Tuesday, May 30, 2017

Infrastructure Illusions

By Roy C. Smith

Last week in Saudi Arabia, Mr. Trump announced a series of deals to generate new jobs and growth in the US. One of these was a $20 billion (nonbinding) commitment by the Saudi sovereign wealth fund to a $40 billion private equity infrastructure fund to be managed by Blackstone, whose CEO, Steve Schwartzman, is one of Mr. Trump’s business advisors. Blackstone says it aims to invest up to $100 billion in new infrastructure projects, mainly in the US. Its inspiration for all this, it said, is Mr. Trump’s announced plans to fund $1 trillion of infrastructure projects through “public-private partnerships” (PPP, or P3). Mr. Trump earlier proposed funding these investments through $137 billion of tax credits for private investors committing to such projects.

Blackstone is not the only private equity manager striving to raise infrastructure funds. Over the last 10 years, $230 billion of these funds have already been raised, with nearly $100 billion still uninvested; still many of Blackstone’s competitors have new such funds in the works. Investors, especially pension funds, are eager to sign on, so why not raise the money if you can – the fees are very good.

But there are problems with all this.

First, the vast majority of US infrastructure projects are funded directly by the federal or state governments - most for maintenance and upkeep. But both Congress and state legislatures are reluctant to pay for them if doing so requires raising taxes or user tolls. The federal gasoline tax was last raised in 1993, and the Highway Trust Fund only survives on piecemeal allocations of small amounts on an as needed basis. And, you can drive the entire 122 miles of the NJ Turnpike for less than the cost of the 1.5 mile Lincoln Tunnel. This is no way to maintain existing infrastructure or to plan and develop major projects that take years to complete. Nor will PPPs accept such underfunding of tolls and rates in projects they are investing in.

Second, unlike Europe, there is little appetite in the US for privatizing public infrastructure as legislatures distrust Wall Street private equity firms’ intentions to maximize profits for wealthy investors out of assets intended for the public benefit. Congress, too, is reluctant to provide large amounts of tax credits to the same crowd that brought on the 2008 financial crisis.

Third, there are not that many projects waiting to be financed from PPP resources.
InfraPPP, an infrastructure information company, has a database of 156 such projects, but these cover the whole world, range across many different types of infrastructure in various states of development, including many in the planning stage. In the last year or so, 14 projects with an estimated cost of $14 billion were “awarded” in the US, and 20 more (for $10 billion) were in the “tendering” stage.  The supply of PPP projects so far is way less than the demand for them, which, of course, means that investors will have to lower expected returns to compete for the business.

And fourth, there are a lot of public infrastructure projects already underway, and these utilize much of the skilled labor force available for new projects. Indeed, much of todays frequent traffic delays on the north-south roadways on the East coast are caused by road and bridge repairs begun in 2010 and funded by the $747 billion economic stimulus package passed in the Obama years. So, if the supply of good PPP projects should increase rapidly, that does not mean that the means to construct them will increase at the same rate.  That will make the projects inflationary.

Even so, infrastructure is “hot” now and drawing lots of moths to the flame. Both Republicans and Democrats are for it because of the expected job creation and economic stimulus associated with it.  There are at least two major projects waiting for action – The NextGen digital air control system (many billions over 10 years), that has only had preliminary funding so far, and the badly needed new rail tunnel under the Hudson River to be paid for by the NY/NJ Port Authority. Neither have funding commitments for the full cost of the projects.

If Mr. Trump’s new budget proposals are any guide, the commitment to infrastructure is quietly beginning to sag. Tax credits for PPP projects are out, and have been replaced by a 10-year $200 billion commitment to direct funding of new projects (hardly a trillion), And, the budget has cut commitments to existing infrastructure projects at the Dept. of Transportation and the Army Corps of Engineers by more than 12%, and imposed cut-backs of $145 billion of commitments to Amtrak, the Highway Trust Fund and other agencies.

Could it be that all the emphasis on public infrastructure spending is just a political show, an illusion? Maybe the Saudi sovereign wealth fund, knew something we didn’t, and consequently only agreed to a “nonbinding” commitment.


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