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House Views: S&P Global Ratings Analysts Discuss The Biden Administration’s Infrastructure Plan

President Biden has prioritized investment in America's infrastructure since his administration's early days. The agenda has faced many hurdles with pressure from both sides of the political spectrum contributing to intense debates over the bill's final status. After a prolonged period of negotiation, a bipartisan infrastructure bill with $545 billion of new spending was approved in the Senate on Aug. 10, 2021, and awaits approval in the House of Representatives. The $545 billion bill represents a significant decrease from the $2.62 trillion original proposal. Putting aside the slow implementation of the bill, the plan represents a seismic shift in America's infrastructure policy. A "Build Back Better" plan that includes social and climate change spending is in the legislative pipeline as well and it's considered the definitive next step in completing the Biden Administration's infrastructure agenda. The final spending amount for this plan is still very much up for debate but current estimates range between $1.5 trillion and $2 trillion, down from $3.5 trillion in the original draft bill.

With such a dynamic policy debate comes a greater focus on the separate issues the bill addresses. From traditional topics such as power and transportation to more modern concepts like electric vehicles and climate resiliency, both the original and bipartisan plans tackle key areas of concern. Chart 1 highlights the net difference between the two new spending figures, around $545 billion in the bipartisan bill and roughly $2.62 trillion in the original proposal.

This panel discussion was moderated by Trevor D'Olier Lees, S&P Global Ratings' P-3 & Renewables Sector Lead, who was joined by a group of distinguished colleagues from across S&P Global Ratings. A replay can be found here.

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The Power Of Transportation

With the temporary reauthorization of the Surface Transportation Act, there is a baseline for new transportation spending in the bipartisan bill. The bill dedicates slightly more than half of its total, $284 billion, to transportation in the forms of roads, ports, waterways, airports, and transit (specifically Amtrak). Transportation sector lead, Kurt Forsgren, noted that "it's a lot to spend in five years," but highlighted just how much of a necessary investment this is in an infrastructure system severely below standard.

Regarding the potential credit implications, the S&P Global Ratings house view saw it as "credit-neutral" with Forsgren highlighting the potential for issuers to either need less debt or issue more debt, which would improve and depress their credit metrics, respectively.

Under the previous Trump Administration, there was an effort to accelerate permitting for large infrastructure projects and they're now being passed into law with this bill. The transportation spending will also prioritize investment in local and regional governments. Forsgren credited these U.S. public finance issuers with being "responsible for building and maintaining most of the infrastructure in this country" and recognized the bill's effort to give these communities a well-deserved advantage. Another beneficiary of the spending will be Amtrak with much needed system upgrades, including in their only profitable Northeast region.

Forsgren concluded with the point that these local communities, along with airports and ports, now "have access to different, new expanded grant programs and actually direct funding for various things like implementing new bridge systems and subsidizing low-income transit users." In a larger sense, the bipartisan bill benefits America's transportation network as a whole.

Connecting The Country: The Future Of Broadband

"This is a big deal for the telecom and cable industry" said Chris Mooney, Director for the U.S. Telecom & Cable sector. The $65 billion figure dedicated to broadband is unprecedented and stands to benefit cable operators in particular. With around $42 billion attributed to rural broadband availability, there are previously untapped markets going from no high-speed internet to at least 100 megabits per second (mbps) of internet speed. Low population density and environmental obstacles previously deterred cable operators, but government subsidies go a long way to reversing that trend. The remaining $14 billion will target consumer subsidies that address internet affordability with Mooney noting that other methods such as regulation and subsidized competition "would have potentially put more pressure on their competitive positioning and their ability to raise prices down the road as increased demand for higher-speed tiers continues to persist."

Mooney did pick out satellite as one of the so-called losers of this bill because of its long-standing status as the main television provider in these rural markets. As high-speed internet becomes more available, satellite will become an increasingly outdated option. Additionally, phone companies serving less than 25 mgbs internet speed will be left behind.

Power Infrastructure Reform Is More Important Now Than Ever

Obie Ugboaja, Lead Analyst for North American Regulated Utilities, started with a discussion of the physical risk facing power entities that the plan grants up to $5 billion to address. Provisions of the plan support "grid-hardening activities" among utilities, reducing the risk that these utilities can either cause disruptive events such as wildfire or be on the receiving end of extreme weather or natural disasters.

Cyber risk was another area of concern that Ugboaja addressed as the bill calls on agencies such as the National Association of Regulatory Utility Commissioners (NARUC) to "identify performance-based rate-making treatments that could encourage utility investments in advanced cybersecurity technologies."

Investments in smart grid come out to around $3 billion of matching grants that assist grid-flexibility initiatives. The goal of these grants is to "promote more flow and exchange of data between the distribution communication systems to increase the transfer capacity of the transmission network," which would allow for greater capacity for renewable energy initiatives. Related to energy transition initiatives are two key provisions: $2.5 billion in grants to support the development of large-scale carbon sequestration projects as well as carbon transport infrastructure, and $8 billion on regional clean hydrogen hubs that will promote a larger national network to facilitate clean hydrogen.

Addressing credit implications again, more robust grid resilience standards and greater investment in carbon capture and hydrogen are positive for credit quality. Ugboaja also cautions that the "bigger picture" needs to be looked at and points out that the Biden administration's carbon-free and net-zero goals will require "elevated capital spending," which would be a key area to monitor.

