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(originally published by Booz & Company)


Putting the Stimulus to Work

How to spend $800 billion and actually improve the nation’s infrastructure.

The American Recovery and Reinvestment Act (ARRA) — the stimulus plan — combines two worthy goals: modernizing the nation’s aging infrastructure in the long term and creating new jobs in the near term. In many ways, the bill is tailored to be a model of efficiency, with tactics adapted from the private sector to measure effort and results. For example, US$3.1 billion earmarked for energy efficiency spending carries a mandate to meet a stringent benchmark of reducing 10 million BTUs per $1,000 spent. Yet, at different points, these twins objectives may be mutually exclusive or difficult to achieve in tandem unless policymakers first consider the challenges posed across three basic dimensions of the program:

1. Which types of projects should get built? Projects that are best suited to job creation aren’t necessarily the ones that deliver the biggest headlines — or that are the most appealing politically. To appreciate the challenge, start with the fact that the labor multiplier — the number of jobs created per dollar of expenditure — varies dramatically among different types of investments. Consider smart grid development: Although a highly popular idea, only one job is generated for every $125,000 spent. The Obama administration, in proposing the stimulus package, had hoped that the expense for each job would be about $90,000.

By contrast, other projects are equally valuable from an infrastructure perspective and more valuable from a job creation perspective but might be overlooked because they are not inherently exciting or because of quirks in individual and institutional decision making. These projects tend to be too mundane or provide benefits of too diffuse a nature to garner political support. Energy efficiency is a classic example of a project area long recognized as holding the potential for high-impact, low-cost economic benefits (creating jobs inexpensively) and environmental benefits. But it has been chronically underexploited due to consumer and business resistance (for one, required rates of return on investment are irrationally high), lofty transaction costs, and the sheer ennui that energy efficiency seems to elicit.

Another type of project that is both essential and a job creator but that is by and large neglected is urban infrastructure, such as roads, bridges, water pipes, sewers, and power lines. These projects have a significant impact on at least four basic services: moving electrons (the generation, transmission, and distribution of power), moving goods, moving individuals, and housing people. There is an inherent interaction among these services; choices made in one sector, say in designing roads, affect the others, including the types of houses that are built (which depends on the population density of a region), the need for personal transportation, and electricity and other energy infrastructure requirements. Most urban infrastructure is planned, funded, and built one sector at a time. Planning and investment to develop the information, power, and transportation infrastructure that enable smarter urbanization require deliberate coordination across infrastructure and manufacturing sectors.

2. How fast should they get built? The “need for speed” is obvious from a macroeconomic perspective, and perhaps politically as well, but the proper pace for infrastructure investment is more measured. The ARRA specifies that funds must be allocated to specific projects by September 2011. To put this effort in perspective, to inject the planned sums of stimulus into the economy, federal agencies must disburse approximately $600 million per week for the next two years.

Were this program aimed exclusively at enhancing U.S. infrastructure with maximum efficiency and effectiveness, the preferred timing would be slower, at least initially, in order to ensure proper planning and the support of various affected constituencies — such as environmentalists and local communities — in designing rather than litigating a mutually agreeable construction effort. Indeed, the rush to meet arbitrarily imposed deadlines for fund dispersal or project completion will only increase the final price tag. In particular, litigation that causes delays and frequent change orders in ongoing projects has been a recurrent source of cost overruns in the United States. Supply chain bottlenecks, suboptimal sourcing, excessive allocation of risk to general contractors, and subpar design are also common consequences of rushed infrastructure development.

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  1. Alan A. Altshuler and David E. Luberoff, Mega-Projects: The Changing Politics of Urban Public Investment (Brookings Institution Press, 2003): American political history from Robert Moses to Boston’s Big Dig, proposing new forms of multiple accountability.
  2. Viren Doshi, Gary Schulman, and Daniel Gabaldon, “Lights! Water! Motion!s+b, Spring 2007: How to reinvigorate our electricity, water, and transportation systems by integrating finance, governance, technology, and design.
  3. Bent Flyvbjerg, Nils Bruzelius, and Werner Rothengatter, Megaprojects and Risk: An Anatomy of Ambition (Cambridge University Press, 2003): Skeptics document how enthusiasts negligently green-light bad projects and explain how to build in better accountability, particularly in Europe.
  4. Daniel Gabaldon, “Pollution, Prices, and Perception,” s+b, Spring 2009: An examination of how business leaders can plan for new government climate change initiatives.
  5. Mark Gerencser, Fernando Napolitano, and Reginald Van Lee, “The Megacommunity Manifesto,” s+b, Summer 2006: How to bring together multiple organizations to develop solutions to complex problems.
  6. Peter Senge et al., The Necessary Revolution: How Individuals and Organizations Are Working Together to Create a Sustainable World (Doubleday, 2008): The authors explore the steps that businesses can take to create cooperative environmental strategies.
  7. Lord Andrew Turnbull, “Toward a Flexible Energy Future,” s+b, Winter 2006: How governments can promote better capital investments despite imperfect information.
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