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Aging Infrastructure:How Are States Financing?2013 Annual Conference of The National Association of State Auditors, Comptrollers and Treasurers (NASACT)

Presented by Kevin J. McHugh

Managing Director, Navigant Valuation Services

Infrastructure in America – Where Do We Stand?

» We are at a pivotal moment when it comes to maintaining and modernizing our nation’s infrastructure. Many of our roads bridges, water system as well as our national electric grid were put into place over 50 years ago and all of these systems are simply overwhelmed or worn out.

» The American Society of Civil Engineers (ASCE) 2013 Report Card for America’s infrastructure gives an overall grade of D+ across16 major categories of infrastructure. This was a slight increase to the 2009 Report Card due to either an increase in private investment, targeted efforts in cities and states to make upgrades or repairs, or from an one time boost in federal funding.

Infrastructure in America – Where Do We Stand?

» As a foundation to this presentation, let’s review where we are with our nation’s primary infrastructure assets. Clearly, not a pretty picture, but the facts and significance are overwhelming and simply cannot be ignored at risk to our nation’s future and the safety of our citizens.

An Overview of Our Current Aging Infrastructure by Category

» Dams1: The average age of the 84,000 dams in the country is 52 years old. The nation’s dams are aging and the number of high-hazard dams is on the rise. Many of these dams were built as low-hazard dams protecting undeveloped agricultural land. However, with an increasing population and greater development below dams, the overall number of high-hazard dams continues to increase, to nearly 14,000 in 2012. The number of deficient dams is currently more than 4,000. The Association of State Dam Safety Officials estimates that it will require an investment of $21 billion to repair these aging, yet critical, high-hazard dams. – Grade D

1 Statistics provided by ASCE


» Drinking Water 1: Much of our drinking water infrastructure is nearing the end of its useful life. There are an estimated 240,000 water main breaks per year in the United States. Assuming every pipe would need to be replaced, the cost over the coming decades could reach more than $1 trillion, according to the American Water Works Association (AWWA). – Grade D



» Hazardous Waste 1: There has been undeniable success in the cleanup of the nation’s hazardous waste and brownfields sites. However, annual funding for Superfund site cleanup is estimated to be as much as $500 million short of what is needed, and 1,280 sites remain on the National Priorities List with an unknown number of potential sites yet to be identified. More than 400,000 brownfields sites await cleanup and redevelopment. – Grade D




» Levees 1: The nation’s estimated 100,000 miles of levees can be found in all 50 states and the District of Columbia. Many of these levees were originally used to protect farmland, and now are increasingly protecting developed communities. The reliability of these levees is unknown in many cases, and the country has yet to establish a National Levee Safety Program. Public safety remains at risk from these aging structures, an the cost to repair or rehabilitate these levees is roughly estimated to be $100 billion by the National Committee on Levee Safety. – Grade D-



» Wastewater 1: Capital investment needs for the nation’s wastewater and stormwater systems are estimated to total $298 billion over the next 20 years. Pipes represent the largest capital need, comprising three quarters of total needs. Fixing and expanding the pipes will address sanitary sewer overflows, combined sewer overflows, and other pipe-related issues. Since 2007, the federal government has required cities to invest more than $15 billion in new pipes, plants, and equipment to eliminate combined sewer overflows. – Grade D



» Bridges 1: Over two hundred million trips are taken daily across deficient bridges in the nation’s 102 largest metropolitan regions. In total, one in nine of the nation’s bridges are rated as structurally deficient, while the average age of the nation’s 607,380 bridges is currently 42 years. The Federal Highway Administration (FHWA) estimates that to eliminate the nation’s bridge backlog by 2028, we would need to invest $20.5 billion annually, while only $12.8 billion is being spent currently. The challenge for federal, state, and local governments is to increase bridge investments by $8 billion annually to address the identified $76 billion in needs for deficient bridges across the United States. – Grade C+