Environmental, Social, And Governance (ESG) Factors Take Center Stage

Sustainable finance team manager, Michael Ferguson tackled the ESG characteristics of the bill and identified stakeholder capitalism as a big area of focus for his team. Existing infrastructure didn't have stakeholder capitalism featured in their original planning, which shows in the growing lack of infrastructure equity. The underserved communities that stakeholder capitalism would seek to target face a brighter future under this infrastructure agenda. Ferguson notes three pillars of the stakeholder capitalism framework: access to opportunities, personal and community safety, and climate change.

For access to opportunities, transportation infrastructure goes a long way to improving inequity. Aside from general dysfunction, low-income Americans, a considerably more frequent user of public transportation than their wealthier counterparts, "disproportionately" experience the effects of current infrastructure challenges. With improvements to Amtrak and inner-city rail, the bipartisan plan gives these communities access to essential human needs "in an easier fashion and more affordable fashion as well." Also, broadband access has become important because of the growing telework and remote-learning environment and the communities that lack this access are in dire need of a way to not fall behind.

Regarding safety, transmission-line replacement is part of the puzzle, but the $55 billion investment in water pipe replacement deserves recognition. Outdated water infrastructure has led to recent disasters like Flint, Mich. and Newark, N.J. Higher water infrastructure standards will prevent another public health crisis.

Lastly, in terms of climate change, Ferguson emphasized that "this is not a climate change bill by any means." While climate change is still a much larger economic challenge that the imminent Build Back Better Plan will possibly make great strides in addressing, this bipartisan bill focuses on infrastructure resiliency. Current infrastructure models aren't built to withstand the growing physical threats of climate change and recent hurricanes and storms coupled with ongoing droughts and wildfires are a strong reminder of that.

Diving Into The Numbers: Macroeconomic Footprint Of The Bill

Chief U.S. Economist Beth Ann Bovino, took a big-picture approach devoting time to assessing the macroeconomic impacts of the bipartisan bill. The roughly $550 billion in new federal spending would generate a multiplier effect. The multiplier effect, a measure of the economic return or growth per dollar spent by the government, would in this case be 1.4. As a result, a $1 trillion infrastructure investment "would result in $1.4 trillion more in economic activity spent." In other terms, $545 billion would transform into $763 billion of economic activity.

Productivity, another important economic metric, was forecasted by the Congressional Budget Office (CBO) to drop to 1.7% over the next two decades, but this infrastructure agenda lifts that rate up 1.8%. With a persisting low-interest rate environment, large public investment projects are increasingly attractive.

Looking Ahead To A Larger Agenda

Shifting gears to a roundtable discussion on the impending Build Back Better Plan, panelists highlighted the new areas of "social" infrastructure such as child and health care that have previously been pushed to the side and the more aggressive energy transition policies. This social infrastructure investment has the potential to be "absolutely transformative." Ferguson notes that a lack of access to health and child care "has had disproportionately negative effects on lower income Americans." The new energy transition policies, namely the provision for clean-energy payments, can provide companies most likely to be subject to energy-transition requirements with incentives to get a head start on developing more ESG-friendly business models.

Regarding the regulated utilities space, there is a proposed Clean Electricity Performance Program, which includes $40 per megawatt-hour (MWh) fine payments for non-compliance, and these costs cannot be recouped from ratepayers. The lack of recovery here suggests this policy could have negative credit implications for affected electric utilities in the industry. A more neutral credit implication is the plan for $150 MWh incentive payments to utilities for meeting certain clean electric performance requirements. The neutral aspect, Ugboaja explained, is that "the dollars that they receive are restricted to use for the benefit of ratepayers in areas of bill assistance, energy efficiency, and clean electricity investments, or for things like worker retention. "While these are justified concerns, there is a general trend toward increasing renewables with an Energy Information Administration (EIA) expectation that 42% of renewable power generation will be achieved by 2050, up from 21% as of 2020.

Bovino provided additional macroeconomic analysis regarding the Build Back Better Plan. After mentioning current inflation conditions and the effect that they would have on input costs for potential projects, the plan's financing ramifications were assessed. The need to distinguish between a deficit-financed and deficit-neutral plan addresses the debt ceiling implications of the bill as the former would increase the debt ceiling while the latter would maintain current levels. Bovino relayed a CBO statement arguing that a deficit-financed plan would "mitigate the positive effects on the economy" and raise future interest rates.

A mention of the current labor market conditions closed out the panel discussion, with the hope that the infrastructure package would alleviate some of the location-based concerns of the labor environment.

Related Research

S&P Global Contact List
Primary Analyst Trevor J D'Olier-Lees New York 1 (212 438-7985 trevor.dolier-lees@spglobal.com
Primary Analyst Reme Uduebo New York 1 (332) 214 1588 reme.uduebo@spglobal.com
U.S. Chief Economist Beth Ann Bovino New York 1 (212) 438-1652 bethann.bovino@spglobal.com
Primary Analyst Michael T Furguson, CFA. CPA New York 1 (212) 438-7670 michael.ferguson@spglobal.com
Primary Analyst Kurt E Forsgren Boston 1 (212) 438 8308 kurt.forsgren@spglobal.com
Primary Analyst Chris Mooney CFA New York 1 (212) 438 2420 chris.mooney@spglobal.com
Primary Analyst Obioma Ugboaja New York 1 (212) 438-7406 obioma.ugboaja@spglobal.com

This report does not constitute a rating action.

Primary Credit Analysts:Trevor J D'Olier-Lees, New York + 1 (212) 438 7985;
trevor.dolier-lees@spglobal.com
Reme Uduebo, New York;
reme.uduebo@spglobal.com

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