‘The greater part of … public works may easily be so managed as to afford a particular revenue sufficient for defraying their own expense, without bringing any burden on the general revenue of society.’ Adam Smith
Government Matters. We should remember that government determines almost everything about infrastructure investment, from specifications, to approvals, through to funding and operations. Now that big government is back – that is what a $7.5 trillion injection into rich economies will do – it is the right moment to redesign how the public sector looks at, and oversees, the infrastructure market.
This is going to be a time of change, and we need to lead that change. The Economist notes this week that “A profound shift is now taking place in economics as a result, of the sort that happens only once in a generation.” It is going to be the same with government, especially those agencies that oversee infrastructure – will they be capable and swift partners, or will the good people in the federal, state and local agencies continue to be hamstrung by organizations biased toward inaction?
The saying that ‘you get the government you deserve’ is never more true than after a crisis, when everything everything is possible. I see three broad options for governance of our critical infrastructure markets going forward: (1) an activist, and smothering, approach – perhaps shorthand for business as usual; (2) a dynamic and entrepreneurial state – the ‘guiding hand’ as Michael Barzelay described Brazil in the 1970’s; or (3) an innovative state that is a partner to the private sector, in every sense – from the adoption of technology, to innovation to the sources and uses of investment.
Epochal Change. What is certain is that a transformation of the public sector is on the way. The key idea is that we need a new approach to how government interacts with the infrastructure economy. The way that government considers, creates and governs infrastructure assets is about to go through a global transition. The market is broken – underinvesting, and highly dysfunctional, at a time when we need rapid infrastructure investment to drive economic recovery.
The U.S. market will be the critical laboratory. For three decades, as resource-constrained countries around the world have experimented with new models, rapidly adopted new technologies, taken risks, and brought institutional funds into projects, we have resisted change. Think about it: we have been toying with the PPP model since 1996 but no U.S. firm has ever led and won a PPP bid. Look at last week’s release of Maryland’s managed lanes short list, led by Spanish, Australian and U.K. firms, with no U.S. firms leading any of the four consortia.
We need a new model, but so does the world.
The Behemoth – The Fierce Urgency of Performance. The guiding fact is that government – the U.S. is nearing $27 trillion in debt, with states and cities topped out as well – no longer has the money to afford infrastructure, so it must become what I would call, for lack of a better term, a vital partner for the private sector – and for civil society. As a country (and I would argue as a world) we have the immense privilege of having a tremendous responsibility heaped upon us, whether ready or not: we need to double our infrastructure investment, swiftly increase the integration of technology in all aspects of the built world, and drive – and measure, and communicate – the delivery of extraordinary benefits to users.
There is a ‘last war’ aspect to our current public sector, fully occupied with distributing public largesse to the infrastructure market, while no longer controlling the necessary funds to do that right. The money is in institutions and – as Adam Smith suggests – something is going to have to change so that we don’t heap additional burdens on public budgets.
Three sets of facts give you a sense of where we are now, and the challenge – and opportunity – we face. First, the agencies that govern the infrastructure market, in the U.S. and globally, are big: the U.S. Department of Transportation has over 58,000 employees (the Department of Energy and the EPA have over 14,000 apiece). These are institutions full of talented and motivated people – focused on the public good.
Second, the public workforce is much older than that of the private sector – only 17% of the federal workforce is under 30 years old, while 40% of the private sector workforce is in that age group. Think about that! These are the people with the critical data, AI and overall technology skills required to make decisions in, and run, a modern agency — quickly approving research, green-lighting new AV initiatives, awarding contracts and making the kind of swift adjustments required so that services can be targeted, delivered – and annually upgraded.
Third, there is the fascinating – all important – question of where leadership and initiative reside in an organization. Famously in the U.S. Army it is with captains. Given the complexity and the number of decisions required for a modern infrastructure market to function it is striking that infrastructure decisions are bottle-necked at the top of our infrastructure bureaucracies. It should not be that way, and the pay scale makes that point: the average public sector employ makes 40% more than his or her private sector counterpart – they, and their organizations, are primed for leadership from the middle. Note: average private sector CEO makes 8100% more than the Secretary of the Treasury, or the Secretary of Transportation, a fact that I simply cannot explain.
The Blockchain Moment. The table is set for change, and revolutions are led by ideas. The model is not yet clear — nanny state, entrepreneurial state, or distributed state. But if I think strategically, and look at our objectives, and the resources that we have available, then the only real choice is a distributed model – captains on the front lines fighting for economic recovery. Modernize the image and make it less martial if you like; we are describing a distributed decision-making model that the blockchain revolution will drive – and perhaps make inevitable.
The story about the revitalization of the U.S. and global infrastructure market is going to be a story of technology, youthful innovation and the organization of institutional funds focused on the right investments.
For business and investors focused on the public sector results of this change will be extraordinary. Bureaucracies, whether large or small, will have to be enabled – with technology, and highly trained, constantly learning, executives. Performance will be the North Star, and big data and AI will drive how we get there.
On the private sector side you are going to see massive new investments, ideally a doubling of investment as we bring the U.S., and the world back from the Covid precipice. The focus will be on both forgotten infrastructures, like water, wastewater and health – as well as those infrastructure networks that drive productivity. Performance will be kind, everything will be connected, and the bulk of decisions will be made by “captains.”
As a great Canadian once said – “skate to where the puck is going, not where it has been.”