performances of the distinct infrastructure sectors. It ranges across public and private sector systems to explain how they obtain operating and capital revenues and how the balance between demand and supply is achieved. For investors, the book explains the structures of the industries that are in the infrastructure arena, how they obtain their capital and operating revenues, and how opportunities for private sector involvement arise in the capital markets, in equities of listed companies, and in private business start-ups.

INFRASTRUCTURE THEN AND NOW

Whereas the public side of infrastructure has a high profile, the fact is that infrastructure has always had a high level of private sector involvement. Just 100 years ago, the infrastructure business was strong in the United States, railroad stocks were hot on Wall Street, the electric utility industry was new, and the public demanded more roads for its new Model T automobiles. Go back 100 years earlier, and you see that change from a rural to an urban society gave birth to the technological age that drove the need for infrastructure.

This industrialization and urbanization that led to infrastructure development started around 1800, when a private banking venture led by Aaron Burr built a new water system for New York City. At that time and for another century, bankers were important players in financing infrastructure systems as well as other high-stakes national issues, even wars.

The steam engine had been invented, and it powered the Industrial Revolution. The privately owned Erie Canal created a boom for the Northeast, and people could see the close links between transportation and economic development. The growing nation required more and more politically charged internal improvements, and infrastructure issues moved to center stage in politics as well as business.

Now we live in a different world, but the infrastructure business remains important because the public still needs rail, electricity, roads, and many other infrastructure-related public services. If you include the Internet as part of infrastructure, then it rises even higher on the agenda. In any case, we are reminded of infrastructure constantly by the media. Time magazine, in its March 23, 2009, cover story, reported on 2 its top 10 national trends as related to infrastructure (Lacayo, 2009). One was the evolution of smart highways that serve to organize economic activity (see Chapter 4), and the other was recycling the suburbs with updated land uses (see Chapter 3).

Not only is the role of infrastructure in the economy large, it is growing in importance. This role was high on the agenda of many economists during the 1980s and 1990s, and they explained how infrastructure is essential to economic development, productivity, and employment (Gramlich, 2001). They also showed that infrastructure investments encourage innovation, competitiveness, and is the basis for a high standard of living (Infrastructure Australia, 2008).

During the recent financial crises, infrastructure figured prominently in national stimulus packages and the U.S. budget. Having learned from past recessions, cities have been competing to show how many “shovel-ready” projects they have on their books. Much of the response to the financial crisis has been about housing, public projects, and transportation systems, all of which are central to infrastructure policy.

America is under criticism for how it invests in infrastructure. Along with other policy questions, we as a society face decisions about how much to invest in infrastructure, even while we are confronted with tremendous “needs estimates” to rebuild highways and fix aging sewers. Some say that if the nation does not invest more, it risks having the infrastructure of a third-world country. Experts look back at past nation building and grand projects like the Interstate Highway System and ask, “Where is that vision today?” Investment analysts compare America’s infrastructure investment of 2.4 percent of gross domestic product (GDP) to Europe’s 5 percent and China’s 9 percent and point to dysfunctional transportation, choked ports and airports, road congestion, and inadequate rail track systems.

One way to view this lack of investment is as a “third deficit,” to go along with our national debt and social security deficit. On a more positive note, it is apparent that we are entering a period of massive investment to rebuild and reinvent our infrastructure, almost like the 1930s New Deal or 1950s Interstate Highway eras. In any case, the overall view among experts interviewed by the Economist (2008) was “It’s time to think big again.”

As we explain in the book, an important dimension of infrastructure finance is how it can be used to manage demand and raise efficiency of critical public systems and services. This challenge is aimed directly at a central question about infrastructure: Should it emphasize public or private purposes? Public purposes focus on the core needs of society, such as clean air and water and access to education and healthcare. Private purposes relate to more discretionary needs, such as housing choices and entertainment.

Infrastructure finance addresses the central questions of public versus private purposes and is thus in the crossfire of political debates about a fair society. Chapter 14 discusses how decisions about infrastructure finance align public and private purposes. It answers questions about the roles of government and the private sector and how to meet basic human needs, such as safe water, disposal of wastes, energy, and transportation to work.

Infrastructure is at the center of debates about the global problem of poverty. When basic needs are not met, why are they not met? Whose job is it to provide them? Should the poor pay the same for basic services as affluent people? If basic services are not provided, who should intervene?

