Photo "Henry Ford Bridge" courtesy of the U.S. Library of Congress

Larry Summers–the 71st Secretary of the Treasury and a former Director of the National Economic Council–believes deferred maintenance is a debt burden that compounds at 7% a year.


When it comes to infrastructure quality, the United States doesn’t even make it in the Top 10 list on the World Economic Forum’s Global Competitiveness Index. Our dams, schools, bridges, airports, waste water plants, transit systems, our roads, all of these concrete things that keep modern society civil, earn a D+ from the American Society of Civil Engineers. If our nation’s physical plant was our child, it’d be time to take away the iPad.

Deferred maintenance liabilities are largely unmeasured, unnoticed and passed on to subsequent generations of elected officials. No one can name a maintenance project. – Larry Summers

Deferred maintenance compounds at 7%

According to Larry Summers, the 71st Secretary of the Treasury, there are five reasons to support a vibrant infrastructure investment program.

1) The rewards extend beyond what the Excel model covers–think of the nation-building and market expansion effects of the Transcontinental railway. 2) The return on maintenance is huge, despite the disincentive factors influencing political decision-making. For example, 2/3rds of the construction projects at Harvard between 1990-2005 were over budget. So, what did the Harvard administrators do? They chose to strip out, at the last minute, the insulation and other energy efficient technologies in order to save on construction costs. Originally a skeptic to green technology, Mr. Summers was quickly converted by the realization that this narrow, construction-cost-centric view ended up costing Harvard an additional 20% a year to run the HVAC. 3) Some projects look like clear home runs, such as a new U.S. air traffic control system. We should trade WWII radar technology with GPS to improve safety, drop delay times, and reduce greenhouse gas emissions from circling planes. 4) Don’t forget about quality. It’s taken longer to fix the eastern span of California’s Bay Bridge than it took to build the entire original bridge. Maintenance tends to occur where it’s most needed, on assets that are getting used, making boondoggles less likely. 5) It’s hard to imagine a better spending program for an environment of low real interest rates and structural employment challenges.

Just how big is this maintenance gap?

In total, our deferred maintenance backlog is $3 trillion. Since the cost of poor maintenance is so expensive–as with a collapsed bridge–prevention is cheaper than the cure. The energy efficiency savings from preventive maintenance are worth $0.02 a square foot in commercial real estate. In most cases, the cost of maintenance far exceeds borrowing rates. Mr. Summers estimates that we could profitably spend 0.5% of GDP on maintenance of our infrastructure over the next 10 years. That’s the equivalent to $1.25 trillion, or over $90 billion a year (in 2017 dollars).

Checkout our podcast if you want to dig deeper into the reasons why we name Henry Ford Bridges but not essential maintenance projects. And don’t forget it’s #InfrastructureWeek!

 

About Millen Paschich

Millen began his career at Cambridge Associates, trained in finance at SMU, and has an MBA from UCLA. Talk to him about bicycling, business, and green chile burritos.

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