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Is Trump’s US Infrastructure Vision For Real?

IImage by Henry TeitelbaumBy Henry Teitelbaum, Editor, P3-Planet.com

Right up to election day, President-elect Donald Trump was frustratingly short on the details of his post-election plans. In hindsight, it seems that lack of specificity didn’t hurt his chances, and may have even helped his campaign.

Now that he’s elected, Trump’s public remarks point to the possibility that he really is committed to investing in rebuilding America’s infrastructure. If confirmed, such a program would go a long way towards redeeming an otherwise deeply misguided political agenda.

As of this writing, it’s too early to expect a detailed plan from the new administration, particularly one that is led by such an easily distracted personality. However, most political observers seem to agree that this is one domestic program that passes the smell test. It is potentially  a rich harvest of low hanging political fruit because behind all the angry rhetoric of the campaign, both candidates put infrastructure near the top of their domestic agendas.

Serious Commitment

An analysis written in October by Commerce Secretary nominee Wilbur Ross and and business professor Peter Navarro — both senior policy advisers to Trump — points to a serious level of political commitment to infrastructure investment. It also indicates a willingness to consider innovative approaches to private sector financing for infrastructure  alongside public sector and public private partnership investments.

The “Trump Private Sector Financing Plan” described in their analysis is designed to be a revenue-neutral option for financing up to $1 trillion of the nation’s infrastructure needs over 10 years. A key incentive for early stage private sector infrastructure construction would come from federal tax credits. These would be  equal to 82% of the amount of the estimated equity required to absorb long-term revenue-related risks on projects. Because the equity component of the required investment is tax credit-supported, it reduces the revenue needed to service the financing, thereby improving the project’s feasibility.

Tax Neutrality

By their calculation, $167 billion of private sector equity investments in infrastructure could then be sufficient to secure leverage financing of $1 trillion. All of this assumes interest rates of 4.5% and 5%, an assumption that the post-election jump in yields call into question.

To achieve tax neutrality, the plan calls for the repayment of the tax credits from incremental revenue generated from project construction. That would be mainly from taxes on additional wage income and taxes on additional contractor profits.

Trump’s proposed corporate tax reform plan is designed to incentivize private capital flows into redeveloping America’s infrastructure. It achieves this by using the tax credit on infrastructure equity investment to offset corporate tax liabilities on the repatriation of  untaxed profits from foreign operations – effectively turning a tax liability into an equity investment.

Trump has proposed to tax US companies’ accumulated offshore profits at 10%, down from the current top corporate income tax rate of 35% on a one time basis if they repatriate those monies. US companies currently hold an estimated $2.5 trillion in earnings overseas because current federal law allows them to indefinitely defer paying taxes on these profits until they return them to the US.

Trump, who has specified that as a businessman he has “always loved leverage”, has also indicated a desire to take advantage of the current historically low interest rates to borrow long term, likely for a sum exceeding $500 billion.

Clean Sweep of Congress Helps

It’s worth remembering that Trump has been a real estate developer for his entire career. It is where his main business interests lie. But  it also seems that creating impressive, modern, even garish physical structures really excites him on a personal level. During the campaign, Trump emotionally recounted his experiences visiting modern airports in China and Dubai and wondered why the US has allowed its own public infrastructure to fall into its current state of disrepair.

Another factor that supports a potential increase in borrowing for infrastructure investment is the Republican sweep of both houses of Congress. Historically, most of the increase in federal spending in the US in recent decades has occurred under Republican administrations, most notably under George W. Bush when both Houses were under Republican control.

There is also considerable bi-partisan support for large scale infrastructure investment. President Barack Obama’s first term featured the American Recovery and Reinvestment Act, which was passed in 2009. It has been widely criticized for being too small in scope, and too focused on shovel-ready projects and other short-term fixes to address the enormous backlog of under-investment in infrastructure. But many still consider it an important Keynesian boost to the economy that contributed to the US outperforming other developed countries over the past eight years. A significant part of Hillary Clinton’s plan would have involved extending this investment program by creating a federally funded infrastructure bank that Obama was blocked from creating in the early part of his term by congressional Republicans.

