Partha Chakraborty is an Indian-born immigrant; a naturalized US Citizen since 2018. Educated in India and at Cornell University, Partha is currently an entrepreneur in water technologies, Blockchain, and wealth management in the US and in India. The views expressed are his own.
“We also make Steel”, was the slogan of Tata Steel of India. Their primary output was respect, of which by-products were company-maintained housing complexes, hospitals, schools & colleges, roads, bridges, educated and empowered workers…., and, steel. As Biden Administration embarks on an expansive, and ambitious, infrastructure program, a better tomorrow is the primary intended output with roads, bridges, rural broadbands, et. al. being bricks that support the foundation.
I cannot think of a single country where large infrastructure projects did not mark its (re)birth as an economic force. Nowhere better to look for example than China. China consumes 2.2 gigatons of cement annually, a reliable proxy for infrastructure spending, while US consumed about 4.5 gigatons in 100 years to 2000. China produces more than half of the world’s steel, high-speed trains serve 98% of major urban areas with 23,550 miles of tracks and another 30% expected by 2025. To reiterate, by 2025 China is expected to build more high-speed rail tracks than all of the rest of the world has currently, combined. Of the world’s top 100 skyscrapers, China has 49. The sheer scale, and audacity, of these infrastructure projects, are apparent to any who visits China. How could it not? Within 10 years of the opening of a vastly expanded airport in Beijing, the city opened a brand-new Daxing airport spanning 7.5 million square feet on a surface area of 18 square miles.
At play is how China looks at infrastructure projects. In a telling tale, the World Bank advised Shanghai officials in 1991 to go for buses, as opposed to its first subway system, dismissing any underground project will be wasteful and environmentally questionable for a city on Yangtze river basin. Shanghai ignored and went ahead, arguing that building a subway network would allow it to expand and leave room for building high-rises on the ground, whose residents, in turn, will justify projected ridership. They were right of course. Three decades later the megapolis now has the world’s busiest network carrying over 10 million people every day, a success they replicated in hundreds of other cities. Along the way China also became the world’s largest producer of subway cars and a major producer of large boring machines that burrow under rock and sediments.
Infrastructure projects can spur economic growth in unforeseen ways and that means they do not have to be paid for directly. Traditional accounting-based viability assessments fall short when you can not take into account the collateral benefits of your project, simply because they are known unknowns. It is an open secret that many of these large-scale Chinese projects incur bad debt in an accounting sense, as own-account P&L cannot justify billions spent on them. That said, the economy as a whole ends up stronger, and improved fundamentals make it very logical to ignore these bad debts. For example, the High-Speed Rail network expenses were indirectly paid for by increased efficiency from reduced dependence on freight corridors. Airports, roads and rail lines bring far-flung places within reach, helping factories spread out, reducing poverty in hinterlands, and reducing pollution in coastal cities. New cities bring factories and the other way around, creating a symbiotic cycle of virtue. Shanghai, and hundreds of cities after that, used subway networks to expand both vertically and horizontally, at times increasing implicit tax revenue by 100X, not to mention China ending up as a dominant force in global loco-body manufacturing. Ghost cities do not remain a shadow for more than a year or two. Many of these projects could very well be infeasible in the short run own-account-based calculations but taken together, you can only stand back in awe at the marvel they are creating.
Chronicling China’s rise, Thomas J. Campanella of Cornell University sums up as follows “We need a bit of China to be stirred into our game. We’re over-privileging the immediately affected residents. What we don’t do is give requisite weight to the larger society”.
Not that Chinese experience is without course-corrections or going for new challenges. Wind and solar farms, electric vehicles and artificial intelligence are in focus now, supported by a war chest of USD 378 billion in 2020, an increase of 10.3% year on year, within it, spending on basic research rose 12% to USD 20 billion. Chinese Premier Li Keqiang laid down the thoughts as follows: “To improve China’s innovation system, we will work faster to enhance our strategic scientific and technological capability underpinned by the development of national laboratories, strive to make major breakthroughs in core technologies in key fields, and formulate and implement a ten-year action plan for basic research.”
Positioning for the future in a bipolar world is a driver for the new American Jobs Plan as the White House makes clear. But I wonder if the Administration is ready to look at infrastructure projects holistically. Taking a long view about benefits of large-scale construction projects is Job #1. But it does not have to be all on the balance sheet of the Federal Government – Transportation Research Board estimated in 2018 that cost of repair on nation’s highways alone will exceed USD 1 Trillion over 20 years, a reasonably comprehensive plan of updating the nation’s aging infrastructure will easily cost over USD 20 Trillion. No matter how much money the Fed pumps into the economy, these are numbers not advisable for the Feds to go into.
Enter private capital, an area where the US does have a strong advantage. In 2020, private infrastructure funds raised USD 102 billion in the US, and invested USD 54 billion, mostly outside. Endowments, institutional investors and insurance companies are sitting on trillions ready to be invested for the long term – in a very low yield environment infrastructure projects are an easy win for them. Recently Congress has taken the right steps – by authorizing the issuance of tax-exempt private activity bonds and loosened the ban on using tolls on the interstate highway system. More needs to be done, raising the cap on private activity bond issuance from the current USD 15 billion to USD 1 Trillion or more will be a move in the right direction. Similarly, states need be allowed to use tolls for the modernization of interstates, a move that should be done with caution and care.
China can afford to take a really long – and wide – view because it has essentially one balance sheet and income statement for the entire country. What we have is a high-functioning financial system that can price risk exceptionally well. By involving private resources, we will be breaking down silos as it relates to large infrastructure projects, and the market will price and spread risk optimally and in a more transparent way. It may even be able to bring back trillions of investment dollars from inside the country and outside.
One approach might be is to set up standards and parameters and provide nominal federal funding for seed and first-loss. Let individual project champions – local transportation authority, e.g. – craft projects within that parameters and commit to supervision standards that will, in turn, be monitored by the Feds and the public. These individual projects – or pools of them – can then go to the market for actual investment dollars luring in institutional monies. Feds need to finance their part, presumably by higher taxes, but the burden will be much smaller. Using oft-used back-of-the-envelope benchmarks, a USD 100 Billion total budgetary outlay can easily support the entirety of the Infrastructure plan, which will add trillions to US GDP, thereby paying for the USD 100 Billion outlay in no time even without raising taxes on anybody. Not only a public-private partnership avoids a “crowding out” situation, it creates a new template of success to repeat later on. It gives public projects private scrutiny on costs that it lacks currently, curbing profligacy that is the bane.
It is not a new concept. During World War II, the US-financed three-quarters of US Government spending in 1941-45 with War Bonds (over USD 5 Trillion today). In practice that is what China does too – except that parties across from each other on a negotiating table represent different line items on the same ledger. Ours brings more accountability and transparency if rightly structured.
Hit the road, and the railroads too, Joe, and think big. We will build roads, bridges, and so on, but above all, we also will build a better tomorrow, together. Amen.