Road and bridge builders might turn out to be the biggest winners of this year’s presidential election.
Both candidates have called for big new investments in infrastructure, and Republican Donald Trump now has a new plan to spend a gargantuan sum rebuilding the nation’s economic backbone: $1 trillion. Trump has said before that he’d double the infrastructure spending proposed by his Democratic rival, Hillary Clinton, whose plan calls for $275 billion in direct government spending over five years, plus another $225 billion in private investment. Trump’s new plan, drafted by economic advisors Peter Navarro and Wilbur Ross, would finance up to $1 trillion in spending over a decade.
Trump’s plan would rely heavily on private funding, with the government encouraging investment through a tax credit that would raise the return to investors and lower the cost of borrowing to states and municipalities that would oversee the projects. Unlike Clinton’s plan, there would be no need for new taxes to finance spending. Tax credits would cost the government some money, but taxes collected from the workers and companies participating in such projects would offset the costs, according to Navarro and Ross.
“If there’s ever a great time to do it, it’s got to be now,” Ross, a billionaire private-equity investor, tells Yahoo Finance. “With interest rates so low, this has got to be the best time from a break-even point of view, from a societal point of view.”
The tax credit in Trump’s plan would apply only to projects with a dedicated source of revenue that attract private investment. Examples of such project include toll roads, airports or utilities financed at least in part by fees paid by users. The Trump campaign says it doesn’t favor toll roads. “It’s a state-by-state decision,” says Navarro. And roads tend to be easier for states to finance through traditional means than complex or multi-state projects. User fees on such projects guarantee cash flow back to investors that doesn’t normally exist on “free” resources such as parks or interstate highways. Wider adoption of facilities covered by user fees would amount, to some extent, to the privatization of America’s infrastructure.
Private sector funding
That’s controversial, since many citizens aren’t happy with the idea of for-profit entities funding roads, airports, tunnels, and mass-transit systems meant to help the general public get around. But the traditional way of paying for infrastructure, through tax revenue, has left thousands of needed repairs unfunded. The American Society of Civil Engineers, for instance, says the nation’s infrastructure needs $3.6 trillion worth of work by 2020. The federal government only spends about $100 billion a year on infrastructure, with states and cities spending another $320 billion or so. That suggests a $2 trillion gap during the next four years.
Fans of private funding for infrastructure argue that projects would be selected with less political interference (and fewer “bridges to nowhere”), along with a stronger focus on projects likely to return the best bang for the buck. Private-sector interests might also be able to control costs better, since there’d be more profit if they do. Governments would still have an oversight role, in setting maximum tolls or user fees, for instance, and making sure private owners or investor groups didn’t skimp on maintenance.
The Trump plan would provide funding for riskier and costlier projects that government might have difficulty funding on its own these days, especially with many state budgets hamstrung by the soaring cost of pensions and retiree healthcare. These would be big, complex projects such as a new tunnel beneath the Hudson River from New York to New Jersey, high-speed rail in California or the Federal Aviation Administration’s next-generation air-traffic-control system. More routine projects, such as ongoing funding for existing highway or utility systems, don’t need radical new sources of money.
With its emphasis on private funding, the Trump plan would require investors to take an equity stake in projects, essentially putting a down-payment on funding. That would amount to about one-sixth of total funding, with the rest coming from borrowing, for a 5-to-1 leverage ratio. For $1 trillion in total investment, a 5-to-1 leverage ratio would require equity investors to pony up $167 billion, nearly twice what Washington already spends each year on infrastructure.
Under the Trump plan, the federal government would offer an 82% tax credit on the equity investment, sharply reduce the risk to investors. That would make people more likely to invest while also lowering the interest rate states and municipalities would have to pay on the debt they issue to finance the rest of the cost. The feds would essentially be guaranteeing part of each project funded in this way, raising the confidence of investors, lowering borrowing costs and making such investments more affordable.
Clinton’s plan would fund new infrastructure mostly through higher taxes, with the additional revenue spent directly on projects. Such spending might be more subject to political interference, in terms of what gets built, and the taxes would depress growth somewhat. But Clinton’s plan would also provide more funding for projects such as parks, school buildings and other things that don’t typically involve a fee on users and might be hard to fund with private money. Clinton’s plan also includes $25 billion for an “infrastructure bank” that would provide seed money for projects that would be mostly financed through borrowing, with a leverage ratio as high as 9-to-1, which would be higher than the debt portion under the Trump plan.
Trump isn’t the first to propose more private spending on infrastructure, and there are a few such projects already funded this way in the United States, such as the Indiana Toll Road and the Chicago Skyway. And some investor groups specifically seek out infrastructure projects, mostly overseas. But such projects are often approved by legislatures less fractious and more pragmatic than the US Congress. And some infrastructure projects become controversial when it appears rich foreign investors are making money off of less-well-off locals, even if the private funding produces better quality than public funding might.
Public projects funded by private investors can still be publicly managed. “You could still have the public sector operate the infrastructure,” Ross says. Even that, however, may not be enough to silence corporate critics such as Democratic Senators Bernie Sanders and Elizabeth Warren, who seem unlikely to favor private ownership of once-public assets and might vigorously oppose it. Even if both sides agree on doing more building, that doesn’t mean it will happen.
Editor’s note: This story has been updated to include an additional comment from Trump advisor Peter Navarro.
Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman.