Why Infrastructure Could Be the Next Big Investment Opportunity

BlackRock Chairman and CEO Larry Fink reveals how one of the nation’s greatest challenges could also be the next big investment opportunity.

by Larry Fink, Chairman and CEO, Blackrock

Have you ever driven up I-95 on a weekend? Tried living in Los Angeles without a car? Taken a train directly to JFK airport? Oh, wait—you couldn’t even do that last one, because it doesn’t exist. Infrastructure in the U.S. is dismal—whether it’s crumbling roads, underfunded public transportation networks, or less visible things like power grids and sewer systems.

A lot of time when we’re stuck in traffic or our internet is running slowly, it feels like a nuisance. But it’s actually something much more serious: an obstacle to economic growth. Last year, the American Society of Civil Engineers estimated that by 2020, “aging and unreliable” infrastructure will cost American businesses $1.2 trillion.

Needless waste is not an efficient way to run a business—or a household balance sheet. We shouldn’t have workers diverting their retirement savings into gas tanks and businesses bleeding cash for their shipments and workers to sit in traffic.

With such obvious drawbacks, why can’t we get our act together?

Part of the problem is an increasingly prevalent short-term mentality, combined with a historic level of political paralysis. As we saw earlier this year, Congress couldn’t even pass a transportation bill that gets us past next May, and had to resort to budget gimmicks to do it. There’s no question that we have much to do to reduce our deficits, and that there are a lot of difficult choices to make, but infrastructure investment—designed in such a way to attract private sector participation—is absolutely crucial to long-term economic health.

Infrastructure helps to solve both long-term and short-term economic problems. In the short-term, infrastructure investment helps provide jobs for low skilled workers, who are struggling with the long-term impacts of the financial crisis as well as the increasing impact of technology on the job market.

In the long-term, infrastructure has a wide range of benefits. A pipe manufacturer will be able to produce and distribute its goods more effectively and cheaply. A technology company will pay a better price to power its servers. A school district will be able to use water more efficiently. A commuter won’t see a day’s pay disappear at the pump.

Business will be able to use the money they save to invest in new equipment and technologies, create jobs, and help control prices. Governments will be able to make better use of tax dollars (and potentially even cut taxes). And individuals will be able to put money towards a college fund or simply spend their extra cash.

This may sound a bit blue-sky. But these are achievable outcomes. The question is, with stretched budgets and an unproductive atmosphere in Washington, how do we get there?

Private sector participation is going to be crucial to the future of infrastructure investment, both in the United States and around the world. There is a natural partnership here: most governments simply don’t have enough cash for the projects they need, and investors are looking for new sources of return in increasingly difficult and correlated financial markets.

Local governments will also need to work together to attract investment. One of the most effective strategies is to aggregate projects. Whereas investors might not want to invest in—or even know about—a single wastewater treatment facility, they might be quite attracted to a large-scale, multi-site project across region. Aggregation also helps lower costs by consolidating materials and labor, and by fostering a more competitive bidding process, which will help save governments and increase returns to investors.

I participated yesterday in the Treasury Department’s Infrastructure Investment Summit, where we discussed a range of ideas for how to help jumpstart infrastructure investment. The summit is part of the President’s recently announced Build America Investment Initiative, which is taking some important steps to connect investors with infrastructure projects, and working to improve access to federal credit programs. Credit programs—where government funding is leveraged to fund many multiples of private investment—are key to increasing private investments.

These are important initiatives—but investors should push Washington to do more. An infrastructure bank, which would use a core federal investment of perhaps $50 billion, would be able to leverage several hundred billion more in private investment. It’s a bipartisan idea that has sadly withered in today’s Washington atmosphere. But we can’t let it die. It’s this sort of big and bold initiative—and act of confidence by the government—that investors want and need, and which can help unleash the power of private dollars to help propel our economy for the next hundred years.

 

The opinions expressed are current as of September 2014, and are subject to change. Reliance upon information in this article is at the sole discretion of the reader.

A version of this post first appeared on Larry’s LinkedIn Influencer page. For more from Larry, click here.

 

Copyright © Blackrock

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