The collapse of a bridge over the Mississippi River in Minneapolis and an explosion of a steam pipe in New York reminded Americans that underinvestment in infrastructure in recent decades has left the country with a dilapidated and insufficient physical infrastructure. Besides the obvious safety and well-being issues, these recent incidents have highlighted the economic importance of infrastructure investment.

The importance of infrastructure to America’s competitive position in the global economy cannot be understated. Most of the country’s road, rail, water, sewer, electric power, telephone, ports, rail terminals and airports are in need of repair and in many cases are used at significantly higher capacity levels than they were originally designed for. Infrastructure is the lifeblood of an economy and continued failure to address its needs will invariably lead to economic decline. The economic success stories of many emerging market economies including China and India has accelerated the development of physical infrastructure in those countries. Hundreds of billions of dollars of investment has already occurred in the emerging markets and there is even more to come. That investment will further the economic position of those countries and the United States needs to ensure that it can compete. The transportation of goods and services by air, land and water is the cornerstone of economic prosperity by companies and citizens and therefore the tax revenues that are crucial to the operation of government.

The question is not whether investment needs to occur, but rather how to pay for it. At the center of that issue is whether infrastructure should be paid for through taxes, tolls or private sector solutions. Taxes are heralded, generally by the left, as the most equitable way for citizens to bear the burden of infrastructure investment. Tax increases specifically for increased infrastructure investment may not be realistic given the combination of a slowing economy and large budget ambitions from both sides of the aisle on the war, healthcare and other core legislative priorities. Pay per use or toll solutions are championed, generally by the right, as the fairest way to pay for investment as only the users of assets directly pay for them. However, this leads to a significant free-rider problem in many cases as the indirect benefits of infrastructure investment are enjoyed by many whereas only a few directly pay.

Private sector investments have increased in recent years and may offer the best solution to the infrastructure challenge. There is increasing demand from institutional investors for infrastructure investments. Pension funds, in particular, are attracted to infrastructure assets because infrastructure revenues are generally long term and linked to inflation, which more closely matches long term pension fund liabilities than most other assets. The trend towards privatization of infrastructure has been more readily embraced by other countries than it has been in the United States so far. Given the demand from investors, this is likely to change over time as state and local governments seek income from the sale of infrastructure assets to offset budget deficits.

Privatization of infrastructure assets is not without controversy. In February 2006, DP World, a United Arab Emirates state-owned company, agreed to purchase British P&O Steam Navigation Company, which had a contract to manage major U.S. seaports. The sale was initially approved by the U.S. government, but then later approval was rescinded based on arguments that foreign ownership might compromise national security. Although port security was still to be controlled by the U.S. Coast Guard and the U.S. Customs Service, many in Congress argued that foreign ownership, particularly by an Arab Nation, would compromise the government’s ability to ensure security. The politically charged issue drew criticism from both sides of the aisle. Eventually, the management contracts were sold to an asset management unit of AIG.

In recent decades, the burden on infrastructure maintenance has shifted from the federal government to the state and local governments. Cities and counties now pay for many improvements through increased user fees in the form of tolls. Major infrastructure projects such as railroads, roads and airports have multi-decade or often multi-century expected lives. The benefits of those projects are often only realized many years after construction, creating incentive for politicians as well as their voting constituencies to delay investment until the next generation.

The infrastructure investment issue also poses a challenge for the nation’s educational system, specifically colleges and universities. Given the career options in service industries and the technology sector, fewer students are attracted by careers in civil engineering or other disciplines that lead to careers in infrastructure development. The best and the brightest students have been increasingly attracted by other careers.

Our society needs to make infrastructure maintenance and investment a priority again. As we move further into campaign season for the 2008 elections, the public needs to challenge politicians to bring infrastructure investment to the forefront of the debate. The eventual solution will be achieved through a combination of education, political negotiation and without a doubt significant investment. The infrastructure investment issue needs to become a larger priority for our society and part of the debate, or how to prepare the economy to remain competitive in the 21st century.