On a broader scale, what are society’s obligations to provide infrastructure for the many displaced and disenfranchised people around the world? Hundreds of millions of people displaced by war, climate change, or lack of opportunity do not have the basic support systems provided by infrastructure.

In more affluent societies, the more urgent problem is to find ways to sustain current levels of infrastructure-related services in the face of resource and environmental limits. Doing this requires more attention to managing demand rather than constantly ratcheting up supply. Closely related to demand management and efficiency of infrastructure is the subtle but important issue of trade-offs. You will read over and over in the book about how society and individuals can make choices about using public services, and the closer we can align these choices with the obligation to pay, the better our management will be.

The other focus in the book is on the attractiveness of infrastructure businesses, whether as an investment, such as purchase of municipal bonds or stocks of listed companies or direct equity stakes, or as a business line for entrepreneurs. The controversy over privatization and use of public-private partnerships is addressed with this topic. Chapter 10 provides examples of investment opportunities, including privatization.

While people have a general idea about infrastructure, measuring its financial performance is difficult because it is hard to define and classify and it has broad public purposes as well as well-defined private purposes. Infrastructure is not one unified system but a composite of systems involving utilities, transportation systems, and environmental services, among others. Also, reports about infrastructure tend to confuse the condition of government-owned physical assets and operating performance of the organizations that provide public services.

The definition of infrastructure can seem abstract and apply to different types of systems. To avoid a fuzzy definition, the book focuses on the constructed assets in six systems: the built environment itself, transportation, communications, energy, water, and waste management systems. This definition leaves out nonphysical categories, such as economic and social infrastructure systems. It emphasizes that infrastructure services are required for people and the economy, and they are not simply based on consumer choice.

To formalize this definition, we can say that infrastructure comprises the structural assets of the built environment and its physical support networks, and it includes a great deal of equipment, such as generators, motors, and actuators. In most cases, when accounting for infrastructure, we include both structures and equipment, which are the two types of fixed assets tracked by the U.S. Bureau of Economic Affairs.

Our definition of infrastructure distinguishes between the structures of infrastructure systems and the equipment of the organizations using the infrastructure to deliver public services, such as private motor vehicles and aircraft. In the case of rail companies, infrastructure includes structures and railcars. In the case of airlines, equipment is not considered part of infrastructure in our analysis but is part of the fixed assets of private companies using public infrastructure. You could, of course, make a case to include privately owned aircraft as infrastructure, but the definition of it would require adjustment.

The concept of public and private infrastructure systems can be confusing. There are many possibilities, but our main focus in the book is on infrastructure systems that provide public services, as distinguished from those that meet only private needs, such as the infrastructure that serves a manufacturing site. In some cases, the infrastructure that provides public services also serves broad public purposes that fall outside of the direct service. For example, a privately owned toll bridge could provide the public service of access across a river, but it might be required to remain open in case emergency vehicles needed to use it. Whether the bridge owner was compensated or not for the emergency access could be a matter for negotiation when rate-setting decisions are approved by regulators.

Some of the terms used can be confusing, and this list may help clarify them:

Public infrastructureInfrastructure that meets public purposesPublicly owned infrastructureInfrastructure owned by governmentsPrivate infrastructureInfrastructure that meets private purposes onlyPrivately owned infrastructureInfrastructure owned by private entities that might be used to provide public services and meet public purposesPrivate companyA company whose ownership is private and not be share held by the publicPublic companyA company that is owned by the public through issuance of traded stock sharesPublic serviceA service provided by government to the publicPublic purposesGoals of society that benefit all citizens

Given these variables, our focus is mainly on what is called public infrastructure, but it includes privately owned systems that provide public services. Although we focus on the public infrastructure, it is difficult to divorce the discussion from private infrastructure because it creates the main demands on public infrastructure. Private, residential, and commercial buildings are prime examples of private facilities that need public infrastructure systems.

Our definition is consistent with one used by the U.S. Congressional Budget Office (1983) and cited more recently by Dzierwa (2009) in his investment analysis of infrastructure as a sector. He emphasized that infrastructure has the common characteristics of capital intensity, high public investment by all levels of government, and criticality to the economy. The sectors included in the CBO study were about the same as ours, although we also include buildings as infrastructure because their financial needs are the largest among built facilities, and they drive needs for the other categories of infrastructure. How this is handled is explained in Chapter 2, which presents a conceptual model in which all building types form the core of the built environment, which drives demand for the other categories of infrastructure.

