Infrastructure Investment Under the Trump Administration

America’s infrastructure received an overall grade of “D+” in The American Society of Civil Engineers Report Card for America’s Infrastructure, most recently published in 2013 (an updated Report Card is expected to be released on March 9, 2017). Grades for individual infrastructure categories ranged from a high of a “B-“ for solid waste to a low of “D-“ for inland waterways and levees. Other infrastructure sectors all received grades between a “D” and a “C+”. The infrastructure investment needed from 2013 through 2020 was estimated by the American Society of Civil Engineers to be approximately $3.6 Trillion, with a projected deficit of approximately $1.6 Trillion. Therefore, it is not surprising that during the presidential election campaign both major parties put forth programs to expand and repair infrastructure in the U.S.

1. The Trump Administration Plan -- Overview

   (a) The Trump Plan calls for $1 Trillion in infrastructure investment over ten years. The specific sources of the entire $1 Trillion are not entirely clear. Nonetheless, the Plan calls for a $167 Million private sector equity investment to provide a so-called “equity cushion” to absorb the risk, claims difficulty in predicting the cost to construct such improvements, the utilization rate of the improvements, and operating costs over a lengthy useful life.

   (b) To encourage investors from the private sector, the Trump Plan provides for a tax credit of 82% of equity investments (or approximately $137 Billion). The Plan predicts that such tax credits will encourage private investors to borrow additional funds through private markets to finance up to $1 Trillion for infrastructure improvements and projects. Those projects would create jobs and generate profits.

   (c) According to the Plan, the tax credits would be repaid from two revenue streams: (i) tax revenues from additional wage income created from the projects, and (ii) tax revenues from additional contractor profits.
   
   (d) The Trump Administration cites three potential shortcomings with traditional public funding of infrastructure through issuing bonds: (i) certain projects need an equity component or guarantee from a creditworthy public authority, which is not always possible; (ii) the private sector can deliver construction projects at a lower cost and in less time, and the benefits of lower cost and accelerated delivery often exceed the higher cost of private financing arrangements; and, (iii) not all infrastructure projects can meet the complex eligibility rules that apply when public funding is used, thereby preventing certain needed improvements from reaching fruition.

   (e) The Trump Plan also contemplates reducing regulatory requirements that delay or prevent the commencement and performance of infrastructure projects. Proponents point to the stimulus program of Obama administration, and note that even the so-called shovel-ready projects still required an excessive amount of time before proceeding. The Plan does not include detail on how the reduction in applicable bureaucracy will be achieved.  

2. Initial Concerns(a) Investors from the private sector will need to repay debt service, and also will be looking for a return on their investment. Therefore, critics believe that the Trump Plan will produce only those projects that generate a revenue stream, either through the payment of tolls or collection of some other type of user fee. As a result, the Plan would likely incentivize construction of projects in wealthy areas that can absorb the payment of tolls or user fees, and would likely not address infrastructure needs that do not generate any revenue (e.g., certain roads and bridges, needed maintenance, etc.).(b) Although proponents of the Trump Plan believe that it will be revenue neutral and pay for itself, many question that assumption. Some economists believe the Plan overestimates the amount of tax revenue that would be generated.(c) Many critics point to potential shortcomings with the public-private partnership delivery methodology that would be used by the private sector to deliver infrastructure projects, and express concerns that profit motives will outweigh public needs.

   (d) Critics also assert that the Plan is not revenue neutral and that the public ultimately will pay for such projects, if not through taxes, then by payment of tolls and user fees. The Plan, in their judgment, simply defers the cost to the public to a later date, but does not eliminate it.

   (e) It is unclear whether project users will support or accept payment of tolls or other user fees. Polls that have been conducted are inconclusive at best. A Washington Post – ABC News poll of 1005 respondents conducted in January of 2017 found that tolling plans were strongly opposed by 44%, and somewhat opposed by 22%. If project sponsors do not believe that adequate revenue can be generated by the project, then other financial contributions from the government most likely would be needed to make such a project viable. 