Sorry State of US Infrastructure

There’s no question that the US would benefit enormously from new investment in these essential assets of future prosperity. The nation has been under-investing in its economic and social infrastructure for many years under both political parties, with overall spending dropping by half over the past three decades.

The extent of the neglect is evident across the board, with the American Society of Civil Engineers giving the country’s infrastructure a ‘D+’ GPA score on its 2013 report card. This includes a ‘D’ (poor) for drinking water and wastewater and a near failing grade of ‘D-‘ for levees and inland waterways. Aviation, roads and schools infrastructure are also rated ‘poor’ in terms of their fitness as measured by their capacity, condition, funding, future need operation, maintenance and public safety.

According to the ASCE, the US has infrastructure needs of about $3.6 trillion through 2020, including $1.7 trillion for roads, bridges and transit alone.

The Trump analysis points out that the future attractiveness of the US as an investment destination, its competitiveness, and its productivity are all at risk from the poor condition of the country’s infrastructure. It noted that the US now ranks 12th on the Global Competitiveness Index in infrastructure, with traffic delays due to inadequate transportation infrastructure costing the economy more than $50 billion annually.

Public Safety Issues Emerging

Beyond this, America’s quality of life and increasingly public safety are compromised, as recent episodes of lead poisoning and bridge collapses have demonstrated. The Trump campaign’s analysis cited an investigation by USA Today identifying nearly 2,000 additional water systems spanning all 50 states where testing has shown excessive levels of lead contamination of the past four years, including 350 systems supplying drinking water to schools or daycare facilities.

Since the Great Depression in the early part of the 20th century, infrastructure investment has been used as a fiscal tool for generating economic growth.

Citing the Federal Reserve, The Trump campaign paper says that in the US every $200 billion in additional infrastructure spending creates $88 billion in wages and increases real GDP growth by more than a percentage point, with each GDP point creating 1.2 million additional jobs. Other estimates, suggest that this multiplier effect could be even higher. According to the Federal Reserve of San Francisco, over a 10-year horizon, the average multiplier effect of government spending on highways is about two, which means that for every dollar spent, two dollars of GDP activity is generated.

There is also a potentially huge pool of domestic investment demand for infrastructure projects from pension funds, insurers and other institutions with long-term liabilities. The long-term nature of infrastructure programs means these investments are structurally well matched to the revenue flows from the debt that finances their construction, operation and maintenance.

Inflation Protection, Diversification Benefits

This revenue is highly reliable due to its link to dedicated tax revenue streams (availability payments) or revenue collected from tolls (concessions), it can provide inflation protection to the investor. Investors also look to infrastructure for its portfolio diversification benefits.

There are several challenges that could derail, or at least limit the success of Trump’s infrastructure plans. Among these is that the US unemployment rate has now fallen below 5% and continues to decline. That leaves very little slack in the labor market to prevent cost-push inflation from being generated. Regardless of the fundamental economic case for investing in infrastructure, shortages of labor are bound to appear, driving up the cost for delivery of these assets and making his goal less attainable.

It seems, in fact, that Trump’s plans for rebuilding America’s infrastructure will almost certainly be at cross-purposes with other key elements in his domestic agenda. Most notably, this includes his outspoken pledge to deport some 11 million illegal aliens.

Debt Spiral Risks

Another consideration is that the scale of Trump’s other policy initiatives, including higher defense spending and a range of tax cuts, could create a debt spiral that is potentially unsustainable. Already, the bond curve has steepened significantly amid concern that interest rates could start to rise quickly to prevent inflation from running out of control. If this happens, it could quickly and dramatically raise the cost of any large infrastructure investment program.

