A once-in-a-generation opportunity to restore America’s failing infrastructure is being squandered by a dysfunctional White House.
By Henry Teitelbaum, Editor, P3 Planet
It would be difficult to overstate just how wide the chasm running through the American political landscape has become since Donald Trump entered the White House. It is evident on the streets, at town halls, and in every proposal that comes before Congress. Even so, there is a lot of common ground when it comes to appreciating the need to invest in restoring the country’s crumbling infrastructure.
America has some of the oldest, most inadequate and poorly maintained public roads, bridges, transit systems, waterways and sewage infrastructure in the developed world. Its condition is seriously affecting everyone’s quality of life, whether through clogged roads, flight delays or flooded homes. In the face of challenges ranging from the threat of bridges collapsing to an entire city’s water supply becoming tainted, there should be no scope for partisan disagreement on the need to act quickly.
Failing Infrastructure’s Real Cost
In the just-released 2017 Infrastructure Report Card, the American Society of Civil Engineers gave a particularly grave assessment of the state of these critical public assets. The nation received another cumulative GPA of D+, unchanged from the previous survey in 2013 and consistent with “D” grades going back to 1998. That’s an exceptionally poor performance for a country with the kind of wealth America has, particularly given the number of high-profile infrastructure-related emergencies that have hit since the last survey. Lead tainted drinking water in Flint, Michigan in 2014 and this year’s evacuation of 200,000 people living downstream from the Oroville Dam in California are two incidents that made headlines, but there are many others.
One might have hoped that such crises would focus more minds on the condition of the nation’s dams and drinking water infrastructure. Sadly, according to the report, this has yet to happen. Both got “D” grades, which is one level above failing, just like last time. Meanwhile, the condition of America’s neglected transit systems, parks and solid waste infrastructure meanwhile, has actually worsened, according to the ASCE. In 2013, for example, it found that only 51% of people in America are able to use public transit to do their grocery shopping. This means more cars on the road, more unnecessary traffic congestion, more pollution, and more cost to those who can least afford it.
The reason, according to the ASCE, is that America is paying only about half of its infrastructure bill, and this is creating a funding gap of the kind that costs businesses and the economy hugely in terms of lost sales and productivity. This gap is estimated to total somewhere around $1.44 trillion between 2016 and 2025, or just under half of the nation’s $3.32 trillion infrastructure funding needs for the period. The cost to the US GDP, according to the report, will grow to an estimated $3.9 trillion by 2025 should infrastructure needs continue to be ignored.
The Case for Investing
Aside from the economic costs of not fixing America’s broken infrastructure, there are excellent reasons for making new investments in it today. Borrowing now, while interest rates are still low, reduces the cost of financing, which improves the financial feasibility of long-term projects. This makes them more attractive to the types of investors that are structurally geared toward this type of investment.
Increasingly, for example, pension funds see infrastructure as a good way to invest safely over the long term. When they are operational, public assets such as toll roads generate secure long-term, even inflation-indexed cash flows that are easy for pension funds to match to their liabilities. At a time when large pension funds in the US are lamenting the lack of attractive long-term investments at home due to low yields on government bonds, infrastructure could provide just the kinds of returns they seek to meet the needs of a growing population of retirees.
Infrastructure investment also has a long-standing history of generating high-quality jobs, both directly in the construction industry and in a range of services to local economies. Building a better physical infrastructure that brings benefits for future generations can also encourage stronger communities. It does this by helping to restore a sense of common purpose to a nation where faith in government has been eroded and where voters worry about their future and their children’s future.
Does Washington Know About This?
So why is it taking so long for Washington to get behind a big infrastructure plan? For the answer, look no further than President Donald Trump’s failing leadership and divisive style of governing.
It’s not just that the US President has failed to set, lead or seriously promote his infrastructure agenda so much as his inability to engage seriously with any issue long enough to see it through. Infrastructure, as much as any legislative program, requires discipline, bipartisanship and patience – none of which has been in evidence from the Oval Office.
