Can Trump’s infrastructure plan work?

Can Trump’s infrastructure plan work?

President Trump campaigned on fixing America’s infrastructure so that it would be “second to none.” However, upon closer examination of the details, there are financial problems with his plan in rebuilding America’s infrastructure.

Donald Trump’s presidential campaign made many promises. One of those promises emphasized  fixing America’s crumbling roads, bridges, highways, water treatment facilities, and airports. Based on his reputation for building skyscrapers and cutting deals, thousands cheered his promises. His plan, written by private equity investor Wilbur Ross and Professor Peter Navarro, dealt with the situation and financing to make it possible. Yet, there are sizable holes creating more problems than it solves.

No cheap solution

Without question, America’s infrastructure needs immediate repair. The American Society of Civil Engineers issues its “Infrastructure Report Card” every four years critiquing the nation’s roads, bridges, and highways. Its March 2017 report card gave the nation a “D+”. The society’s infrastructure group examined 16 sectors, stating that conditions were worsening. The worst grade in the report was the nation’s transit system with a grade of “D-“.

The Society stated that the cost to repair America’s infrastructure to achieve a safe and functional level was $4.59 trillion over the next decade. This includes over $2 trillion for surface transportation, over $900 billion for the nation’s electricity grid, $157 billion for airports, and $45 billion for dams. The Society also reported that investment in America’s infrastructure must increase from its current level of 2.5% of GDP to 3.5% by 2025. This is a tall order since state and local governments and the private sector are ready to spend approximately $2.52 trillion.

Not only is the cost of upgrading and building costly, but failing to do so carries a higher expense. For example, the American Transport Research Institute stated that traffic congestion on highways cost the nation’s trucking industry an estimated $50 billion in increased operational costs as recently as 2014. The Automobile Association of America reported that potholes cost drivers an estimated $3 billion annually for car repairs.

While it is admirable that Trump wants to repair America’s infrastructure, the problem is that he campaigned on spending only $1 trillion over the next ten years. This is not enough. At present, the federal government spends about $100 billion annually on infrastructure while states and municipalities spend approximately $320 billion per year. The amount under Trump’s plan must be increased to $4 trillion or $400 billion annually, if he is to fulfill his campaign promises and solve a huge problem. This leads to an important question: Can Trump’s Infrastructure Plan Work?

Financing: show us the money

Financing an infrastructure project is a problem.. Trump’s plan is no exception. Ross and Navarro dealt with financing Trump’s plan that would use private investors while not adding a penny to the federal government’s budget or its deficit.

The plan’s premise is that private companies would front approximately 20 percent of the project costs while borrowing the remaining funds. This could come from issuing bonds or bank loans. The federal government would give tax credits covering 82 percent of the firm’s investment. This will create public-private partnerships (P3s).

In Ross and Navarro’s calculations, the companies only need to attain a 10 percent return on the investment not covered by the tax credits. These tax credits, $137 billion according to some estimates, would ultimately be paid for by the economic activity of the infrastructure projects, the income taxes of the workers on these projects, and the taxes paid by the firms involved in the projects.

According to Trump’s “Contract with the American Voter”, his plan leverages public-private partnerships, and private investments through tax incentives, to spur $1 trillion in infrastructure investment over ten years.  It is revenue neutral.

Trump’s plan means that investors and construction contractors would own, run, and maintain the nation’s infrastructure. To recoup their investment and pay for maintenance, they would charge users tolls and fees for the infrastructure projects they run. The objectives are to build and maintain these projects, earn revenues paying off the initial investments while also covering maintenance costs, and turn a profit.

While theoretically, this seems a great way to pay for massive and expensive infrastructure projects, there are problems. One key difficulty is with P3s, which have a spotty investment record.

P3s are often regarded as a way to transfer financial capital to developers and contractors without guarantees that new investments will be made. The dilemma is creating user fees and often the public partner (government) must provide the guaranteed minimum revenue streams for the project to be built and serve poor communities.

The P3 private partner may increase user fees or reduce the quality of service to cut costs and maximize profits hurting users since they may not have an available alternative. The Congressional Budget Office reports that only 14 highway projects were finished using P3s with private financing, while 24 are still under construction, declared bankruptcy or must be bailed out financially.

Ross and Navarro’s plan can work if interest rates stay low. But with the Federal Reserve Bank planning rate increases this year, borrowing costs will rise. The plan can work if infrastructure projects are exclusively built in higher-income and wealthier urban areas.

Rural areas with lower-income residents will have difficulties paying for toll roads and user fees. Therefore, builders, developers, contractors, and private investors will decide which projects will go forth and which will not.

Private investors want immediate compensation for projects while obtaining a double-digit return. If the economy is booming, this is possible, but if there is a recession or economic slow-down, obtaining double-digit returns will be extremely difficult.

Can the plan work?

America’s infrastructure desperately requires repairs. While Trump may have good intentions in his infrastructure plan, it is not well thought out, and, like a major highway or bridge, needs much work. Prudence, accountability, money, and strict oversight are just the beginning of making this succeed or else we will all pay for it in the long run.

About Author

Arthur Guarino

Arthur Guarino is an assistant professor in the Finance and Economics Department at Rutgers University Business School teaching courses in financial institutions and markets, corporate finance, and financial statement analysis. The first half of his career was spent in the financial services industry. He has written articles dealing with finance, economics, and public policy.