A SYSTEM OF SYSTEMS

In the broadest sense, infrastructure is everything in the built environment that is distinct from natural and human environments. Usually definitions are more specific and explain what infrastructure is and which categories of systems it includes. Here are a few examples of these definitions:

• The basic physical systems of a country’s or community’s population (InvestorWords, 2009)

• The functional modes of public works and combined infrastructure system (National Research Council, 1987)

• Physical assets that provide services used in production and final consumption (New Zealand Ministry of Economic Development, 2005)

• Assets that range from large-scale national networks to smaller community-based facilities (Infrastructure Australia, 2008)

• A collective term for services (refers to critical national infrastructure) (Parliamentary Information Management Committee, 2009)

The definitions are usually accompanied by explanations of why infrastructure is essential to the economy, to quality of life, to communities, to the environment, and to high standards of living.

In some cases, economic and social systems can be called infrastructures. For example, the U.S. Department of Homeland Security includes economic and government systems, such as emergency services, finance, food, and public safety, in its definition of “critical infrastructure” (2009). It is also not unusual to find social facilities, such as hospitals, schools and universities, museums, and libraries, in the definition. These definitions illustrate the dual nature of infrastructure: It can be explained as physical infrastructure or it can refer to operating sectors.

EXHIBIT 1.1 Built Environment and Infrastructure Support Systems

In our definition, infrastructure is limited to the buildings of the built environment and their support systems for transportation, communications, energy, water, and waste management. Exhibit 1.1 shows how these five infrastructure systems support the developed areas and corridors of the built environment.

As Exhibit 1.2 illustrates, all infrastructure systems utilize large-scale fixed assets, provide essential public services, involve both the public and private sectors, and are regulated by the government for health, safety, and performance. They include but are not limited to the services offered by public utilities for energy, water, and other utility services. Even with these attributes, it can be hard to say why one public service, such as road transportation, is based on infrastructure and another public service, such as police protection, is not.

EXHIBIT 1.2 Distinctive Attributes of Infrastructure Systems

The answer to this question comes through the arcane science of classification, which is explained for infrastructure systems in Chapter 2. Using a classification system, we can place police protection in a category of security services, which do not depend as much on physical assets as infrastructure-related services do.

The classification framework in Chapter 2 can be used to explain infrastructure investment needs and policies. At the highest level, the classification system starts with human systems, constructed systems, and natural systems. The classification can be taken to successively lower levels until the most basic components of the built environment are included, down to a streetlamp or water valve.

The terms sector, industry, and system are used interchangeably to explain infrastructure. When sector and industry are used, they generally refer to economic issues. The term system usually refers to physical components working together, such as a network of roads.

SECTOR STRUCTURE AND SIZE

Chapter 11 is about measuring the infrastructure sector, including both capital and operating costs. It is often difficult to separate these costs, but accounting for infrastructure must recognize that sometimes one organization provides the infrastructure (such as a roads department) and another one provides the operating services (such as transit services).

It can be difficult to compute the true annualized capital costs for infrastructure systems. For example, a buried pipe might cost $1 million per mile to construct, but its lifetime cost is hard to measure because you do not know how long it will last. Once debt service is paid, the capital-intensive nature of the asset will not be noticed much, and it may be taken for granted. This may continue until it fails, and lead to the need for sudden large expenditures for repair and/or renewal. Just as you must know the condition of a house before buying it, discerning the likelihood of these sudden costs can be important in appraising the full costs of infrastructure.

The problem of neglect is pervasive in the infrastructure management arena. One financial manager said that the practice is to build it, forget it, and rebuild it. Out of sight, out of mind is another slogan that applies. What should an elected city council member argue to rebuild a sewer that has not yet failed, when the funds can go for another community park that might even have the names of the elected council members on a placard?

No matter how you measure it, infrastructure activity is a major part of the economy. Although it is not measured directly in national economic accounts, the infrastructure sector’s size can be approximated by statistics such as construction spending, government spending, and utility revenues. Construction is 4 to 5 percent of GDP on the basis of value added. Energy costs are on the order of 8 percent, and, while it is not accounted for in an integrated way, the transportation sector is huge. If you add utilities, real estate, waste management, professional services, and government activities related to infrastructure, the percentage rises. Taking all together, the costs to build, maintain, and operate infrastructure systems and all buildings rise to around 20 percent or more of the economy. Of course, the critical issue in measuring this is what infrastructure includes.