My own view is that Trump, or his Congressional allies will sooner rather than later have to decide which of his campaign promises needs to be curtailed so he can pursue the priorities that he believes will restore America to some semblance of his definition of its historic ‘greatness’.

Brexit: What Happens When Governments Stop Investing

By Henry Teitelbaum, Editor, P3 Planet

The Brexit vote not only exposed how out of touch the government here is from British voters, it laid bare the extent to which its leaders have failed to address the twin issues of low growth and rising inequality that led to this fiasco.

More than anything else about the UK referendum decision to leave the European Union (EU), it was middle class economic insecurity and diminished hope for the future that allowed people to be influenced by mostly false propaganda about immigration, compromised independence and lost identity.

Assigning blame for the conditions that led to these misconceptions is the easy part. Prime Minster David Cameron and Chancellor  George Osborne had tough choices to make starting in 2010 as they tried to navigate the UK economy out of the worst recession in the modern era. They  consistently made the wrong ones, and it is fitting that they should now resign.

As Goes Britain…

The question for Britain and the many other western countries that face populist rebellions, is whether their leaders will have the courage to do things differently before they too feel the wrath of a despairing and disenfranchised electorate. It could well become the ultimate measure of success in post-globalization politics across Europe and the US.

I am of course referring to fiscal policy, or in the case of this Tory government, the absence of one. It always seemed counter-intuitive, to put it mildly, to expect that piling  austerity onto one of the worst hit economies of the 2007-2009 financial crisis would produce anything other than misery.

But that’s exactly what they did. Public spending has been cut by 8.3% since 2010, and there’s no end in sight,  with the Institute for Fiscal Studies (IFS) now estimating that it will be 2020 before the budget is balanced.  Benefits were cut without consideration for the massive workplace displacements that people were experiencing, and investment in  public infrastructure was drastically reduced after Osborne decided in 2011 to suspend Private Finance Initiatives. This is no different from the ruinous austerity that has prolonged recessions and hobbled growth across the EU for the past seven years.

Stoking A New Housing Bubble

But Cameron and Osborne have done even worse. Instead of using ultra-low borrowing rates to encourage productive investment in long-term growth, they reflated the housing bubble with questionable programs such as Funding for Lending. Near-term, this  generated some stamp duty revenue for the government, but not nearly enough to close the budget deficit.

It also did nothing to create jobs outside of the real estate business. In fact, it probably added to peoples’ sense of financial insecurity by putting the cost of home ownership even further out of reach.

The result of these policies has been one of the most uneven recoveries, and one of the world’s most persistently wide income gaps.

 

Historically, this level of income inequality would be resolved in one of three ways. Politically, it could happen through tax policies that re-distribute wealth. Economically, it could result in financial collapse, which causes massive bond defaults that disproportionately destroy the wealth of those with income to invest. Or it could happen by way of  Europe’s traditional equalizer: war.

Britain’s Infrastructure Deficit

But there is a much less painful way out of this mess. And all it requires to produce real results for people, their communities and the economy at large is some big picture thinking and the courage to grasp the opportunity.

Britain is sitting on a more than £60 billion deficit between what is needed and what is currently being spent on public infrastructure. This is not unlike other parts of Europe, where government spending has become a dirty word. What needs to happen here is to make infrastructure development a priority the way it was during the depression era, because this investment creates stable, well-paid jobs in precisely those sectors of the economy where middle-class incomes have eroded.

Investments in infrastructure, whether financed by the government or through partnerships with private sector delivery organizations, create enormous value for the economy in both the short- and long- term that fully justifies their cost. In the short-term, new jobs restore middle class incomes, and get money circulating in the real economy. This supplies a key ingredient that has been missing from this recovery, where  aggregate demand has been  too weak to prevent price deflation.

Longer-term, the essential assets that are delivered  – modern roads, railroads or better schools and hospitals – boost productivity and attract new investment at home and from abroad.