“…the Trump Administration quietly moved to Plan B, and practically nobody noticed.”
Over the past six months, we’ve instead witnessed a distracted and belligerent President failing to push through any of his campaign’s legislative agenda, whether it’s tax reform or his repeated efforts to repeal and/or replace Obamacare. The way with which Trump moves from failure to failure while blaming everyone else is as astonishing as it is consequential. Which brings us to Trump’s infrastructure agenda.
During the campaign, Trump promised to spend $1 trillion on infrastructure over the next 10 years. The original proposal, the “Trump Private Sector Financing Plan,” relied on passage of a huge, heavily flawed and ultimately un-passable overhaul of the entire US tax system. This would have included reducing taxes on the repatriation of US corporate overseas profits from 35% to as low as 10%, if companies then invested those profits into infrastructure redevelopment. Some $2.5 trillion of deferred taxes overseas earnings could then be eligible for investment in rebuilding America’s roads, airports and water systems, and other essential assets.
But because the Trump administration doesn’t have a budget bill yet, even with Republicans dominating both houses of Congress, none of these overseas profits are available for investment. So when “Infrastructure Week” came around a few months ago, the Trump Administration quietly moved to Plan B, and practically nobody noticed.
Stealing A Page From Hillary
The proposal that was finally unveiled bears very little in common with his original infrastructure proposal other than the $1 trillion aspirational figure over 10 years. Instead of relying on tax revenue and credit giveaways to incentivize private sector equity investment, though, the plan appears to rely almost entirely on Public-Private Partnerships (PPP) to bring private financing and expertise to the task.
Even to the untrained eye, this looks an awful lot like the infrastructure plan that Republicans ridiculed and then blocked for much of President Obama’s eight years in office. It’s also very much like the plan put forward by Hillary Clinton during the campaign, which envisioned mobilizing private capital for investment in public infrastructure through the PPP model.
PPP, or as it’s called in the US and Canada, P3, is a model for procuring and managing long-term infrastructure that has been used successfully around the world in both developed and developing countries. It requires private consortia, typically construction firms and their financial backers competitively bid for a contract to design, finance, build, operate and maintain a public asset. The private companies also shoulder the risks around project delivery and face stiff financial penalties for failing to perform contracted duties. In this and other ways,P3 is distinct from privatization because the asset, whether a road, an airport or a school district, remains publicly owned.
People debate the merits of this model as opposed to traditional public sector borrowing and spending. But in an age when governments, including the US, are close to broke, it has broad appeal. In Canada it has become something of the default procurement option for the government because it delivers reasonable value for money and better mobilizes the skills, discipline, financial capacities and risk management capabilities of the private sector.
Dysfunctionality As Policy
So what does the Trump administration’s failure to push through a corporate tax reform bill linked to his original infrastructure agenda, or for that matter even a budget, mean for America over the next three and a half years?
We will have to see after the summer recess. But it doesn’t take a tarot card reader to tell you that the signs are not good. A federal government led by an incompetent administration that stumbles from crisis to crisis of its own making is unlikely to follow through on any kind of infrastructure agenda. That would be a huge lost opportunity for America because an infrastructure-led government agenda could go a long way towards putting investments to work in restoring the country’s competitiveness while delivering the jobs that Mr. Trump boasts about creating.
With or without support from the current administration, P3 projects are destined to become a permanent part of the infrastructure investment landscape in the US because the alternatives are expensive and sometimes deliver poor value for the public funds that are invested. In Canada, they account for some 36% of all infrastructure investment while in the US it’s 1%.
The most likely scenario for the next few years will be for many of the 33 states that have PPP-enabling legislation in place to formulate their own infrastructure agenda, perhaps in cooperation with each other. This could go some ways towards making sure these next few years are not wasted while waiting for Trump’s dysfunctional government in Washington to do its job.
This blog post has also appeared in The Market Mogul.