PWF Blog

PWF Blog 2/3/16

From Public Works Financing newsletter
November, 2016

Trump And Infrastructure

by William G. Reinhardt, Editor

President-elect Donald Trump’s towering plan for rebuilding America has yet to take shape.

As Bob Poole notes on p. 9, there is not a single Trump infrastructure plan: there are more like three, at this stage of the transition. First is an oft-repeated figure of a $550-billion program, with no details on where that money would come from or how it would be spent. Second is a $1-trillion proposal for investor-funded infrastructure, which is analyzed on p. 15 by Bryan Grote and David Seltzer of Mercator Advisors. And third is recent mention of an infrastructure bank, possibly funded as part of an overhaul of the tax code and currently championed by Trump adviser Steven Mnuchin.

Already in play and possibly of great consequence are new IRS “safe harbor” rules for expanding the availability of tax-exempt debt financing for privately developed public works. Nossaman partner Barney Allison assesses the impact of the rules change on the public-private partnership (P3) market on p. 11.

There is also an inside-the-beltway plan. Seizing the moment, a coalition is forming behind the scenes in Washington to gain quick passage of a permanent solution to the soon-depleted Highway Trust Fund. Proposed funding sources are undisclosed, but the thinking goes goes well beyond a one-shot infusion from repatriating corporate profits. Martin Witmer, who is leading Trump’s transportation transition team, is well versed in trust fund politics and aware of the consequences of its destruction.

In addition to a political win for Trump, putting the Highway Trust Fund on a sound financial footing would stop the bleeding of talent from the highway and transit agencies that Trump will need to deliver his infrastructure program. Further out, rebuilding those big procurement agencies is a necessary first step in the rebuilding of the Interstate Highway system.

Public-private partnerships seem to be high on the Trump agenda. Trump’s knowledge of P3s mainly comes from a $2.25-million deal in 1986 with New York City to restore the Wolman ice skating rink in Central Park. With much fanfare, the rink was refurbished and operated by Trump as a nonprofit business until 1991. Trump’s logo still is displayed on the walls of the rink and on the Zamboni ice machine.

Presidents can propose big-ticket infrastructure programs, but there isn’t much a president can do to fund them. Congress can, but didn’t under the leadership of former House Speaker John Boehner. His replacement, Rep. Paul Ryan, is untested as House leader. And Majority Leader Mitch McConell’s poor management of the Senate has earned him the highest disapproval rating among voters nationally of any of his peers.

[Presidents can defund projects that would deliver political rewards to their opponents. In Trump’s case, one target could be Amtrak’s Gateway tunnel, the ultimate blue state-project, being promoted by New Jersey Senator Cory Booker, a rising Democratic star. Another target is Gov. Jerry Brown’s California High Speed Rail project. Both depend on a steady flow of federal funds to keep them alive.]

A Shortage of Shovels: The assumption that a fast infusion of public investment capital into a tight labor market will cause inflation and fuel a rise in Treasury yields probably is wrong. Even if there is a burst of funding, the spend-down of new money by states will take far longer than investors expect. Most public agencies have a difficult time spending the money they already have. That’s true both for new projects and for rehabilitating existing assets.

In his stimulus program, President Obama discovered that there are no big shovel-ready projects. That’s still true, largely because there are too few shovel ready people in the state, regional and municipal agencies that own most of America’s infrastructure.

Years of regulatory creep, underfunding, and the stop-and-start federal budgeting process have confounded the project planning work of the big transportation agencies that depend on Congress to help fund their projects. As a result, the most experienced public servants in these agencies left long ago in search of higher pay and more rewarding work. Those who remain are often challenged to write a good outsourcing contract, and to manage the dozens of consultants it takes to fill the experience gap and procure large projects.

In any case, pouring $1 trillion into the traditional public works pipeline may not be the best way to stimulate long-term economic returns. The public sector too often overdesigns projects and then has to pay to construct them. The public sector does not know what the capital and lifecycle costs of projects will be. It doesn’t recognize the costs involved with deferred maintenance. There is resistance to thinking about these issues, and it is exacerbated by the fact that data is not organized in a way that can facilitate effective analysis. A better procurement model is needed for making America great again.