The Multiplier Bonus

There’s also a big bonus from the multiplier effect. This is the impact on GDP from the increased amount of money that people spend as a result of  job creation and the contribution that the new asset itself makes to economic activity. According to Standard & Poor’s Corp., the UK would benefit twice as much from this multiplier effect than would Germany or France. It also specified that an increase in infrastructure spending of 1% of GDP returns 2.5 times as much as the cost of that investment over a three-year period.

Government tax collections meanwhile typically increase dramatically due to  all of this additional consumer spending, eliminating the deficit far more quickly than any policy fix this government has tried.

The UK government’s updated National Infrastructure Plan (NIP), published at the end of 2014 and updated last year, contained 550 projects and programs with a combined capital value of £413bn. The pipeline of planned projects includes investments in the energy, transport, flood defense, waste water and communications sectors and features 40 major infrastructure projects termed as high priority.

It would be nice during his remaining time in office to see Mr. Cameron put an effort into mobilizing the nation around delivering  these projects before interest rates start to rise. It would go a long way towards giving people hope for a better future, as well as bringing a new sense of identity and purpose to the nation.

Global Climate May Be Biggest Loser In India’s Growth Budget

By Henry Teitelbaum
Editor, P3 Planet

A lot of positive press has been directed at Indian Prime Minister Narendra Modi for a budget that promotes long-term economic growth by investing in infrastructure and reforming the way it is delivered. But insufficient attention is being given to the disastrous long-term climate change implications of its heavy reliance on coal.

Supporters of sustainable growth inside and outside the country need to do a lot more than cheer-lead for Modi’s agenda if they want to prevent a potentially catastrophic rise in carbon emissions from what is already the world’s third largest CO2 producing country.

Modi’s 2015-2016 budget focus is geared heavily towards spending and investment to develop the country’s transportation infrastructure. High on the agenda is ensuring that regulatory and land acquisition issues that have hobbled the completion of rail and road links are corrected. For years, these issues have prevented India from making effective use of its existing Public Private Partnership (PPP) model for transportation infrastructure, particularly highways. An estimated $10 billion of such projects are uncompleted due to the inability to secure the land that is needed to finish them.

PPPs allow governments in developing countries such as India to get the infrastructure they need without adding massively to public debt by allowing private investment capital to pay for much of the upfront development costs. In return, the private sector project delivery businesses that are selected receive the right to design and build the asset. Once the project is operational, they get paid to operate and maintain it over the long-term through a share of the tolls collected or from dedicated government tax revenue streams.

To give an idea of how much of this infrastructure is needed, the International Monetary Fund (IMF) estimates that India, with the world’s second largest population, needs an additional $1 trillion in investment in the medium term.

Infrastructure’s Multiplier Effect

The experience in neighboring China over the past 20 years suggests the Modi government is right to view investment in infrastructure as central to India achieving its potential as a global manufacturing hub. With its stable democracy and vast pool of young, highly skilled workers, India has drawn interest from around the world, including from China, as a future export manufacturing center because wages are so low. But until now, the poor state of the country’s infrastructure has held India back.

Modi’s program for investment in infrastructure promises to do a lot to turn that around. His  pro-growth policies, which include business tax cuts and measures to promote bank lending, are likely to support continued strong GDP growth, currently estimated to be over 7%. According to the OECD, India is already on course to become the fastest growing large economy in the world by next year.

A focus on domestic infrastructure investment is particularly appropriate for India because it quickly puts money in the pockets of working people. According to a recent study by Standard & Poor’s Corp., the “multiplier effect”, that is the increase in final income arising from any new injection of spending, is particularly strong in developing countries. It estimates that in India, any increase in infrastructure investment would result in a boost to GDP of at least double that increase. So a little investment in India’s infrastructure can go a long way towards addressing wealth inequalities in one of the world’s most economically polarized societies.

