The $1 trillion in infrastructure spending that drove the so-called "Trump trade" in equity markets after the U.S. election will likely dwindle to just a fraction of that total in public money, but investors and infrastructure financiers say private funding will make up the difference if the government provides incentives and tweaks regulations.
With the White House expected to release its proposed budget May 23, comments Transportation Secretary Elaine Chao made last week suggest the plan will call for $200 billion in taxpayer funds to spur investment. The public spending would stimulate at least $800 billion from state and local governments and the private sector, according to a Bloomberg report quoting an official in the Office of Management and Budget. The administration's budget is only a proposal and Congress is likely to enact a spending plan vastly different from what the White House envisions.
Asset recycling would allow private companies to pay to operate publicly owned entities like toll roads or airports, according to budget planners. States and localities could then invest the newly-unlocked capital in other infrastructure projects. Experts also say reducing regulations that make it difficult to get public-private partnerships off the ground could address the shortage of projects available for private sector investment.
Congressional Democrats have indicated they could work with Trump on infrastructure spending. New Jersey Democratic Rep. Frank Pallone on May 17 introduced an infrastructure package that would allocate $40 billion for expanded broadband access and more than $17 billion for energy infrastructure, ranging from grid improvements to methane pipeline replacement.
'The Market is Hungry'
The nation's infrastructure needs are well-known, but an imbalance between those needs and the funding and local will necessary to actually carry out the projects. As a result, companies are pursuing smaller projects they would have passed on under different circumstances.
"The market is hungry," said Geoff Segal, who manages government advisory and affairs for Macquarie Capital (USA) Inc., explaining that projects "that would have been considered too small to chase" several years ago are attractive and competitive now.
"Where a project makes economic sense, again with almost perfect certainty, the market will react, will show up. You’ll have lots of participants. You’ll have a very competitive process, and one that should generate a good result, whether it’s in downtown D.C. or New York City or if it’s in Cheyenne, Wyoming," he added.
Where a project makes economic sense, the market will react.
Raj Agrawal, global co-head of KKR & Co. LP's infrastructure business, said the share of real assets invested in infrastructure, energy and real estate went from essentially zero in 2000 to nearly 10% of all private capital invested across real assets in 2016.
That private-sector interest, though, has not been accompanied by a boost in federal expenditures. Public infrastructure spending as a share of U.S. GDP hasn't managed to crack 1% in recent years. According to the Brookings Institution, a nonpartisan think tank in Washington, non-defense investment spending was 0.06 percent of GDP in 2013.
The American Society of Civil Engineers estimates that improving America's infrastructure, which received a lackluster D+ grade from the same group in 2017, would cost $4.59 trillion over 10 years.
Reducing regulation is also key to getting new infrastructure projects started, and federal help in that arena is just as crucial, Agrawal said.
Getting a public-private partnership, referred to as a PPP or P3, approved for an infrastructure project can require a mayor or city council member to "stick his or her neck out" and forces localities to retain counsel to figure out its structure, Agrawal said. Those factors, coupled with the amount of time needed to convince constituents to come around to the idea, means projects can take years to pursue.
"Just as important as capital – if not more important than capital – is the soft stuff," he explained. "And by soft stuff I really mean two things. Number one: reduction of regulations and barriers to bringing projects to bear and number two is some assistance to the state and local level to help bring projects to bear."
Agrawal said he met with Secretary Chao in March to discuss the administration’s vision for infrastructure and ways to reduce the burden put on local officials to get projects approved.
Creating a group or commission on a federal level that can sign off on public-private partnerships would help mitigate risk for local officials who try to pursue them, Agrawal said, adding that this approach could help make P3s the norm for these kinds of projects. It isn’t clear if the administration’s infrastructure plan will establish such a body.
Also unclear is how the Trump administration will choose to allocate money – or even the amounts that will be allocated.
"My expectation, and I think everyone’s expectation, is that that [$200 billion] has been parceled out in a number of ways," Segal noted. "Meaning … maybe a piece goes to transit, maybe a piece goes to block grants to the states, maybe a chunk of it could be used for sort of an incentives package where you’re encouraging particular behaviors from state and local governments," like entering into a private-public partnership.
Addressing the Urban-Rural Divide
President Trump’s infrastructure commitments extend from urban areas – some with airports he has compared to those in the world’s poorest countries – to rural areas, like those where some of his most enthusiastic supporters live.
"I think there are opportunities for rural communities through public-private partnerships, through some concession opportunities," Segal said. "You may have to bundle or create more of a regional approach in some cases, but I think the market would react and respond positively."
He added that Congress and the Trump administration are aware that they cannot create a program that more heavily favors urban areas over rural ones "even just on paper" and he said he wouldn't be surprised if there was a specific amount of money allocated for rural projects.
For KKR, public-private partnerships have been lucrative, as well as beneficial for the rural areas they serve, according to Agrawal. He said KKR paid up front to run a water system for the next several decades in Middletown, Pa., which then enabled the city to reinvest in other parts of its infrastructure.
Segal said the overall infrastructure package could include an incentive to recycle capital so that it can be reinvested into infrastructure, similar to a model that has succeeded in Australia.
While "not every project is suitable for a P3," the White House and Congress understand that and will design a package with that in mind, Segal said.