Slowly but surely, a clearer picture of the details behind President Trump’s US$1 trillion 10-year infrastructure plan are coming together through the various Budget related documents released throughout the first half of 2017. The first sign of something concrete came in January, when the Trump Administration released a list of projects to the National Governor’s Association entitled Emergency and National Security Projects. These projects were identified as being of the highest priority going forward. The project list carries a total value of US$137.5 billion, and while yet to be confirmed, it is expected that 50% of the funding will come through private investment and that the projects will directly create 193,350 job years.
In March 2017, the Trump Administration released a document entitled America First: A Budget Blueprint to Make America Great Again. The document outlined preliminary goals, and gave a breakdown of funding and priorities for the various US federal departments. The America First document calls for an increase in defense spending by US$54 billion, offset through cuts to funding from more than 18 Cabinet Departments and Agencies. Despite Trump’s pro infrastructure stance, many of the infrastructure related departments and agencies were not immune to funding cuts.
The Department of Transport (DOT) saw a decrease in funding of US$2.4 billion on 2017 levels in the America First document, behind the elimination of federal programs that were deemed inefficient, duplicative or better served in the hands of State or local governments or the private sector. An example was the elimination of funding for the Transportation Investment Generating Economic Recovery (TIGER) grant program. Reasons cited for the program’s removal were that these projects are generally also eligible for funding under existing surface transportation formula programs, it would save US$499 million and that the DOT’s Nationally Significant Freight and Highway Projects grant program is authorized to provide US$900 million in funding annually for larger highway and multimodal freight projects with national or regional benefits.
The America First document has a clear focus for strengthening the country’s nuclear capability. While the US$28 billion in federal funding earmarked for the Department of Energy (DOE) is down on the 2017 level, it does provide for a US$1.4 billion increase for the National Nuclear Security Administration (NNSA). Specific initiatives set forth as part of the document include providing US$120 million to restart relicensing activities for the Yucca Mountain nuclear waste repository to address nuclear waste issues, enhance national security and reduce future taxpayer burden. Unsurprisingly, the increased nuclear budget also comes with national defense considerations in mind. The document notes the administration’s strong support for ensuring the US’s nuclear force is second to none.
The Environmental Protection Agency (EPA) suffered some of the largest cutbacks in the America First document, with a 31.4% drop in funding on 2017 levels. Much of this has come in controversial fashion, through discontinued funding for the Clean Power Plan, international climate change programs, and climate change research and partnership programs. One area of the EPA funding that remains a priority is critical drinking and wastewater infrastructure. The document specifies US$2.3 billion for the State Revolving Funds, a US$4 million increase on the 2017 level. US$20 million is also provided for the Water Infrastructure Finance and Innovation Act program.
In May 2017 the Trump administration released the fiscal year 2018 Budget of the US Government, A New Foundation for American Greatness. The mandate for infrastructure set forth in the Budget is to seek reform on how infrastructure projects are regulated, funded, delivered and maintained. First and foremost, this will be achieved through improving underlying incentives, procedures and policies to create more efficient infrastructure decisions and outcomes. One such procedure improvement initiative discussed in the Budget will be to track the progress of major infrastructure projects on a public dashboard to ensure the transparency and accountability of the permitting process.
The President’s US$1 trillion target over the next 10 years is to be met through a combination of new federal funding and incentivized non-federal funding. The administration has proposed US$200 billion in federal outlays for infrastructure over the 2018 to 2026 period, with US$160 billion of this funding earmarked for the 2018 to 2022 period. Public funds will be focused on incentivizing additional non-Federal investments rather than providing direct infrastructure funding. The administration is currently working with Congress, States and local governments, and other infrastructure stakeholders to finalize the direct federal programs to be supported by the infrastructure funding.