While it is difficult to measure infrastructure’s economic impact, estimates in Chapter 11 show that the value of U.S. infrastructure assets is around $8.3 trillion for public structures and $28.0 trillion for private structures (2007 data). Most of the public asset value is in roads, streets, and other infrastructure networks, while the private asset value is heavily weighted toward residential housing.

Expanding, modernizing, and renewing public infrastructure place heavy burdens on state and local governments as well as rate payers and taxpayers. For example, the $8.3 trillion asset value for public infrastructure represents over $80,000 per household in the United States, and the number is heading up as systems become more complex and need replacing with new models. The residential housing cost per household is much larger and is a principal reason for the financial crisis that occurred with the housing bubble. New management approaches are needed to deal with these large obligations while not increasing taxes and fees to burdensome levels.

ESTIMATING THE PER CAPITA COST

Although the details are complex, the overall cost of infrastructure can be estimated from the capital and operating costs for each sector. For the built environment, these would be paid as rent or opportunity cost for residential, commercial, and industrial facilities. In the transportation sector, costs would include the upkeep and capital on roads and the subsidies and fares of transit, rail, and aviation systems. The energy and communications sector revenues would be added to all charges and subsidies for water, wastewater, and waste management. The sum of all these costs would cover all debt service and operations of the infrastructure categories.

Generally speaking, if the GDP is about $45,000 per capita and if all infrastructure costs are 10 percent of GDP, then the annual cost to provide infrastructure and related services is about $4,500 per capita in the United States. If infrastructure costs are greater, at 15 percent of GDP, then the cost is $6,750 per capita, or about $20,000 for a three-person household. The numbers appear low if you consider the full cost of housing and other buildings.

As the major factor in infrastructure cost, residential housing comprises a large percentage of the estimates. For example, for a $200,000 three-person home, the annual cost per capita is about $4,000 (assuming a 40-year life, cost of capital at 5 percent, and maintenance at 10 percent of annualized capital cost). That amounts to an estimate of $1,000 per month for housing for the family, which would be higher if the interest rate rose.

The costs of the other infrastructure categories add to the total cost of housing, but they cost less than the buildings themselves. For example, as Chapter 6 shows, the total national electric power and natural gas revenues for a year are around $500 billion, or a per capita cost of about $1,700. Adding all such related infrastructure costs to the costs of housing seems to corroborate the $20,000-per-family range (about 15 percent of GDP) for housing plus infrastructure. In the final analysis, the per capita cost to provide infrastructure depends on its definition and how the costs are allocated. Chapter 10 presents an overall picture of these costs in the form of a scorecard for infrastructure.

NEED FOR NEW APPROACHES

It is true that infrastructure was a driving force of the Industrial Revolution, but economic challenges have shifted. Now society and the economic system are more complex. There are close links between infrastructure and economic vitalization, and no one can afford command-and-control approaches to infrastructure development unless the systems can be financed and sustained.

Mandel (2009) saw a link between infrastructure challenges and our current need for more innovation:

Of course, no industrial revolution in the past has been based on a single technology. A combination of radio, television, flight, antibiotics, synthetic materials, and automobiles drove the productivity surge of the early and mid-20th century. The Industrial Revolution of the second half of the 19th century combined railroads, electricity, and the telegraph and telephone. (p. 34-40)

So, what about innovation in infrastructure? Can we bring better services to more people at a reasonable cost and help the triple bottom line? The links between infrastructure and quality of life are undeniable. Developed and developing countries need sustainable infrastructure to support their citizens while not damaging the environment. Success for these countries will depend on their management approaches and financing methods.

New management approaches to achieve sustainable infrastructure systems must confront their capital intensity, which presents obstacles to performance improvement and cost reduction. New approaches, such as those described in Chapter 14, can feature different forms of ownership and financing as well as new technologies and management strategies.

While it is tempting to think that a market approach of pricing infrastructure services will solve the problem, this strategy suffers from market failure, a term that explains how the private market cannot fully deal with issues of public goods. This difficult issue draws in the economic problems of managing monopolies to protect the public interest as well as many newer business issues about social equity and environmental protection.