Elephant in the Room

But Modi’s strategy also brings big environmental challenges that few seem to want to discuss. These derive mainly from the fact that the government intends to rely on domestic energy resources, chiefly coal, to power its economic expansion. Considering the size of India, unchecked expansion of India’s use of coal at a time when other coal consuming countries are either cutting back or have plans to do so could soon turn India into the world’s largest carbon emitting nation.

According to the International Energy Agency (IEA), more than 80% of electricity generation in India comes from fossil fuels, with the power generation sector alone consuming about 70% of the domestically produced coal. Developing modern economic infrastructure is very energy-intensive by definition, requiring vast amounts of cement, bricks, lime, steel and aluminum. Heavy industry in India is already heavily reliant on coal, which is also the only fossil fuel for which domestic reserves are still plentiful. So it’s not hard to to see where the energy for the vast majority of India’s growth agenda is going to come from, or why.

Worse yet, coal-fired energy production in India is currently very inefficient by global standards, running at around 31% at a time when efficient rates of 45% have been achieved, according to the IEA Clean Coal Centre.

There’s no reason to doubt Modi’s word when he expressed  the hope that India will become the “renewable energy capital of the world” through its focus on solar and wind deployments. But the government has released few details about how its renewable energy plan can be made to meet the country’s energy needs. In the meantime, its stated goal remains to double coal production to one billion tons annually within five years.

The Deafening Silence From Abroad

Perhaps the absence of a roadmap to sustainability in energy wouldn’t matter so much if there was at least a blueprint for eventually reducing India’s reliance on coal.

Unlike China, which concluded a bilateral deal with the US last November committing both countries to begin reducing carbon emissions, no such deal was struck with India when US President Barack Obama visited the country in January. And while China aims to start lowering carbon emissions by 2030, the best Obama could come away from India with was an agreement in which the US will financially support India in five clean energy programs.

It’s not just the US that’s been willing to overlook the potential for environmental degradation and global warming that will accompany India’s head-long rush for growth. IMF chief Christine Lagarde said nothing about the issue during her recent visit to India, where she instead heaped praise on the government for its pro-growth policies.

For the record, India’s latest budget does present some practical measures to fund renewable energy projects, notably a doubling of the coal tax for a second consecutive year. That represents about 10% of the price of coal and should bring in about $2 billion a year in revenue. This at least should start to encourage greater efficiency and lower CO2 emissions. But that revenue estimate will still bring in far less that the $100 billion commitment that Modi has made toward reaching India’s renewable energy targets of 100GW of solar and 175GW of total renewables by 2022.

Promoting Private Sector Involvement 

So it would seem likely that a great deal of private sector participation, particularly from foreign investors, will be required if there is to be any chance of achieving these targets. In other countries where PPP is in use, the need to mobilize vast quantities of private capital to deliver such improvements would present an excellent opportunity for using this model. But India’s poor record of project delivery through PPP, particularly in road transportation projects, is likely to cause a great deal of hesitation among foreign investors.

The modal unit for PPPs in new and renewable Energy at India’s Ministry of Finance didn’t respond to numerous efforts seeking to discuss specific plans for encouraging private investment in renewables.

In all likelihood, India’s government will need to find other ways to encourage private investment in public infrastructure, particularly for frontier technologies in wind and solar energy. This could be done through the issuance of low-interest projects loans, guarantees, or some form of credit enhancement facility.

India’s increasing reliance on coal could also make it an attractive proving ground for carbon capture and storage technologies, particularly as carbon taxes continue to rise. The retrofitting of existing coal-powered energy facilities, as well as the design and construction of new ones, could prove more attractive and perhaps less risky for foreign  private investors than PPP infrastructure, at least in the near term.

Ultimately, the best guarantee of performance for the energy and transportation infrastructure that India needs to reach  its potential in a globalized economy will be for the government to ensure that its PPP reforms are effective. That means doing what needs to be done to make sure projects achieve completion and deliver value for money.