- The recently announced Bipartisan Infrastructure Framework is making its way through debate in the Senate and seeks to spend nearly a trillion dollars rebuilding aging American infrastructure.
- The most significant spending is allocated for roads, highways, and bridges. We expect this to advance significant progress in addressing climate-resilience needs, although more investment will be needed.
- There's a renewed focus on community safety and reversing historical injustices and the underfunding of transit systems and other critical infrastructure in poor communities.
- Universal access to high-speed internet will help enable better access to economic and educational opportunities for poor urban and rural areas alike.
- Alongside this bill, there's a reconciliation that focuses more heavily on social infrastructure and climate change.
The recently announced Bipartisan Infrastructure Framework (the framework) may still be in the middle of debate and facing uncertainty in the U.S. House of Representatives, but that hasn't chilled the enthusiasm for a long-awaited solution to one of America's most pressing and overdue problems: aging infrastructure, which is ill suited to realities of climate change and promises to limit economic growth in the future if not addressed. We've seen ambitious infrastructure packages fail for a variety of reasons in recent decades, few have been the result of this degree of bipartisan negotiation and collaboration, itself something of an anachronism in American politics. While most Americans can probably agree that our infrastructure needs upgrading, many of the most significant and pernicious consequences go unnoticed, and have affected the most vulnerable and disadvantaged communities most severely.
Previous efforts to rebuild America's infrastructure may have been undermined by a conundrum common to sustainability and capital investments--how to weigh short-term sacrifices against the need for long-term viability. In particular, long-term, climate-resilient infrastructure may not always be more appealing, if viewed strictly through the lens of a financial stakeholder. Afterall, for many of the projects proposed, development and construction costs are very substantial, incurred in the near term, and can be reliably estimated, while the avoided costs afforded by resilient infrastructure are less quantifiable and less certain, and likely to be realized only over a period of decades. This has resulted in substantial underinvestment in U.S. infrastructure and a 2021 grade of 'C-' from the American Society of Civil Engineers.
However, on closer examination, this framework seems to portend a new focus on stakeholder capitalism, with the timeframe now capturing the long-term implications to a greater a degree, and a broad suite of stakeholders, including communities, customers, and workers being considered in a way they haven't in the past. Because of this, the bill allocates the bulk of its considerable funding to historically underserved communities from rural to urban.
The framework, as drafted, may not have the explicit focus on the energy transition envisioned in the $2 trillion American Jobs Plan, and, for the moment, eschews the broader definition of infrastructure advanced by the Biden Administration, including more social sectors, such as health care and education. Still, the provisions of the bill are likely to have significant social consequences by targeting spending intended to address historical, structural inequities that have persisted, in some cases, since before our existing infrastructure was built, often times dating back 50-60 years. And while it's difficult to measure or quantify social risk, a framework of this size, currently estimated at around a trillion dollars over eight years, would undoubtedly curtail some social externalities that have weighed on human and social capital for decades. Additionally, some economic sectors stand poised to benefit from this more inclusive approach to infrastructure building.
To listen to the related S&P Global Ratings podcast "Beyond The Buzz: A Bipartisan Infrastructure Framework Emerges To Address Disparities," released Aug, 3, 2021, click here.
What's In, What Out
In its current form, the trimmed down bipartisan package excludes significant investments in renewable energy. Most provisions addressing the energy transition have been removed from the framework and placed into a parallel, more partisan budget reconciliation that also includes elements of social infrastructure, with a much steeper $3.5 trillion price tag. That effort focuses heavily on ESG-related investments in the economy, but itself faces substantial headwinds.
The most significant spending in this framework is allocated for roads, highways, and bridges. There's also a large chunk of spending for passenger and freight rail, along with public transit. The framework also plans to invest a lot in expanding broadband access across the country to achieve President Biden's goal of connecting every American to reliable high-speed internet. And the next significant spending allocations will go to improving communities' water infrastructure along with increasing resilience to wildfires and floods (see chart 1).
