The new Democratic Congress is likely to boost infrastructure funding beyond what President Donald Trump has proposed. It is also likely that the ultimate infrastructure plan will maintain Trump’s idea of creating incentives to get private investors and state and local governments to fund infrastructure projects rather than providing direct federal funding of infrastructure, as in the past.
Congress has yet to move forward on the Trump Administration’s proposed 10-year, $200 billion infrastructure financing and policy blueprint, which aims to incentivize $1.5 trillion in public and private infrastructure improvement projects. This proposed plan also does not yet have a funding source.
In 2015, Congress authorized $305 billion over five years for infrastructure projects, still far below the $478 billion then President Barack Obama had proposed. Democrats, which plan to propose a bill with more significant infrastructure funding within the first six months of 2019, have previously proposed raising $500 billion in funding for infrastructure by issuing 30-year bonds and using revenue from indexing fuel taxes to rise with inflation.
Improving infrastructure is vital to U.S. economic growth, according to economists who argue that funding for infrastructure has a “multiplier effect.” A University of Maryland study found that every $1 spent on infrastructure added $3 to GDP, and global consulting firm McKinsey & Company estimates that increasing U.S. infrastructure spending by 1 percent of GDP would generate 1.5 million new jobs.
The proposed federal contribution, which amounts to about $20 billion in direct funding annually, seems a paltry sum, considering that the American Society of Civil Engineers’ (ASCE) 2017 report on the state of U.S. infrastructure estimates $4.6 trillion is required to fix the nation’s roads, dams, airports and water and electrical systems. That’s even before tackling the expanding infrastructure needs of growing cities and adding technological innovations to improve efficient, safe, earth-friendly movement of people and products.
A follow-up ACSE study on Failure to Act, estimates that the U.S economy will lose $4 trillion in GDP and 2.5 million jobs if the infrastructure investment gap is not closed by 2025.
The Trump proposal provides $100 billion for projects by state and local governments or private investors that demonstrate innovative funding strategies; $50 billion in block grants for rural infrastructure projects; $20 billion for ambitious, exploratory or groundbreaking projects focusing on transportation, drinking water, energy, commercial space and broadband sectors; $20 billion for expanding existing financing programs such as TIFIA, RRIF, WIFIA and USDA Rural Utilities Service; and $10 billion that would be set aside to establish a revolving fund to finance purchases, construction or renovation of federally-owned property.
The proposal also directs revenue generated from public lands to pay for the maintenance needs of public lands infrastructure and expands eligibility for superfund and brownfield projects. While Trump’s proposal falls short of ACSE’s funding recommendation, it does provide a starting point for discussing infrastructure needs and how to fund them and proposes policy changes to provide state and local governments some flexibility to raise revenue to reinvest in infrastructure projects.
In a Q&A with NREI, Andrew Garbutt, who leads KPMG's U.S. infrastructure advisory team, which specializes in project finance and public-private projects, discusses the new infrastructure game plan. Trump’s proposal, and presumably the ultimate plan Congress passes, would fund incentives for capitalizing infrastructure projects, as Rep. Peter DeFazio, who heads of the House committee on transportation, is calling for “mass privatization” of infrastructure. This proposed funding model, which places the majority of the funding burden on states, local governments and private investors, would significantly alter or reverse long-standing infrastructure policy of direct funding of infrastructure by the U.S. government.
NREI: America’s infrastructure is deteriorating. What types of infrastructure projects should be a priority for any federal infrastructure funding plan?
Andrew Garbutt: The number one priority should be projects where there are key safety issues. Secondly, the focus should be on getting infrastructure into a state of good repair and thirdly, building new infrastructure where demand exists.
Infrastructure needs differ depending on the location. For example, older cities may need repairs or enhancements to existing infrastructure, like replacement of transit rail, leaky water mains or additional lanes on streets and highways to relieve traffic congestion. On the other hand, rapidly growing cities need more infrastructure assets to cope with increasing demand.
NREI: What types of infrastructure opportunities does Trump’s infrastructure proposal provide investors?
Andrew Garbutt: There’s no shortage of capital that could be deployed into large infrastructure projects across sectors, particularly transportation, where we have seen the most activity. When projects are unlikely to generate enough revenue to cover the cost and a fair return for the investor’s risk, as well as pay for personnel and maintenance, the government entity could provide “availability payments,” periodic payments over a set period of time as long as the investor/operator meets defined performance standards. These public-private projects, which may include roads, transit and accommodation projects, are seen as lower risk because revenue isn’t subject to demand risk from users, like it is if you are a toll road investor.
The U.S. could also look to Australia’s asset recycling model as an additional tool in its infrastructure investment toolkit. This scheme involves leasing existing government assets to private companies to fund new infrastructure projects. Australia’s New South Wales, which initially launched this model, established a separate agency to manage recycling of government assets. It matches government assets with private sector investor interests, handles lease negotiations and identifies and prioritizes the delivery of critical public infrastructure. This agency, for example, leased two ports, a desalination plant and an electricity distribution network for close to $15 billion. Other local governments have now adopted this model, which has provided quick cash to make necessary infrastructure investments, including improvements to the Sydney Metro.
Trump’s plan would allow the sale or lease of federally-owned assets and authorize the Veteran’s Administration (VA) to lease vacant assets for private commercial or mixed-use projects to invest proceeds in facility renovations, and it speeds up the VA’s ability to handle facility improvements.
NREI: Does Trump’s proposed infrastructure plan offer funding for commercial real estate projects?
Andrew Garbutt: The plan envisages streamlining and improving the federal real property disposal process which, if adopted, would allow agencies to more quickly move property to market. The additional funding would come from the ability to retain proceeds for reinvestment in new agency real property.
NREI: Would the federal infrastructure proposal provide funding for “smart city” infrastructure?
Andrew Garbutt: Smart city infrastructure is generally funded at the local level, and the Trump plan doesn’t contain any specific smart city proposals. However, the plan does propose funding a Transformative Projects Program that could ultimately, of course, benefit city technology projects.
NREI: Is there anything we haven’t covered you’d like to mention?
Andrew Garbutt: With the continued log jam around federal funding for infrastructure, forward-thinking states and cities have begun to realize the most efficient way to get needed infrastructure is to fund it themselves, often by dedicated sales tax increases, e.g. in Los Angeles and Virginia. I think we’re going to see more of that in the future. (During the 2018 midterm election cycle, U.S. voters passed 17 of 20 public transportation ballot measures, which included sales tax increases for mass transit projects.)