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When people hear the term “emerging market”, they tend to think of faraway places like Brazil or China or Russia. Safe to say, the one place they do not think of is the US, which has not been an emerging anything for quite some time. And yet, for the manager of an infrastructure fund, America is precisely that - an emerging market.

This is true for several reasons. For one, US infrastructure is in dire straits, by pretty much every measure. India currently spends about 4.6 per cent of GDP on infrastructure, while China spends 9 per cent, and Japan, 10 per cent. By comparison, the US government spends just 2.4 per cent - approximately $80bn (£40.3bn) less than it did in the 1960s.

The effects of such long-running neglect are now obvious. The EPA estimates the US will need to spend $277bn on public water systems. Every year, flight delays cost more than $15bn in lost productivity. A third of roads are officially substandard. Road capacity since 1970 has increased by a mere 7 per cent, yet in that time highway usage has surged by 167 per cent. Nearly a third of all bridges have been deemed “structurally deficient”, while more than 3500 dams are “unsafe”. The list goes on and on.

The American Society of Civil Engineers, in its 2005 Infrastructure Report Card, was unforgiving in its assessment of US infrastructure, giving the country’s bridges a C, its railways a C-, its aviation and transportation industries a D+, its dams, energy systems and roads a D and its wastewater facilities a D-. Overall, America’s infrastructure received a D.

Even more damning is an Urban Land Institute and Ernst & Young survey of finance, development and engineering experts. “The system,” the report concludes, “is broken - the US suffers in the absence of national infrastructure priorities, relying instead on an archaic regional planning process mandated by Congress 45 years ago.”

One of the survey’s respondents laments that the US behaves “more like Eastern bloc governments than a superpower”. Another points out that, because so few Americans travel to Europe and Asia, they fail to realise just how “medieval” their airports, railroads and roads are. And yet another warns that, if nothing is done within the next 10 years, the US will be “heading for a crisis”.

The cash-strapped US model

None of these problems is likely to come as a surprise to the municipal, state and federal agencies that have been charged with resolving them. When an eight-lane, steel-truss arch bridge suddenly collapses into the Mississippi River, as the I-35W did in Minnesota last August, people notice. The pitiful state of America’s infrastructure is not due to a lack of political attention, as such, but rather a lack of funding.

Even by conservative estimates, the US is going to have to spend an astronomical amount of money to put its house in order. The American Society of Civil Engineers estimates the US needs more than $1.6trn to build and repair highways, bridges, dams, airports and railroads over the next five years. According to a study conducted by Macquarie, the US is set to become the largest market for private infrastructure investment in the world, at an estimated size of $3trn.

Historically, the onus of building, maintaining and repairing infrastructure in the US has fallen on local governments, which, in turn, interact with hundreds of metropolitan organisations. For all intents and purposes, the federal government has had no real infrastructure agenda, apart from foisting costs onto the states. Not only has this created a system the Urban Land Institute describes as “balkanised”, it has also become an enormous fiscal burden on local governments.

“Over the last 60 years or so, infrastructure in the US has primarily been financed by tax-exempt municipal bonds - there are no stock exchange-listed airports,” says Neil Jones, division director and head of UK distribution at Macquarie. “When you compare that to the European and UK models, and arguably most of Australasia, it’s a very different model.”

And this model, according to Peter Meany - head of global listed infrastructure securities at First State Investments and manager of the £46m First State Global Listed Infrastructure fund - is simply not working.

“Many other economies in the world have opened up their infrastructure to private investment,” he says. “In the US, because of history, because of state control of the assets, because of the political situation the US finds itself in, because of lobby groups’ power to influence spending, the market has not developed as quickly as it could have.”

And it gets worse, if only because America’s outdated model looks certain to come under increasing financial pressure. With the unfolding of the credit crunch, the bursting of the housing bubble and the onset of a widely expected economic recession, cash-strapped local governments’ cash is set to become increasingly strapped.

“Municipal bonds are more expensive now than they were 12 months ago, so the ease with which councils can raise money and access debt markets has deteriorated,” says Andrew Greenup, deputy manager on the First State Global Listed Infrastructure fund. “It’s just a fiscal reality - it's very difficult to raise taxes as it can get you voted out of office.”

Opportunities for private capital

The question, then, is - where is all this money going to come from? Increasingly, the answer looks to be private investment.

