Industry Trend Analysis - Q&A: Trump's Infrastructure Plan Will Fail To Meet Goals - MAR 2018
BMI View: President Trump's infrastructure plan will struggle to meet its ambitious targets. We do not expect congress to support the level of federal funding proposed given the steep increase to the deficit as a result of the tax plan and budget. Whilst the plan contains several positive proposals to open up US infrastructure to further private participation, the ability to leverage over a trillion dollars in non-federal funding is not viable without a broader restructuring of US infrastructure funding from user fees and tax hikes - neither of which will be palatable to consumers or politicians.
The release of President Trump's long-awaited infrastructure plan by the White House on February 12th confirms our view that the President's ambitious infrastructure targets are unattainable under current proposals. The plan pushes the burden of financing infrastructure on to states, but does not address the age-old challenge of how to secure this capital without raising taxes or charging user fees - both politically unpalatable. As such, it is unlikely to address the major disconnect at the centre of the US infrastructure problem: how to improve infrastructure without paying for it.
Regardless, we do not expect the plan in its current guise to progress through congress. We expect major challenges in securing USD200bn in federal capital for infrastructure from a Republican held congress given the major deficit hits from both the tax plan and the budget. Democrats are unlikely to support a plan which relies so heavily on non-federal funding.
What Is The Plan?
President Trump's USD1.5trn infrastructure plan seeks to leverage USD200bn in Federal funding to raise USD1.3trn in state and local government and private funding for infrastructure over the coming decade. The plan includes five areas of funding (see table below), with the USD200bn apportioned across each area.
|Source: "Legislative Outline For Rebuilding Infrastructure In America", White House portal|
|100||Infrastructure Incentives Program||Incentives for state, local and private core infrastructure. Grant awards cannot exceed 20% of project cost. 70% of the criteria contingent on identifying non-federal funding sources. Any individual state cannot receive more than 10% of the funds.|
|50||Rural Infrastructure Program||Targets rural infrastructure development. Funding distributed to governors, who have discretion to choose projects. Rural = population of less t han 50,000. Non-specified amount available for Tribal and Territorial Infrastructure.|
|20||Transformative Projects Program||Federal funding and technical assistance for innovative and transformative infrastructure projects. Eligible projects would be commercially viable but possess risk unlikely to appeal to the private sector.|
|20||Infrastructure Financing Programs||Supports programs such as TIFIA, WIFIA, RRIF, etc. (USD14bn) and Private Activity Bonds (USD6bn). TIFIA expanded to port and airports, WIFIA expanded to include non-federal flood mitigation, navigation and water supply as well as brownfield and superfund programs.|
|10||Create Federal Capital Financing Fund||Establishes a mandatory fund to finance purchases of federally owned civilian real property, to be repaid over 15 years using discretionary appropriations.|
Why Won't It Work?
The infrastructure plan presented by the White House is unlikely to achieve its ambitious goals for two central reasons: first, it is unlikely that congress will approve USD200bn in federal funding, and second, in the event capital was secured, this would not translate into USD1.3trn in infrastructure spending without a major restructuring of the way US infrastructure is operated and developed, towards greater private participation. Whilst the plan suggests some measures to open up infrastructure to private investors, without a major expansion in user fees - which remains political unpalatable - this will remain a small segment of infrastructure assets.
Federal Funding Unlikely: Appetite to further increase federal spending amongst a Republican held Congress is weak following the tax plan and the budget - two deficit busting measures passed in recent months. Whilst infrastructure scores high on rhetoric amongst politicians, it is of a lower priority than either tax reform or the budget, and we expect that the appetite to further extend the deficit is waning. Whilst Democrats are in favour of additional federal spending for infrastructure, it is unlikely they would support any legislation that puts funding responsibility onto states or private partners, or shortens the permitting period in favour of looser environmental regulations. Further, an increasingly combative Democrat minority in the Senate and House is likely in the run-up to November's mid-term elections, meaning that the potential for bipartisan action is unlikely.
Leverage Will Be Capped: The largest allocation is USD100bn as seed money for state and local infrastructure development under the 'Infrastructure Incentives Program'; however it would reduce the federal match for projects to just 20% (from a current 50%-80%), placing a heavy burden on state and local entities to find non-federal funds. With 70% of the qualification criteria for funding dependent on identifying non-federal funds, this will heavily favour revenue generating infrastructure. States can either find the additional capital through public funding by collecting user fees or taxes - both politically challenging, or through private capital by allowing the private entity to collect revenue via either user fees or public payments - also unpopular on currently non-fee infrastructure.
|Private Financing Unable To Take The Burden|
|US Transport Infrastructure Spending, By Source, USDbn|
|Note: 2017 Based on First 11 Months. Source: US Census Bureau|
The plan suggests several changes that open up existing fee charging infrastructure to greater private investment (such as ports, airports) as well as providing states more ability to toll highways, although we expect the latter is unlikely to be adopted broadly. As such, this method of infrastructure financing will not be viable for the vast majority of the US infrastructure needs - primarily the maintenance and upgrade of the existing publicly owned networks. Rather, it will only further bolster the development of greenfield infrastructure projects with high demand, where adding a user fee (i.e. tolls) to new assets is more viable. Already, the US has a series of successful PPPs in this vein, and securing financing for these projects is not a major challenge (noting that financing mechanisms such as PABs and TIFIA have smoothed the process). As such, the plan addresses a challenge that does not exist, whilst providing insufficient funding to address the bulk of the infrastructure investment needs.
Are There Any Positives?
There are several measures in the plan which are positive in enabling an expansion in private investment in infrastructure or which will otherwise support infrastructure development:
Infrastructure financing program: The allocation of USD20bn to infrastructure financing programs programs such as TIFIA, WIFIA and Private Activity Bonds is a positive for enhancing private investment into infrastructure. These programs have proven popular with infrastructure investors, and have enabled major greenfield projects to progress. The plan expands financing for these programs, in addition to expanding the eligible sectors under TIFIA and WIFIA (airports and ports to be included under TIFIA for example).
Opening up more assets to private investors: Expanding the FAA pilot privatization programme, allowing PPPs for transit and providing states with tolling flexibility are all measures that will open up more assets to private capital. Many of these are assets with existing and viable revenue streams and therefore are candidates for increased private participation.
Access to education and workforce development programs: The US is facing a shortage in construction workers, and growing immigration restrictions will only exacerbate these issues. Already wage inflation in the construction sector is increasing the cost of projects and delaying project development. By providing more incentives and accessibility to training, this would help to develop a pipeline.
Permitting procedures: A reduction in permitting procedures and streamlining feasibility studies is a necessary step in order to progress infrastructure development, reduce lead times and costs. The plan proposes several mechanisms, focusing primarily on environment planning. The trade-off between environmental prudence and expediency will be a sticking point, especially given the major rolling back of environmental regulations seen so far which have so far proven unpopular with Democrats.