The opposite of market failure is government failure. The government cannot manage infrastructure fully by itself without spiraling into pure socialism and waste caused by pork-barrel approaches and other public sector problems. At its best, the issue becomes one of efficiency. At its worst, corruption and criminal activity are involved.

This combination of market failure and government failure leads to a principal theme of the book: the need for improved models for public-private cooperation, or a “middle way.” In today’s parlance, these are usually referred to as public-private partnerships. They are discussed in more detail in Chapter 12.

Embedded in the discussions in the book about infrastructure finance are many new management approaches. In addition to public-private cooperation, these include pursuit of efficiency and equity, environmental sustainability, and triple-bottom-line thinking to link infrastructure to objectives for energy conservation, environmental management, and security.

The next chapter provides an overview of the infrastructure sectors, including the built environment, transportation and communications, energy and water, and waste management. Separate chapters follow for each of these key infrastructure sectors. A chapter to summarize investment opportunities wraps up Part I of the book.

SUMMARY

Whereas infrastructure is often considered a technical sector, current issues point to the important roles of business and finance in improving the sector. Technology will continue to push new developments, but the most important changes will be organizational and financial. This section reviews important issues that confirm how these issues drive today’s infrastructure sector.

Infrastructure as a Business

The infrastructure business evolved rapidly during the Industrial Revolution and is still in a period of change. The earliest public roads, railroads, water systems, electric power systems, and other facilities were private, for-profit ventures. Although it has changed, the infrastructure business will remain vibrant because it is essential to the economy, society, and the environment. Even during the Great Depression, electric power, transit, and other infrastructure services continued in operation. Although demands for infrastructure continue and grow, the nature of the business has changed so that the security of regulated returns is less certain than in the past.

Infrastructure as a Third Deficit

The large backlog of infrastructure needs comprises a third national deficit, along with the public debt and unmet future Social Security needs. Therefore, America will be challenged to invest enough in its infrastructure to meet the identified needs because it has other heavy financial obligations. Its dispersed population and standard of living create greater per capita infrastructure costs than other, more centralized nations face. The United States must develop new policies to respond to these challenges.

Infrastructure Is Not Just a Public Good or a Private Good

Infrastructure systems serve both public and private purposes, and it will always be difficult to draw a fine line between services that can be financed through consumer choice and those that require government mandates and subsidies. This juxtaposition presents a challenge to the political and economic systems: Can the U.S. political system adapt once again to show how a representative democracy can step up to the plate to make equitable choices that serve all the people?

Infrastructure Is a Core Issue in Overcoming Poverty

Around the world, poverty and deprivation are all about lack of basic infrastructure and related services. How can people escape poverty if they lack housing, safe water, affordable energy, transportation to a job, and a healthy way to dispose of wastes? If nations and the international community are serious about overcoming poverty, they must find ways to straddle the public and private purposes of infrastructure services and deliver workable and sustainable systems to everyone.

Trends and Driving Forces

Without exception, infrastructure systems are becoming more complex, costly, and vulnerable. These attributes pose danger and opportunity. The danger occurs because infrastructure may absorb more national resources and cause distress in society when it fails, but the opportunity is to create through the private sector new products and services to address these changes. Information technology, telecommunications, smart controls, new sensors, and other technologies can help ensure more reliable and responsive infrastructure systems at affordable costs.

Management Requires Keen Insight

While it is easy to agree on the need for infrastructure and public services, defining what is meant by this can be difficult. Without a fixed definition of infrastructure and clear demand signals from the marketplace, it can be difficult o measure the financial performance of infrastructure systems. Lacking performance indicators, politicians can refuse to invest or spend on the basis that they require more evidence of the results. This dilemma afflicts infrastructure systems and creates problems ranging from financing transit buses to preventing failures of aging infrastructure systems, such as buried water lines.

Choice in Services

Providing infrastructure and its public services is not only a matter of defining needs and meeting them. It is also about giving people choices so they can decide how much of the infrastructure services to use and how to pay for them. Infrastructure finance is the key tool to provide this choice by creating demand management systems that raise overall efficiency of infrastructure delivery systems. Infrastructure finance offers new ways to make government more effective in its management and oversight roles, including tools that have come through reinventing government and managing the price of government.