The next step: engaging the private sector
While the federal government’s contribution to infrastructure has become clearer, much still remains unknown about the most important piece of any US infrastructure plan – the funding mechanisms to be utilized to maximize private sector involvement. Tax credits for the private sector have been the most prominently discussed investment incentive. It has been estimated that US$137 billion of tax credits would result in US$1 trillion of investments. Tax credits provide a one for one reduction in tax liability, i.e. a $100 tax credit can offset taxes to be paid by $100.
Criticisms of a tax credits driven program include that while tax credits provide an incentive for private investors to invest, a large consideration will always be if investor will be able to earn a return on investment. High traffic major highways, toll roads and bridges are ideal for private funding. However, these types of infrastructure projects are the exception. Rebuilding old roads in rural areas, and investing in basic needs infrastructure sector areas such as water and sewerage are unlikely to be attractive to private investors, even with such credits. Further, if tax credits are offered for high demand infrastructure investments such as toll roads, there is a major risk the government is potentially subsidizing projects that would have been built anyway. An additional criticism that exists is that much of the private investment that exists comes from pension funds and sovereign funds of foreign countries, neither of which pay US taxes and thus will receive no benefit from tax credits.
Tax credits have been utilized in the past in the US, a recent example being the Railroad Track Maintenance Tax Credit, also known as the 45G Tax Credit. Short line railroads use around 184 million gallons of fuel to move 10 millions of freight annually. This compares to 540 million gallons required if trucks were responsible for this shipping. Despite this, due to freight railroading being a private venture, and the capital intensive nature associated with repairing railroads, short lines have been poorly maintained or abandoned by rail companies that cannot justify the investment. The 45G tax credit, in reducing the tax burden for companies has helped to ensure short line railroads can continue to operate. The initiative has undeniably been successful, originally expected to run from 2005 to 2009, but has subsequently been extended multiple times. In early 2017, a bill to make the 45G tax credit permanent was introduced to the House of Representatives.
Build America Bond’s (BABs) have been another initiative in recent years designed to stimulate infrastructure investment through tax credits and subsidies. The BAB program was developed under the Obama administration to help state and local governments achieve the debt capital required to create jobs and implement infrastructure projects. Two types of BABs were created: direct payment loans and tax credit bonds. Direct payment loans offered a 35% subsidy to bond issuers on the interest payments paid to bondholders, making the cost of financing significantly cheaper for issuers. Tax credit bonds provided a refundable tax credit to bondholders. This benefit to bondholders helped to encourage a wider array of participants than was traditionally the case for infrastructure debt. The BAB program, which ran over 2009 and 2010, was a success, with state and local governments issuing US$106 billion of BABs, and saving over US$12 billion, significantly more than the net cost to the federal government of implementing the program.
Foreign investment coming from unlikely sources
Regardless of the array of tools and incentives used by the administration to encourage private investment in infrastructure, it is unlikely that the US will be able to achieve its lofty goals alone, foreign investment will also be required. Trump in the past has also committed to rendering agreements with foreign investors. In May 2017, a partnership was struck between Saudi Arabia and the US, with the former’s main sovereign wealth fund set to invest US$20 billion in US infrastructure projects. An agreement was made with US private equity firm Blackstone, and the Saudi Arabian investment will be used as an anchor investment to help raise a further US$20 billion in equity from other investors, and combined with debt financing is expected to provide over US$100 billion for investment in US infrastructure projects.
While the America First focus of the infrastructure plan may have been thought to significantly dampen enthusiasm from foreign investors, there has been investment interest in US infrastructure projects from other countries also. Japanese Prime Minster Shinzo Abe has said that the US could benefit from Japan’s High Speed Rail technical expertise. In addition, Chinese officials have are confident that Chinese construction companies will be able to compete for US contracts, particularly in the arena of subway construction.
The outlook for US infrastructure spending
Despite funding cuts to some federal infrastructure programs in the released Budget documents, there is no real sign of any backtracking from the Trump administration in terms of making infrastructure a major priority going forward. The total value of the infrastructure construction market reached US$334 billion in 2016. Output is projected to grow to US$430 billion by 2021 (in nominal value terms), corresponding to a 5.1% annual average growth rate.