Infrastructure in the Trump era

January 26, 2017

Infrastructure was at the heart of President-elect Donald Trump’s economic plan, yet his approach to infrastructure is not well known. Prudent innovation is the cornerstone of his approach, and he has taken some of the most innovative bipartisan ideas for infrastructure financing and moved them from the periphery to center stage.

When you look at how Trump plans to raise and deploy capital, you see prudent, innovative financing, in that his approach will likely include four innovative financing tools. These tools are: 1) public-private partnerships or P3s, 2) a federal tax-credit bond, 3) rationalizing the regulatory process, and 4) repatriating U.S. dollars through tax reform to pay for projects.

Today, enormous amounts of U.S. dollars sit abroad. Companies do not want to repatriate them because of the tax hit involved. The Trump plan wants to give companies a tax break to bring those dollars back, so long as they are invested in U.S. infrastructure. This approach has bipartisan credentials. He would charge 10 percent tax on repatriation, and all taxes levied on returning capital would be earmarked for infrastructure.

Trump has as the cornerstone of his approach equity participation in public infrastructure projects. His view is that much of infrastructure can be funded through private equity, which adds a discipline and involves cheaper design and building costs. However, he doe

s not see private participation in public projects as happening at the exclusion of government. In fact, government must play the role of active financing partner under his plan. It will provide credits to make projects more affordable and stable over the long term. On average, the expectation is that projects will return 9 percent to 10 percent.

Another component of his financing approach is the introduction of a federal tax-credit bond. Today, a good deal of infrastructure financing happens through tax-exempt bonds. These bonds are only practically available to high-net-worth individuals who can benefit from their tax characteristics. Large institutional investors, such as those who invest in P3s, are largely shut out of the system. A tax-credit bond changes this. A federal tax-credit bond has been experimented once before, and it was wildly successful, bringing $187 billion to market during the height of the financial crisis over six quarters.

The biggest challenge for President-elect Trump’s infrastructure plan will be politics. Today, many projects do not happen not because of lack of private and federal money. Instead, P3 participants have difficulty dealing with government. Over the past 20 years, I have advised government at all levels as well as U.S. international organizations and major labor union pension funds on P3s. Investors are not alone in wanting to do P3 deals — so do public officials and labor leaders.

However, investors very often are not attuned to how government views the benefits of P3s. It will be important to have a strategy that aims at getting everyone on board, and all stakeholder points of view and objectives understood.

 

Michael Likosky is head of infrastructure at 32 Advisors.

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