Trump and Infrastructure – 2018
After two failed starts in 2017, and no support in the new tax legislation, the Trump Administration is heralding infrastructure support as a top priority for 2018. However, the Democrats’ vision of a $1 trillion program palls in comparison with the modest GOP aspirations for $200 billion in national investment, with the rest made up with public-private partnerships (P3’s) in the future.
History has shown the shortfalls in private financing are amplified without strong political support at all levels of government. Moreover, most infrastructure investment projects in the US are not accompanied with a revenue stream to support repayment of debt service with an adequate return, and provide adequate ratings for project debt and its placement in the marketplace. Infrastructure in the US does not suffer from a lack of adequate capital. Many infrastructure assets are not structured in a manner to receive private capital because they do not offer an adequate and reliable revenue stream. They also face public sector pressures for entitlements, social services, and pensions which crowd out availability of capital for infrastructure.
Outside the US many countries provide for repayment of private investment in P3’s through a longer-term source of funding over the life of the project. It is more common to see governments levy a tax or user fee to provide revenues to support project financing. A higher gas tax, user fee or carbon tax would be just the answer in the US to attract private capital through the revenue stream created in support of private involvement. Pew Charitable Trusts reports that 26 states have increased gasoline taxes in the past four years. Deep US political resistance to taxes, borrowings or debt for infrastructure has harmed US competitiveness and has impacted deferred maintenance as US infrastructure has deteriorated into inadequate, unsafe conditions.
Federal support is critical for infrastructure investment especially in new facilities. Otherwise, most private capital will not flow into P3’s but instead will go to existing infrastructure already privately owned like natural gas pipelines, power utilities, storage terminals and hubs. Capital will flow where public revenues are established with clarity in airports, ports and harbors and similar commercial assets. The Trump infrastructure support will not be dedicated for rebuilding the public America of the past – not its roads, highways, bridges, waste and storm water plants, or tunnels that support American middle class and everyday needs of US business and entrepreneurs. Only narrow special interest projects will survive, and social impact and infrastructure investment will decline with no government support, incentives and tax system direction.
Private investors will be attracted to states, counties and cities that are true partners. They will look for strong financials, an adequate tax base, and fee structures to pay for infrastructure. State expertise and experience with central capacity are crucial as well as sophisticated understanding and innovation on discount rates, debt tenors with extended amortization, rates of return and discounted cash flow analysis. A conducive and central permitting process will also prove essential ahead as perhaps a dozen states can satisfy these private objectives.
The infrastructure and P3 objectives of the Trump Administration can only be accelerated and amplified with a strong commitment to private equity and its role as shown in the transportation and water sectors already. No Federal leadership or a tepid response will thwart the opportunity for economic development and competitiveness around world class US infrastructure. Our policy strategy must be grounded in new revenue bases and structures moving away from the inherent limits of gasoline taxes, payroll and middle class income taxes to fund the Federal government responsibilities to make America’s infrastructure great again.