» Inland Waterways 1: Our nation’s inland waterways and rivers are the hidden backbone of our freight network – they carry the equivalent of about 51 million truck trips each year. In many cases, the inland waterways system has not been updated since the 1950s, and more than half of the locks are over 50 years old. Barges are stopped for hours each day with unscheduled delays, preventing goods from getting to market and driving up costs. There is an average of 52 service interruptions a day throughout the system. Projects to repair and replace aging locks and dredge channels take decades to approve and complete, exacerbating the problem further. Conditions remain poor and investment levels remain stagnant. – Grade D-



» Ports 1: The U.S. Army Corps of Engineers estimates that more than 95% (by volume) of overseas trade produced or consumed by the United States moves through our ports. To sustain and serve a growing economy and compete internationally, our nation’s ports need to be maintained, modernized, and expanded. While port authorities and their private sector partners have planned over $46 billion in capital improvements from now until 2016, federal funding has declined for navigable waterways and landside freight connections needed to move goods to and from the ports. – Grade C



» Rail 1: Railroads are experiencing a competitive resurgence as both an energy-efficient freight transportation option and a viable city-to-city passenger service. In 2012, Amtrak recorded its highest year of ridership with 31.2 million passengers, almost doubling ridership since 2000, with growth anticipated to continue. Both freight and passenger rail have been investing heavily in their tracks, bridges, and tunnels as well as adding new capacity for freight and passengers. In 2010 alone, freight railroads renewed the rails on more than 3,100 miles of railroad track, equivalent to going coast to coast. With high ridership and greater investment in the system, the grade for rail witnessed the largest improvement, mainly within the Northeast corridor. – Grade C+



» Roads 1: Forty-two percent of America’s major urban highways remain congested , costing the economy an estimated $101 billion in wasted time and fuel annually. While the conditions have improved in the near term, and federal, state, and local capital investments increased to $91 billion annually, that level of investment is insufficient and still projected to result in a decline in conditions and performance in the long term. Currently, the Federal Highway Administration estimates that $170 billion in capital investment would be needed on an annual basis to significantly improve conditions and performance. – Grade D



» Public Parks and Recreation 1: The popularity of parks and outdoor recreation areas in the United States continues to grow, with over 140 million Americans making use of these facilities a part of their daily lives. These activities contribute $646 billion to the nation’s economy, supporting 6.1 million jobs. Yet states and localities struggle to provide these benefits for parks amid flat and declining budgets, reporting an estimated $18.5 billion in unmet needs in 2011. The federal government is also facing a serious challenge as well since the National Park Service estimates its maintenance backlog at approximately $11 billion.– Grade C-



» Schools 1: Almost half of America’s public schools were built to educate the baby boomers – a generation that is now retiring from the workforce. Public school enrollment is projected to gradually increase through 2019, yet state and local school construction funding continues to decline. National spending on school construction has diminished to approximately $10 billion in 2012, about half the level spent prior to the recession, while the condition of school facilities continues to be a significant concern for communities. Experts now estimate the investment needed to modernize and maintain our nation’s school facilities is at least $270 billion or more. – Grade D



» Energy 1: America relies on an aging electrical grid and pipeline distribution systems, some of which originated in the 1880s. Investment in power transmission has increased since 2005, but ongoing permitting issues, weather events, and limited maintenance have contributed to an increasing number of failures and power interruptions. While demand for electricity has remained level, the availability of energy in the form of electricity, natural gas, and oil will become a greater challenge after 2020 as the population increases. Although about 17,000 miles of additional high-voltage transmission lines and significant oil and gas pipelines are planned over the next five years, permitting and sitting issues threaten their completion. – Grade D



» In summary, the overall grade is D+ with an estimated cost to improve/cost to cure of $3.6 trillion! 1


How Do We Evaluate Our State’s Infrastructure?

1. Capacity – Evaluate the infrastructure’s capacity to meet current and future demands.

2. Condition – Evaluate the infrastructure’s existing or near future physical condition.

3. Funding – Evaluate the current level of funding (from all levels of government) for the infrastructure category and compare it to the estimated funding need.