“In the US, utilities and telecommunications have been open to private investment for quite a while, whereas roads and ports and airports have been owned by the government,” says Randle Smith, co-manager of the $61.5m Phoenix Global Infrastructure fund. “Now, the opportunity is presenting itself because US governmental entities aren’t in the financial position to commit the necessary capital for infrastructure.”

Mr Smith’s fellow manager on the Phoenix fund, Connie Luecke, adds that Americans who have grown accustomed to state-owned and largely “free” infrastructure will have to adjust.

“It’s typical for an American to think that he has the right to drive anywhere he wants on public roads,” she says. “But people are starting to see that the government can’t support that network like it used to.”

She cites a number of recent examples of the trend toward private investment. In 2004, Chicago mayor Richard Daley sold a 99-year lease on the Chicago Skyway to an Australian-Spanish group, the first privatisation of an existing road in the US. More recently, a group led by Citigroup and Abertis of Spain paid $12bn to lease the Pennsylvania Turnpike. In May, RWE, Germany’s second-largest utility, floated American Water on the US stock exchange, while the Chicago Midway airport is set to come onto the market this year, a move that would make it the only major US airport to be privatised.

“I think the tragic collapse of the bridge in Minnesota will be seen as a pivotal point in time when more private capital was invested in US infrastructure assets, and I think you see that trend starting now,” says Macquarie’s Mr Jones. “You’re seeing a lot of opportunities for private capital to be put to work.”

The problem of nationalism

All that said, there is yet another reason - and a rather ironic one, considering America’s long-standing position as a free-market champion - why infrastructure fund managers might think of the US as an emerging market. “The banana skin on the dance floor”, according to a US infrastructure report by Macquarie, is “nationalistic fever”.

The most notorious example of America’s “corporate xenophobia”, of course, is when DP World, a UAE state-owned company, had to offload port-management businesses in six major US seaports owned by London-based P&O. Despite US president George Bush’s vocal support for the deal, political fallout over the thought of strategic assets being owned by foreigners forced DPW to sell.

“Firms from other countries have also experienced significant resistance as a result of being foreigners,” Macquarie’s infrastructure report states. “Macquarie Infrastructure Group recently said that being a foreign firm was one of the major impediments it had to overcome when bidding with Cintra for the Indiana Toll Road.” This resistance, the report continues, was one of the chief reasons Macquarie ultimately decided to set up a fund in the US.

“Political risk is real and must be considered,” says Phoenix’s Mr Smith. “It has to be a consideration of any fund or company investing in US infrastructure.”

“It's ironic," adds First State’s Mr Meany, "that the heart of capitalism cannot find a role for private investment in the nation’s degraded transport infrastructure."

Slowly, but surely

When it comes to infrastructure, particularly transport, America’s protectionist bent is unlikely to change over night. But it is nevertheless changing, private investors contend. Infrastructure fund managers are confident American voters and lawmakers will see - slowly, but surely - that private companies can build, manage and repair airports, ports and roads far more efficiently and profitably than the government.

“The US model is still based on the social provision of these sorts of services,” says Mr Jones. “It will be a slow process, but, the direction in which the tide is turning is irrefutable.”

Phoenix Investment Partners’ Mr Smith agrees.

“Governments are up against a wall,” he says. “They have budgetary pressures that don’t allow them to come up with the funds they need. A tragic example is what happened in Minnesota. If there is nothing else that highlights the need for investment, it’s that bridge. Progress will continue - it may be lumpy, but it will continue.”

Jim Robinson is deputy features editor at Investment Adviser

•India currently spends about 4.6 per cent of GDP on infrastructure, while China spends 9 per cent, and Japan, 10 per cent. By comparison, the US government spends just 2.4 per cent

•A third of US roads are officially substandard. Road capacity since 1970 has increased by a mere 7 per cent, yet in that time highway usage has surged by 167 per cent

•Nearly a third of US bridges have been deemed “structurally deficient”, while more than 3500 dams are “unsafe”

•The American Society of Civil Engineers, in its 2005 Infrastructure Report Card, gave US infrastructure an overall grade of D

•The ASCE estimates the US will need to spend more than $1.6trn (£805bn) to build and repair highways, bridges, dams, airports and railroads over the next five years