Getting Serious About Private Investment in Infrastructure
Back on 9th November, after his victory in the American Presidential election, Donald Trump declared, “We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals. We're going to rebuild our infrastructure, which will become, by the way, second to none.”
His eye-catching, pledge for the nation to spend one trillion dollars on infrastructure projects over ten years has raised an important issue: How will all this be financed? Trump has proposed ideas such as public-private partnerships and a “deficit-neutral system of infrastructure tax credits” to encourage private investment in infrastructure. House Democratic leader Nancy Pelosi has signaled her support for major infrastructure investment, but she has also noted that, “on Capitol Hill, the divide is always over how to pay for it.”
Observers of the global economy have often commented that investment in infrastructure —from airports in the U.S. to power plants in Nigeria — could help boost sluggish growth throughout the world and address challenges in both advanced and emerging economies by raising productivity, prospective returns on a variety of capital investments, and expectations about the future. And there can be political dividends as well. Populism and extremism thrive when people are generally testy, feeding global instability. But while the estimated requirement for global infrastructure investment to sustain “acceptable” growth is about $4 trillion annually (pretty much a guesstimate), less than $3 trillion is actually taking place.
New ideas to transform this gap from a challenge into an opportunity to create value for the global economy, and society more generally, are the focus of a new study by key members of the faculty at NYU’s Stern School of Business, just published.
The premise is that dissolving “clogs” in the global financial plumbing will be required to turbocharge infrastructure investment. The focus is to better harness large pools of institutional capital such as pension funds and insurance reserves (whose managers owe duty of care and loyalty to their beneficiaries in creating investment portfolios) to sponsors of infrastructure projects (who need to optimize their capital structures) through better global financial allocation.
A key issue In the US is that the main source of infrastructure finance (state and localities and special districts created by them) are budget-constrained (in particular by public employee pension obligations) and have limited borrowing capacity, while the Federal role has historically been fairly muted. With the exception of the Eisenhower interstate highway system in the 1950s there have been few big infrastructure ideas since the end of World War II.
Trump wants to greatly expand the Federal role predominantly as a catalyst, harnessing both private capital and market discipline as to what gets done, when, how and where. The subtext is getting significant infrastructure finance off the public balance sheet and avoiding the waste of capital associated with politics overriding economics in infrastructure development. The two ultimately need to strike a sustainable balance, which the Trump plan wants to move in the direction of economics.
Where is that capital going to come from, and who is going to bear the risk? Trump may be exaggerating the appetite of investors in very long-term infrastructure debt and the inevitable political exposure (e.g., limits on fees that infrastructure projects can charge and difficulties in avoiding “free-riders”) without some form of Federal guarantees.
Serious financial innovation can dissolve some of the clogs in the financial plumbing and move infrastructure finance to a different level, harvesting real gains for the public interest - alongside gains for debt and equity investors. So far Trump's remain are “huge” but fuzzy. Still, if the political and financial momentum is there, that’s half the battle.
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