However, this isn't to say that efforts to address climate change are absent from the framework. While the debate around the causes of multigenerational drought, worsening hurricane seasons, and rising sea levels may linger in the American political ranks in spite of an ever-growing body of scientific evidence, there are few in the policymaking ranks who don't understand the significant potential economic and social disruptions associated with these events. The bill includes substantial allocations to fortify critical infrastructure against the reality of climate change. For instance, the bill allocates about $73 billion to hardening power infrastructure, which is currently poorly equipped to contend with both the physical impacts of climate change and the looming energy transition, which is bringing online new generating resources.
The bill itself may be touted as addressing the myriad safety, inclusion, and reliability issues that plague the current infrastructure of the U.S., but there's another underlying theme that runs through each of these provisions: affordability. While improved infrastructure benefits everyone, it has long been denied to the most vulnerable Americans, in part because the economics have been challenging: How does a public or private entity overhaul expensive, long-lived projects (that may still have stranded costs) without considerable shock to customer bills? These entities have had to balance progress and sustainability with affordability, but by funding such a large component of the capital cost, this bill should help balance the scales somewhat and ensure that customer relationships aren't jeopardized by rising prices.
One of the main pillars of social risk under our methodology is health, and this includes both occupational and public safety. In recent years, the decay of American infrastructure has jeopardized public health. In no way is this more true than the high profile failings of water systems in places like Flint, Mich. and Newark, N.J. And while these are the most high-profile examples, thousands of water systems around the country have been long underfunded and may expose vast communities to severe health issues. The framework targets $55 billion to improving water systems, with a goal of removing all of the country's lead piping, which is still in use in approximately 400,000 schools and ten million homes nationally and is proven to result in serious health issues. Furthermore, lead piping is more likely found in homes built before 1986, which disproportionately serve communities with the lowest incomes, typically served by providers with limited financial or legal ability to remediate through rate increases given the significant upfront investment required.
Furthermore, the bill seeks to address environmental injustice of abandoned assets and legacy pollution that disproportionately affects low-income neighborhoods and communities of color. The U.S. landscape remains littered with abandoned mines and industrial sites that have long outlived their economic usefulness, but are often located near residential neighborhoods and rural communities. This colocation has had health and economic development consequences for these communities that may not have been fully understood at the time these sites were developed, but would likely continue if not abated. In this framework, $21 billion is allocated to cleaning up these blighted sites and aiding the 26% of Black Americans and 29% of Hispanic Americans that live within three miles of a Superfund site, which correlates to elevated lead levels and the attendant health issues.
Additionally, while this isn't a bill specifically geared toward addressing the energy transition (despite a modest investment in electric vehicle infrastructure and other lower-carbon transit), it takes strides to address adaptation issues and the intensifying physical impacts of climate change. Specifically, the bill allocates more than $50 billion to resilience to contend with growing numbers of droughts, wildfires, and floods, among other climate hazards (see "Winter Storm In Texas Will Continue To Be Felt In Utilities' Credit Profiles," published March 15, 2021). Americans continue to witness more frequent and severe repercussions from extreme weather events, underpinned by climate change (see chart 2). Earlier this year, Texas experienced an unprecedented winter storm that overwhelmed an electrical grid that wasn't built to accommodate such an event, resulting in at least 151 deaths.
In this respect too, minority communities and vulnerable aged populations are more exposed to the impacts of climate risks and the aging infrastructure not designed to accommodate these exposures. For instance, Latinx residents represent about 37% of the population in zones most at risk for wildfire, against only 18% of the broader U.S. population, a particularly concerning statistic with the most aggressive wildfire season in a century potentially looming. The framework includes provisions designed to assist American communities prepare better for climate-related disasters including an incremental $73 billion dedicated to rebuilding the electric grid, which is in decline due to its age and ill-equipped to accommodate the transition to cleaner energy already underway.
Besides improving community health and safety, this funding helps the utility sector mitigate some of the event risk it inherently faces. Utilities, generally, are local in nature. Even if utilities only inherited deficient piping via acquisition, or are in areas predisposed to wildfire or other environmental catastrophes, they're likely to have trouble avoiding the reputational and financial consequences when event risk materializes, regardless of their own efforts to mitigate the fallout after the fact. Such events can quickly erode social capital of even the most proactive entities.
