Tag Archives: roads and bridges

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.

How Can We Tackle The Infrastructure Crisis?

By Henry Teitelbaum

(Originally Published in Aon One Brief, March 3, 2016)

We often don’t think about it until it breaks down, but the reality is that much of modern society in the developed world is dependent on public infrastructure investments in roads, airports, schools, water, sewage and electricity utilities that were made half a century or more ago. Without these, developed economies and societies simply wouldn’t be able to function.

But in recent years, a lack of public investment has forced many of these basic building blocks of prosperity to serve beyond their intended lifespans. In the U.K., the lack of upgrades or replacements for ageing power plants have begun to threaten electricity blackouts, while the recent toxic tap water in Flint, Michigan, has highlighted that ageing infrastructure may not just lead to an economic impact, but also create serious health issues. As many as half a million children may have been affected by lead poisoning from ageing pipes in the U.S. alone.

Why has the condition of our public physical infrastructure been allowed to deteriorate so sharply – and in our current age of over-stretched public purses, and with ageing populations putting increasing pressure on tax revenues, what are the options for addressing this worsening challenge?

In Depth

Globally, the World Economic Forum estimates that the planet is under-investing in infrastructure by as much as $1 trillion a year – since 1990, the global road network has expanded by 88 percent, but demand has increased by 218 percent in the same period.

With the global population continuing to grow – and urban populations in particular – the pressure on existing infrastructure is only set to worsen. And in the developed world that infrastructure is creaking: in the U.K., 11 coal-fired power stations are nearing 50, the end of their operational lives, and replacements have yet to be built; in the U.S., the average age of the country’s 84,000 dams is 52; in Germany, a third of all rail bridges are over 100 years old; parts of London’s Underground rail system, still in daily use by hundreds of thousands of commuters, run through tunnels that are over 150 years old.

According to the Report Card on America’s Infrastructure by the American Society of Civil Engineers (ASCE), the U.S. alone will need $3.6 trillion of infrastructure investment by 2020, assigning near-failing grades to inland waterways and levees, and poor marks for the state of drinking water, dams, schools, road and hazardous waste infrastructure.

Europe’s infrastructure is in worse shape – The Royal Institute of International Affairs has suggested that the continent needs $16 trillion of infrastructure investment by 2030, more than any other region in a world.

Taxing Issues, Tragic Consequences

While taxes once covered the cost of building and maintaining public infrastructure, entitlement programs such as social security and healthcare have started to claim a larger share of these funds as a percentage of government tax revenue, particularly as the number of people in retirement expanded.

In addition, as the cost of social programs grew, governments came under pressure to cut taxes, leaving even less money available to maintain existing infrastructure, let alone invest in the requirements of growing populations. “Too often infrastructure is seen only through the lens of cost, expenditure and not core to society prosperity”, says Geoffrey Heekin, Executive Vice President and Managing Director, Global Construction & Infrastructure, Aon Risk Solutions.

“Since the 1950s, investment in infrastructure in developed countries has been declining,” he says. “In the U.S., for example, investment as a percentage of GDP has fallen from around 5-6 percent in the 1950s to around 2 percent today.”

Tragically, train derailments, road closures, water mains breaks, and even bridge collapses to become commonplace. “Until situations like the water crisis in Flint or a bridge collapse happen, infrastructure does not hold proper weighting in the psyche of leaders in government,” says Heekin.

This lack of attention to infrastructure is costing developed economies billions of dollars in lost productivity, jobs, and declining competitiveness. Without addressing the infrastructure investment gap, the U.S. economy alone could lose $3.1 trillion in GDP by 2020, according to the ASCE, while one estimate attributes 14,000 U.S. highway deaths a year to poorly-maintained road infrastructure.

A Private Sector Solution To Public Sector Under-Investment?

To begin reversing the infrastructure gap, it is likely that governments will need to find ways to encourage private sector investment towards replacing, renewing and upgrading physical infrastructure.

Governments of all political stripes are increasingly supportive of private investment in infrastructure. One model that is now gaining attention is the Public Private Partnership (P3) model.

P3s in one form or another have been used successfully in developed countries for several decades. They are being used to procure everything from public health care facilities, schools and courthouses to highways, port facilities and energy infrastructure. While the volume and type of P3 deal can vary widely by country, there continues to be an upward trend for the model’s usage by the public sector.

In 2015, for example, Canada procured 36% of its infrastructure with the P3 model. Aon Infrastructure Solutions anticipates that 21 P3 projects will close in Canada in 2016, with a total capital value of USD$12.8 billon – the highest value of P3 projects in Canadian history. In the US, where adoption of the P3 model is less widespread, 11 projects are expected to close in 2016, with a capital value of USD $8.7 billion dollars.

Like traditional design-bid-build procurement, P3 projects involve public authorities putting out tenders for public projects or programs for competitive tender, and selecting a preferred bidder from multiple bidding consortia. The key difference is that the contractual structure in P3 allows the public authority to transfer a different set of risks to the private party – including (but not always) the financing for the project. The arrangement can allow the private partner that designs, builds, and finances construction of the asset to operate and maintain it in return for either, 1) a share of the revenue generated by the use of the asset, or 2) a stream of constant payments from the public authority (also called availability payments).

Keeping Focused on the Big Picture

“The public sector benefits from P3 delivery when the model is applied to a project that meets a community need and is procured through a transparent, accountable process,” says Gord Paul, Senior Vice President & National Director of Public Private Partnerships, Aon Risk Services, Canada.

“Public authorities seek ‘value for money’ in a P3 project by looking to the long-term value,” Paul says. This means identifying whether the private sector party is able to design, build, finance, operate and maintain an infrastructure project for a price lower than if the public authority did it on its own over the same period. It’s about the full lifecycle of the project – not just the build costs.

Taking a big picture view is equally important for the private sector party, says Alister Burley, Head of Construction for Aon Risk Services Australia. He points to the importance of taking a holistic view to P3 projects and investments to enable efficiencies to be built that will carry forward over time.

If done right, P3 arrangements can be a significant benefit to both the public and private sectors. Public bodies gain a much-needed boost to their infrastructure, often with long-term maintenance included in the deal, reducing the potential negative economic and health consequences of infrastructure failure. And private investors can secure a stable, long-term return through a stake in some of the underlying essentials of our economies.

Whatever route governments take to secure the integrity of our underlying infrastructure, one thing is clear – without a significant increase in infrastructure investment over the coming years, the world’s economy and health could well be put at further risk.

GOP Should Put Infrastructure Back On US Agenda

By Henry Teitelbaum, Editor, P3 Planet

Over the past six years, Republicans have become very adept at blocking US President Barack Obama from achieving anything in Washington, often through tactics that could have done lasting damage to the nation’s credit standing in the world.

Now that the Republicans have control over both houses of Congress, it’s time for them to grow up. The 114th Congress  brings with it just about enough time before the  2016 Presidential election campaign for the Republicans to craft a meaningful federal agenda that will prove it is more than just the party that says “no”.

While there is already talk of working together on a tax reform or immigration agenda over the next six months, it’s hard to imagine a breakthrough on issues of such long-standing disagreement between the two parties.

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