Sustainable and Attractive Infrastructure Businesses

Although the idyllic notion of a reliable investment in a regulated infrastructure service that pays unending dividends is a thing of the past, many infrastructure investments still hold attraction for stability, safety, and attractive returns. Some come with assurance of regulation, but even in the absence of regulation, municipal bonds, stocks of growing companies with strong and steady markets, and private equity investments can be very attractive. As in other arenas, picks of the most promising investments remain difficult, but infrastructure offers many opportunities for investors willing to analyze the sector in depth.

PARTOne

Infrastructure Sectors and Investments

CHAPTER 2

Models of the Infrastructure Sectors

Once infrastructure is defined, the next step to understanding it in depth is to probe the organizational issues that explain roles of the public and private sectors, how managing structures may be different from delivering public services, and how different infrastructure sectors vary in their use of capital investments. These issues can be addressed by using a simple conceptual model of the infrastructure sector as a composite system of systems. This conceptual model shows us what the sector includes and how its elements interact. It provides insight to help evaluate the investment possibilities of the overall sector or its subindustries. Without a model like this, every situation is different, and we lack the ability to make a rigorous analysis that compares forces across the industry.

Using the model introduced in this chapter, we classify infrastructure systems and their operating sectors. In the model, the built environment creates demand for transportation and communication systems, energy and water system inputs, and waste management systems. Each part of the composite sector of infrastructure operates differently, and the model explains how they work individually and together. It provides an overall classification system and explains how fixed assets in each subsector support operating organizations, which provide essential public services. Starting with the macro-view, you can use the classification system to see infrastructure as a supersector and drill down to see its tiniest parts.

CLASSIFICATION SYSTEM

The classification system provides a way to compare infrastructure sectors, such as roads and energy, and to understand the nuances of business that takes place at different levels of organizations and government. It is based on infrastructure as a composite of subsectors, each of which has different characteristics for asset types, functions, ownership, and type of service delivered. Classifying industries this way involves finding common attributes and placing objects into categories. While this might not seem very interesting, it is important in the analysis of business activities in industries.

Exhibit 2.1 illustrates a view of the infrastructure sector with four levels. It begins at the macro-level, drills down to sectors and then industries, and then drills to physical systems. This shows at a glance how any physical system fits into the big picture of infrastructure. The example shown is from the water sector.

Exhibit 2.1 creates a basis to classify infrastructure system by levels. As you see on the exhibit, infrastructure at the top level is a sector of a bigger system, perhaps the economy, which is a sector of all national life. You can classify these big-picture systems in different ways. At the lower end, you can drill down to lower and lower levels of detail.

Exhibit 2.2 shows how, at the first level down, the names of the sectors align with government departments, such as transportation and energy. We interpret this to mean that infrastructure as a composite sector cuts across several important government departments (or ministries, as they are called in some countries). This makes sense because so many aspects of government affairs relate to infrastructure in one way or another. In some developing or fast-growing countries, there may be a ministry of infrastructure to group similar development and construction activities.

EXHIBIT 2.1 Infrastructure by Levels (Water Sector Example)

EXHIBIT 2.2 Classification System for Infrastructure Sector Levels

SectorSystemExamples of SubsystemsTransportationRoads and bridgesHighways/streetsTransitBusRailPassenger/freightAirAirportsWater transportDocksCommunicationWiredFiber cableWirelessCellular phoneEnergyElectric powerGenerationNatural gasTransmissionWaterWater supplyDistributionWastewaterTreatmentIrrigationSprinklerFlood controlStructuralDamsFederalWasteSolid wastesCollection/disposalHazardous wastesChemical

At the next level down, the names align with industries, such as electric power, which is part of the energy sector. Each of these infrastructure industries is important by itself, and some of them, such as electric power, involve annual expenditures of hundreds of billions of dollars. Electric power also consumes more capital than any other single industrial sector. These industries are often the basis of economic groups, and investment indices have been developed for utilities, transportation, and construction, for example.

At the next level down, subsystems take on technical and management characteristics, such as local streets as part of the roads and bridges system. As you drill deeper into the classification system, more classifiers are available. For example, roads are classified by ownership (state, local, etc.), service level (arterial, freeway, etc.), and pavement type (asphalt, concrete). At the higher levels, only a few variables serve to classify infrastructure, but lower in the system, the numbers of variables increase sharply.