Similarly, while roads and bridges physically degrade over time, the event risk is acute. When a public safety incident occurs, it can be catastrophic and cast a pall over a transportation infrastructure provider's interactions with its stakeholders for the indefinite future, undermining its social license to operate. Questions may arise as to whether the entity was adequately funding the project to ensure the long-term health and safety of all stakeholders, or whether it eschewed maintenance in favor of greater, short-term profits. This highlights one of the key themes related to social risk: Even events that occur outside an entity's span of direct control can irreversibly harm its reputation and finances.
Access To Opportunities
To users of public transit who endure longer-than-necessary commutes, it's probably not surprising to hear that American transportation infrastructure is in need of an overhaul (see "What Is The Next Stop For U.S. Mass Transit In A Post-COVID Era, published June 2, 2021). But the social impacts of ineffective or inadequately funded public transit are much more deleterious than that. Public transit still recovering from ridership declines associated with the COVID-19 pandemic are far-reaching and can also limit access to educational and employment opportunities, and frequently low-income Americans and people of color rely more heavily on these dated public transit systems. Asian American and African American workers, for example, commute by public transit with a substantially higher frequency than white workers. In some urban areas, lower-income individuals and families have increasingly been priced out of denser neighborhoods, relocating to less dense and more affordable suburban communities--a phenomenon referred to as the suburbanization of poverty--with fewer public transit options.
Additionally, the framework seeks to remediate some of the historical injustices created and perpetrated by previous infrastructure buildout. While the development of the interstate highway system in the post-war era may have stimulated economic growth at large by connecting the country, it often did so at the expense of urban communities, which in some cases were split in half or walled off from other adjoining neighborhoods by highways that were growing in width and complexity. A renewed focus on rebuilding and modernizing public transit, by targeting $39 billion (plus more allocation for related expenditures), will likely have a disproportionately positive impact on low-income communities (see chart 3). The spending on public transit systems also seems focused on upgrading existing vehicles to reduce harmful air pollution and improve energy efficiency to emit less carbon.
An influx of $66 billion of sorely needed capital will go a long way toward making rail systems more appealing for their customers and address the maintenance issues that have dogged these systems in the past.
Additionally, the framework also seeks to develop the system utilized by the National Railroad Passenger Corp. (AMTRAK) outside its current footprint. The Northeastern and Mid-Atlantic U.S. have upgrade needs, and much of the new development is intended to address underserved high-density corridors. More broadly, this infusion would also expand the customer base for these rail transit operators through improved transit times and greater reliability. The present transportation system is one that has frequently reinforced some of the challenges that diversity, equity, and inclusion programs seek to address, and a law that improves access to transit could be an effective first step in expanding access to employment. And, a vigorous investment in upgraded transportation infrastructure would rebuild trust within the communities transportation providers serve.
A rare area of general consensus is the need for the country to remain connected, and, the importance of ubiquitous, reliable broadband access to that effort. The raw economics of this network buildout are such that many Americans live in areas where it is financially impractical to develop broadband. To date, about 35% of rural Americans don't have broadband access, and this number is even more pronounced among low-income Americans (see charts 4 and 5). This has become a more glaring economic and educational disadvantage over the past 18 months, as broad swaths of the American population have been working and learning from home. And, even after the COVID-19 pandemic ends, this trend may continue because of how effectively the remote-working experiment took hold in certain sectors. The framework allocates $65 billion to this purpose, and this sum doesn't seem likely to strictly bolster the finances of the telecom and construction industries, but may have indirect and unanticipated, positive social consequences for other sectors, such as financial services or education, which can improve their human capital standing by permitting greater locational flexibility to key stakeholders. With job searches largely happening on line, and much of the service economy remaining at least partially remote even after the pandemic, this would seem to provide access to opportunities for communities that benefit from this funding.