3. Recent Updates

   (a) Some commentators recently have questioned the commitment of the Trump Administration to investment in infrastructure. It has been noted that a post-election web page from the Trump transition team cites the total proposed investment as $550 Billion. Some suggest, however, that the reduced figure applies to investment over a five year period as opposed to ten years. Nonetheless, Reince Priebus has been quoted as stating that the new administration will focus on other issues like health care and tax reform, before addressing infrastructure. President Trump has also indicated that while he expects a large-scale infrastructure bill, that infrastructure may not be a core part of the first few years of his administration.

   (b) Recent Senate confirmation hearings of Elaine Chao for Secretary of Transportation have provided some insight into how the Trump Administration might view infrastructure investment. Although Ms. Chao deflected many questions regarding the details of how the Trump Administration intends to pay for infrastructure improvements, she indicated that: (i) duplicative regulations and permitting requirements that slow down projects should be reviewed and reconsidered, (ii) some direct federal spending, and not just tax credits, might be used for infrastructure projects, and (iii) federal support for infrastructure projects might be tied to reliance on American suppliers, notwithstanding some of the difficulties encountered with the so-called Buy America type rules.

   (c) President Trump intends to create an oversight council to monitor spending on investment infrastructure. He recently appointed two New York City based real estate developers to lead the council: Steven Roth of Vornado Realty and Richard LeFrak of LeFrak Organization. The Wall Street Journal reports that President Trump expects the council, through leadership of Messrs. Roth and LeFrak, to evaluate the benefits and pricing of potential projects. The council will be comprised of 15 – 20 builders and engineers.

4. What to Watch for

   (a) The Democratic Party, through Senator Chuck Schumer (D-NY), also recently proposed a plan for infrastructure development called “Blueprint to Rebuild America’s Infrastructure.” The Democrats’ plan differs from that outlined by the Trump Administration, with a greater emphasis on direct federal spending and more mention of social infrastructure. Nonetheless, there appears to be bi-partisan support for infrastructure investment. Also, deferred maintenance and lack of investment in new infrastructure is agreed by both parties to have had a severe adverse effect on the economy. Therefore, it is reasonable to believe that common ground will be found and some investment in infrastructure is likely.

   (b) Because of the emphasis under the Trump Plan for private investment, and the desperate need for infrastructure investment, use of Public-Private Partnerships (P3s) for infrastructure projects will likely increase during the term of President Trump. P3 arrangements will probably be adopted even for projects that do not generate revenue or at least where the user fee won’t be paid directly by users, for at least two reasons. First, many such projects are crucial, and can be structured through use of availability payments or shadow tolls, rather than through direct user payments. Second, many investors in P3 projects will prefer such arrangements, which remove significant and unpredictable market risk from the project, which in turn makes such projects more viable for the private sector to implement.

   (c) Direct investment in infrastructure at all governmental levels will continue, so this won’t be an effort by the private sector alone. P3 solutions often are complicated, difficult to implement, and controversial. Not every project is a good candidate for a P3, and other more traditional delivery methods will not be abandoned in connection with infrastructure improvements.

   (d) An effort will be made to reduce regulation and rules that might impair the commencement or prosecution of projects, or that might make projects more expensive. Likely targets for such paring back of regulations and rules are those pertaining to environmental protection and the workplace.

   (e) It is unclear how the economic and trade policies of the Trump Administration might affect the cost or ability to perform infrastructure projects. For example, President Trump campaigned on a pledge to ensure the use of American materials for infrastructure projects even though many leading politicians see such requirements as an impediment to projects. Moreover, the construction industry has become very global, particularly with respect to large projects. But economic policy might also impair the ability of overseas contractors to participate in infrastructure projects, even when such companies possess the distinctive experience and expertise needed to successfully deliver those projects.

   (f) Both major parties have shown interest in creating a national Infrastructure Bank. Although the idea has been floated many times before, perhaps the need for infrastructure investment and bi-partisan recognition of funding challenges will help the idea gain traction during the Trump Administration.