Who Protects the Nation's Infrastructure?

In America, it's mostly in private hands, and that makes it even harder for business and government to cooperate in thwarting terror attacks

It could be a dump truck carrying a "dirty bomb" of TNT and low-grade radioactive material that's detonated outside a Manhattan office building. It could be a biological weapon unleashed in Los Angeles after being concealed in one of the hundreds of shipping containers that enter the nearby port uninspected each week. It could be a private airplane loaded with explosives that cripples a petrochemical refinery outside of Philadelphia, or a data-storage center in New Jersey, or a power plant in Chicago.

However the next major terrorist attack comes -- and each of these scenarios is all too plausible -- the potential loss of life isn't what most worries U.S. security strategists. Rather, it's the economic shocks that could result from an attack on what strategists call "critical infrastructure," such as transportation, telecom, and energy facilities. By striking such targets, which military experts regard as highly vulnerable, an enemy could inflict far more devastating economic damage than the attack on the World Trade Center.


  A "dirty bomb" blast, for example, could force the closure of offices for months while they were decontaminated. The destruction of an oil refinery might cut off fuel to transportation systems up and down the East Coast. A credible threat prompting the closure of nuclear reactors in California could stop electrical power reaching industries and vital services all the way to Wyoming.

At a policy level, not since the early days of the Cold War has so much attention been paid to critical infrastructure. The latest evidence: On June 6, President Bush announced that he wants to elevate the federal Office of Homeland Security to a Cabinet-level agency, which, in effect, would give it the power of the purse in shaping national security policy. That's a key that Homeland Security czar Thomas Ridge has never had. With a budget of $37 billion, this new agency would swallow scores of other federal agencies -- including Customs, Immigration, the Secret Service, and Federal Emergency Management Agency.

Meanwhile, military and industrial think tanks are scrambling to identify the vulnerabilities as they run sophisticated computer simulations of the ripple effects across the country if such facilities were taken out. And through a spate of homeland-security powwows -- including a June 6-7 conference being sponsored by The McGraw-Hill Companies (which owns BusinessWeek and BusinessWeek Online) in Washington -- executives of thousands of companies are meeting with local and federal officials to understand the risks and develop security and contingency plans.


  Eight months after September 11, one feature of the U.S. economy makes it extremely difficult to coordinate such a national strategy: Virtually all vital infrastructure is controlled by private corporations, with the ground rules for government intervention in case of emergency blurry indeed. Yet because so much of the economy depends on the normal functioning of privately owned infrastructure, they still essentially could be considered public goods.

Consider electrical-power infrastructure. For years, Americans have been assured that the national system is robust. Shortages in one part of the country can be filled by shifting power around the national grid, experts have maintained. In fact, surplus capacity isn't nearly as big as most people think. The reason: "Infrastructure expansion has not kept up with demand in the last 25 years," says Massoud Amin of the Electric Power Research Institute. "That's because margins have shrunk steadily since the early 1980s."

From 1988 to 1998, power demand grew 30%. But transmission capacity grew by no more than 18%, Amin says. Over the coming seven years, demand is expected to grow by 20%, but transmission capacity by less than 4%. The same is true for power-generation capacity. In the 1980s, when the industry was run by state-regulated monopolies, there was 25% to 30% extra capacity, says EPRI. Now, that cushion is down to 10% to 15%.


  The further you go into the American heartland, relatively little power actually is connected to a national grid. Look at the 2001 California energy crisis. Some states, such as Wyoming, depend heavily on a few nuclear plants in California. Should a nuke plant be shut down due to a threatened attack, big farms and factories would have to suspend operations, causing considerable economic damage. In some parts of the nation, the cascading effects could shut off many of the things Americans have long taken for granted -- telecom systems, traffic lights, and the like.

Or consider cargo transportation. Thousands of shipping companies working on razor-thin margins compete to move some 7 million containers into the U.S. each year through more than 300 ports. So who'll pay to set up the state-of-the-art information-technology systems needed to keep track of what's inside these containers from the time they leave a foreign factory until their entry into the U.S.?

"The transportation industry has been unwilling and unable to supply monitoring because of the cost," says Stephen Flynn, a transportation security expect at the Council on Foreign Relations. "You can move 15 tons of material from any port in the world to a port in the U.S. for $1,500. Profit margins are in the pennies. The result is that they are not in a position to be innovating and to invest in new technologies."


  That raises big questions. Who should pay the huge costs of protecting such facilities? Should the government order the private sector to provide backup capacity to cushion the shock to the rest of the country if disaster strikes? That's an especially knotty dilemma considering that Corporate America has spent much of the last decade figuring out how to eliminate extraneous cost and capacity in the name of maximizing profits, return on assets, and productivity.

Meanwhile, federal and state governments are faced with severe budget squeezes during the economic downturn. One of the downsides of America's just-in-time economy, strategists now realize, is that it leaves little margin for disruption.

Countries that have had to live with domestic terrorism for decades have developed measures to cover such risks. Restaurant customers in Israel now have a surcharge tacked onto their bills to cover the cost of armed guards. Israel's government also subsidizes excess capacity in the cellular-phone network to stop communications from becoming hopelessly jammed by everyone calling their friends and families after a bombing.


  It's hard to imagine Washington subsidizing Con Edison or Sunoco, say, so that they can build redundant electrical power and oil refining capacity. Or to hand funds to American President Lines, without subsidizing every tiny cargo hauler. What's more, who should provide greater security forces to guard strategic facilities against attack? And if the federal government did pick up some of these costs, which agencies would be responsible?

Securing such facilities against disaster will require a broad new partnership between business and government. The current position of the Bush Administration is to leave these issues to the private sector and prod them to boost security through various kinds of market incentives. Should a major terrorist attack hit vital infrastructure, however, the debate over the roles of the private and public sectors would be joined quickly.

For more homeland-security coverage, see:

• BW Online, 6/6/02, "Post-9/11: How Business Is Buckling Up"

• BW Online, 6/5/02, "Global Shipping in the Security Age"

• BW Online, 6/4/02, "Uncle Sam's Ally: Corporate America"

• BW Online, 5/31/02, "America's Biggest Job"

• BW Online, 5/31/02, "Tom Ridge on Safety's Fearful Price"

• The McGraw-Hill Companies' Homeland Security & Defense special report

By Pete Engardio in New York

Edited by Douglas Harbrecht

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