It is at this level where infrastructure names such as lifelines and networks make the most sense because they are subsystems that perform physically based functions within infrastructure systems, such as to convey water or energy.

The classification system can go deeper than the levels shown in Exhibit 2.2. For example, street pavements of asphalt or concrete can be classified by service levels and quality. You can have a six-level sequence of infrastructure-transportation-roads and bridges-streets-pavements-asphalt, for example. If you add type of asphalt, that makes a seventh level. Another example could be water pipes of different sizes and materials. A 12-inch ductile iron water pipe can be lined or unlined, and it can be of different ages. This increase of number of variables with depth in the system is an inherent characteristic of classification frameworks.

As you move deeper and deeper into infrastructure levels, you finally reach the point at which every bolt or piece of wire can be classified. This might seem way too low. However, as information technology is used more and more to manage infrastructure systems, the emerging asset management systems will demand more and more data. At present, however, these systems are catching up with decades in which infrastructure was buried and forgotten, and often it is a challenge merely to locate major buried facilities. The information technologies being used to solve this problem are the basis for some of the fastest-growing infrastructure sector companies (see Chapter 10).

The classification system explains why the concept of infrastructure creates confusion among different groups. Policy analysts lump the sectors and discuss infrastructure at the higher levels. When they discuss infrastructure, they are seeking general principles to set policy, and their discussions may seem abstract to people working on specific issues within the subsectors.

Industry analysts study the middle levels and seek to find patterns of economic activity to explain supply and demand for goods and services, financial flows, movement of prices, and other economic trends.

Technical professionals work at the more specific levels and are not as comfortable with the general and abstract language used at the higher levels. When the term infrastructure became popular in the 1980s, many civil engineers were not familiar with it, for example.

The point is, with a complex system like infrastructure with many levels, even at the lower levels of classification there is enough clustering to create subindustries and require separate trade associations. Take the field of road transportation, for example. There are separate trade associations for asphalt, concrete pavement, aggregates, traffic engineers, and other niche groups. As another example, in the case of water and wastewater, there are separate associations for ductile iron pipe, plastic pipe, and pumps. To understand what is happening in these sectors, sometimes you have to drill down to those levels.

INFRASTRUCTURE AND SERVICE ORGANIZATIONS

Accounting for infrastructure and analyzing its financial performance requires a distinction between its fixed assets (such as a bridge) and the operating entities (such as a roads department). Operating entities draw on the fixed assets to deliver services that support economic and social activity in each sector.

In some cases, the fixed assets are owned and operated by the same entity that provides the public services. For example, electric utilities mostly use their own energy infrastructures (generating plants, transmission lines, etc.) to provide energy to customers. In other cases, the operating entity does not own the infrastructure but relies on it to provide the service. An example of this arrangement is a waste management company using a government-owned landfill.

Ideally, standard financial reports, such as income statements and balance sheets, would be used to show the health and condition of the infrastructure sector as a whole. Realistically, however, the reports mix the financial situation in private sector and government infrastructure organizations and may create a confusing picture. While it is not possible to sort this out completely, we provide in Exhibit 2.3 a view of the physical assets and the owner/operators for each sector. In the exhibit, the sector of transportation has been broken into road, air, transit, and rail subgroups.

EXHIBIT 2.3 Infrastructure Owners and Operating Sectors

SectorsPhysical AssetsOperators/UsersBuilt environmentResidentialOwnersCommercialUsersIndustrialRoadsRoadsCarsBridgesTrucksBusesTransitRailTransit agenciesBus Rapid TransitRailRailRail companiesAirAirportsAirlinesAir Traffic Control SystemCivil aviationEnergyGenerationElectric and gas utilitiesTransmissionDistributionWater and wastewaterProductionWater and wastewater utilitiesTreatmentPipingWaste managementLandfillsWaste management companiesProcessing

For some systems (such as electric power utilities), the assets and operations of infrastructure organizations can be reported together on integrated financial statements. In those cases, their ability to provide energy can be assessed fairly well, although externalities such as the cost of fuel and environmental regulations will complicate the picture. In other cases (such as for the transportation services provided by roads), mobility is not determined solely by the fixed assets but also involves a fleet of vehicles that are not owned by the roads sector.

Exhibit 2.3