Finally, while universal access to high-speed internet may help level the figurative playing field, one of the negative consequences of more remote work and the proliferation of e-commerce stemming from the pandemic has been heightened exposure to cybercrime (see "Cyber Risk In A New Era: The Increasing Credit Relevance Of Cybersecurity," published July 14, 2021). Just in the early part of 2021, numerous large corporations were subject to data breaches that comprised sensitive customer information. This can create significant financial liability for companies, including online retailers, technology companies, and utilities, that store vast amounts of customer information. Moreover, it more generally undermines confidence in e-commerce, which is only going to increase as a proportion of the economy. Most recently, JBS Foods, the world's largest meatpacker, paid $11 million ransom to cybercriminals to prevent further disruption to U.S. processing plants. The largest fuel pipeline in the U.S. fell victim to a cyberattack when Colonial Pipeline Co. was hacked, combining with customer behavior to lead to gas shortages up and down the East Coast. Hacking and cybercrime continues at an alarming rate, with payments to hackers rising by an estimated 300% in 2020 as the world became more reliant on telecommunications for work, education, and recreation.
At S&P Global Ratings, we believe even with approximately a trillion dollars already proposed as part of the framework, there will still be future investment required to ensure the U.S. infrastructure is truly reliable and sustainable for future generations. This includes hastening the energy transition to help the U.S. meet ambitious renewed Paris Agreement goals and establishing leadership in clean energy. While this round of funding for physical infrastructure may be covered (in theory) without incremental debt, the cost of building out adequate social and energy infrastructure to ensure sustainability longer term is much greater and is going to require a variety of financing solutions, many of which could take place through a growing number of state-level infrastructure banks and financing programs (see chart 6).
Sustainable Development Goals Furthered By The Bipartisan Infrastructure Framework
As mentioned in our previous research, achievement of the U.N.'s Sustainable Development Goals, ranging from climate change to poverty alleviation, is going to require partnership between the public and private sector (see chart 7). In the U.S., this alliance may have a mixed record historically, but the Bipartisan Infrastructure Framework seems to create further opportunities for collaboration between these two essential participants. Most importantly, as infrastructure needs continue to arise, utilizing a broad, inclusive stakeholder approach may contribute to avoiding perpetuation of some of the legacy equity issues this proposal seeks to address. And over time, we believe that additional nonfinancial disclosure, which has drawn the interest of both the SEC and the investment community of late, will help ensure that broad stakeholder interests are being met as the country invests in the infrastructure of the future.
- The Leaders Climate Change Summit: A Decisive Decade to Cut Emissions, May 4, 2021
- Sustainability-linked bonds in 'rapid growth' as more firms tap ESG debt market, June 23, 2021
- Environmental, Social, And Governance: How Sustainability-Linked Debt Has Become A New Asset Class, April 28, 2021
- Sustainable Debt Markets Surge as Social And Transition Financing Take Root, Jan. 27, 2021
- Environmental, Social, And Governance: Stakeholder Capitalism: Aligning Value Creation With Protection Of Values, Jan. 19 20, 2020
- Water Conflicts are Heightening Geopolitical and Social Tensions Globally, July 7, 2020
- Damage Limitation: Using Enhanced Physical Climate Risk Analytics In The U.S. CMBS Sector, Feb. 19, 2021
- Scenario Analysis Shines A Light On Climate Exposure: Focus On Major Airports, Nov. 5, 2020
- Better Data Can Highlight Climate Exposure: Focus On U.S. Public Finance, Aug. 24, 2020
This report does not constitute a rating action.
|Primary Credit Analysts:||Michael T Ferguson, CFA, CPA, New York + 1 (212) 438 7670;|
|Erin Boeke Burke, New York + 1 (212) 438 1515;|
|Ashley Yen, Washington D.C. + 1 (202) 280-8696;|
|Secondary Contacts:||Trevor J D'Olier-Lees, New York + 1 (212) 438 7985;|
|Kurt E Forsgren, Boston + 1 (617) 530 8308;|
|Paul Munday, London + 44 (20) 71760511;|
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