Infrastructure Funding Lags as Governments Tighten Belts

States, regions and cities across the US continue to seek innovative approaches and solutions to large-scale capital projects, the result of constrained public budgets and a growing recognition at the local level of the importance of infrastructure. As stated in Infrastructure 2012: Spotlight on Leadership by the Urban Land Institute and Ernst & Young LLP, "Global economic competitiveness demands new kinds of regional entrepreneurship."

The US continues to lag behind its global competitors in infrastructure funding, but there has also been a marked spending decline in Europe, which has been reeling from the debt crisis and is adopting austerity measures as a result of the crisis. In the United Kingdom, private finance approaches are under fire at the same time that fiscal austerity is forcing the country to rethink infrastructure priorities. Throughout Europe, depleted treasuries make new infrastructure projects look like an unaffordable luxury.

Even emerging nations have applied the brakes. China's aggressive infrastructure building program has been slowing down, along with its economy, and it has scaled back its high-speed-rail program. Increasing internal debt, water supply and environmental issues are pressing concerns. Despite spending 8% of its GDP on infrastructure, India may not be able to keep up with the needs of its exploding urban population. Brazil, South America's emerging market superstar, has ambitious infrastructure development plans tied to the 2014 World Cup and 2016 Olympics, but may miss deadlines due to its weakened currency, red tape and other issues.

In the US, even as efforts to increase infrastructure revenues at the federal level remain stalled, states and localities are looking at other ways of overcoming fiscal woes in an effort to move forward with projects that can lay the foundation for economic growth. State and local governments are funding critical infrastructure building or refurbishment needs with increased sales or gas taxes, bond issues, and user fees, including tolls. Public-private partnerships are also a growing part of the equation.

From 2008 to 2011, ballots allocating funds to transit capital or operations had a 73% success rate. More than a dozen US states have raised fuel taxes over the past year, and drivers nationwide are accepting higher tolls for roads and bridges. Local governments are taking advantage of tax increment financing and special assessment districts as well as public-private partnerships, while exploring alternative sources of private investment for large-scale infrastructure such as sovereign wealth funds and pension plans. (For more on infrastructure by region, go to the Midyear Report Card, page 37.)

In both the US and Europe, the era of massive infrastructure investments may be over. Although local governments may have success in doing more with less, the overall state of the infrastructure in these nations will deteriorate unless the political will and funding to make the needed investments materializes.

One bright spot is Canada. It's made infrastructure investments a national priority and, as a result, has a robust infrastructure program and relatively manageable deficit. Canada's public-private partnership approaches are a model for the world.