4. Future Need – Evaluate the cost to improve the infrastructure and determine if future funding prospects will be able to meet the need.

How Do We Evaluate Our State’s Infrastructure?

5. Operation and Maintenance – Evaluate the owners’ ability to operate and maintain the infrastructure properly and determine that the infrastructure is in compliance with government regulations.

6. Public Safety – Evaluate to what extent the public’s safety is jeopardized by the condition of the infrastructure and what the consequences of failure may be.

7. Resilience – Evaluate the infrastructure system’s capability to prevent or protect against significant multi-hazard threats and incidents and the ability to expeditiously recover and reconstitute critical services with minimum damage to public safety and health, the economy, and national security.

8. Innovation – Evaluate the implementation and strategic use of innovative techniques and delivery methods.

What Should We Do Next?

» Encourage the use of asset management programs in an effort to maintain an inventory of all your capital and infrastructure assets

» Establish a rehabilitation and repair funding program» Develop emergency action plans for every high hazard infrastructure

category

» Require insurance where appropriate» Ensure that operation and maintenance plans cover all aspects of

complex infrastructure asset classifications

» Make the repair of structurally deficient bridges a “top priority”

» Increase annual investment levels for bridge repair, reconstruction and renovation

What Should We Do Next?

» Prioritize capital projects

» Streamline the project approval and delivery process

» Adopt new technologies

» Develop performance based investment strategies

» Increase investment from the private sector via Public Private Partnerships (P-3’s)

Let’s Discuss Public Private Partnerships (P-3’s)

» What Are P-3’s?› They typically deliver public services through agreements between government

agencies and private firms. The Public Partner typically owns the assets, usually through a long term ground lease. The business finances and builds facilities as well as operates the partnerships. P-3’s purpose is not to outsource, or privatize government, rather collaboratively work with the government to perform operations more efficiently and effectively.


» Why Should a State or Local Government Adopt the P-3 Concept?› P-3’s enable state and local governments to implement “key” projects that they

would otherwise postpone or ignore due to budget constraints or other priorities. Many governmental entities have expanded the P-3 concept beyond the typical “infrastructure” asset category to involve all types of public facilities from transportation, to water water/waste water operations, to hospitals, libraries, schools and correctional facilities. By entering into P-3 relationships and collaborating with the private sector on design, financial requirements, construction and maintenance for large and long term projects, the return on investment or proceeds can be utilized for other “key” projects.


» Three Primary Components for Successful P-3’s1. Legal: Define the long term working relationship between the private company

an the governmental entity as the P-3 relationship can scan a period of 30, 40, 50 or 99 year terms. This component should have the following goals of both parties, in terms of risk mitigation:

◦ Protect the public’s best interest

◦ Establish the legal framework of a P-3

◦ Establish the business terms and conditions in collaboration with the parties’ legal counsel

◦ Establish the statutes as to what the owner can and cannot do

◦ Establish a foundation for both the government and the private sector to succeed


» Three Primary Components for Successful P-3’s (cont.)2. Financial: There are three major steps.

◦ Determine the value of the assets to be included in the transaction

◦ Determine how the project will be paid for and identify the financial contribution on both sides of the transaction

◦ Determine that the P-3 model optimizes the value to the government and its citizens


» Three Primary Components for Successful P-3’s (cont.)3. Technical: Establishing the responsibilities of the contractor, addressing all

aspects of design, environment, construction, operations and maintenance, such as

◦ Estimating costs

◦ Coordinating and managing budgets

◦ Develop criteria to monitor the P-3 (s)


» To date, approximately 34 states and key federal government agencies have adopted new P-3 legislation

» The P-3 concept enables state agencies to engage business in the planning, financing, building and operating public projects, from roads and rail to schools and other infrastructures.

Contact Information

Kevin J. McHugh | Managing Director Valuation & Financial Risk Management [email protected] 646.227.4701 direct646.227.4634 fax

90 Park Ave., 10th Floor | New York, NY 10016

mailto:[email protected]













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