On 15 August, US President Donald Trump took the podium at New York’s Trump Tower flanked by Elaine Chao, the transportation secretary, and Macquarie alumnus DJ Gribbin, an adviser on infrastructure policy.
Moments earlier, Trump had signed an executive order targeting the government’s lengthy environmental review process for major infrastructure projects. Now, the president planned to turn the nation’s focus to his promise to spur $1 trillion in infrastructure upgrades – a goal with support across the aisle and across the electorate.
But the press conference soon went off the rails. Trump’s equivocal response to a question about a recent racially charged confrontation in Virginia turned infrastructure into a footnote at an event intended to boost its profile. The resulting backlash led to the resignation of a growing list of advisors and the disbandment of a handful of special councils including, two days later, the Advisory Council on Infrastructure. That an event held to turn the nation’s attention to infrastructure led to the downfall of the body tasked with bringing his vision to fruition was an irony lost on few.
Almost a year has passed since the election of Trump and his $1 trillion promise ignited an unparalleled optimism across the infrastructure sector. A landmark bill opening the door to the billions of capital eyeing the US looks less likely by the day and excitement has been replaced by tempered expectations.
In the absence of major legislation, the sector may be relegated to more modest gains. But growth is not completely dependent on Washington, as many in the infrastructure space see the private sector model already beginning to break through.
“It is almost like we have two markets at the moment,” explains John Schmidt, a partner at the Chicago-based law firm Mayer Brown specialising in public-private partnerships. “We have the actual market, and then we have what might happen.” Trump’s promise to rebuild the country’s infrastructure goes back to his campaign’s launch in June 2015. Nearly two-and-a-half years later, how he plans to do so is still being hashed out.
When Trump promised to spend $1 trillion on infrastructure – a number apparently chosen to double the infrastructure spend of his opponent, Hillary Clinton – some envisioned a Keynesian package focused on federal spending. Investors in the infrastructure sector had a different vision: Trump leading a revolution in how infrastructure in the US is financed and opening the door to private investment as seen in Canada, Australia and the UK.
The first hint of what such a policy might look like came two weeks before the election from two of Trump’s advisers, Wilbur Ross and Peter Navarro. Their plan called for private investors in infrastructure to receive federal tax credits, incentives meant to bring in capital to worthy projects.
As a policy blueprint, the Ross-Navarro plan was dead on arrival. A lack of investable projects, not a want for capital, was holding back investors. Offering tax incentives to fund managers already eager to invest was unnecessary, even counterproductive.
These details aside, Ross-Navarro highlighted the role Trump and his administration saw for private capital in his planned infrastructure push. Further, infrastructure was seen as the one area with the potential for bipartisan support. As Trump took office in January, expectations were booming.
Nine months into Trump’s term, such optimism seems an ancient relic. Little has been accomplished beyond a series of executive orders aimed at streamlining the regulatory and permitting processes, while rallying congressional Republicans, let alone Democrats, around a vision based on private investment has proved more challenging than the real-estate-developer-turned-president imagined.
A 'CRYPTIC' BLUEPRINT
As it turns out, while Democrats and Republicans acknowledge the need for infrastructure improvements, their views on how to get there differ greatly. House Speaker Paul Ryan and other fiscal conservatives have balked at any plan with a high price tag, limiting Trump’s ability to push through the kind of government spending needed to bring on board a significant number of Democrats. And while both parties are open to PPPs playing a greater role, rural Republicans have been just as resistant to any policy dependant on private funding as have Democrats, since rural projects tend to be left behind by private investment.
“When you look at the co-ordination between the executive and the legislative [branches], it is hard not to be underwhelmed at the amount of work product that has actually come out,” says Ted Brooks, portfolio manager for globally listed infrastructure at CenterSquare.
In May, along with his budget proposal, Trump released a six-page fact sheet laying out his plans for an infrastructure initiative. The blueprint called for $200 billion over 10 years, but this added spending would come alongside deep cuts to the transportation department. Overall, according to the non-partisan Congressional Budget Office, the cuts would roughly offset the spending initiative – far from the promised $1 trillion boost.
The blueprint also includes proposals to expand TIFIA and WIFIA, which provide assistance for transportation and water projects, respectively, and to lift the cap on private activity bonds. It mentions a liberalisation of tolling restrictions, which some investors see as a key to unlocking a massive amount of capital.
“If you put tolls on existing interstates and then privatise them, then you are at Trump’s $1 trillion in three months of active dealmaking,” notes Schmidt, of Mayer Brown.
The blueprint, which Schmidt called “somewhat cryptic”, remains the most detailed plan released by the administration to date. While investors have been promised a more comprehensive proposal by early autumn, none has been released as at the time of publication.
“I am not really on bated breath anymore whenever I hear there is going to be a big announcement,” says Joseph Kane, a transportation research analyst for the Brookings Institution. In April, Kane co-authored a report calling a major infrastructure bill a “Washington fantasy”.
Another focus has been rolling back the federal government’s regulatory and permitting process to allow major projects to move forward. When speaking about his plans for infrastructure, the president often has Gribbin hold up a seven-foot flow chart detailing all the red tape builders must wade through before starting construction. His now-infamous 15 August press conference announced orders seeking to limit the federal environmental review to two years and to task one agency with shepherding each initiative through the process.
Such an effort would be welcome, investors say, but many of the obstacles are on the state and local level. And whether the administration can make good on these goals remains a question.
“This executive order does not change the underlying statutory responsibilities that the various agencies have,” Ali Zaidi, a former Obama official and now a senior advisor for the law firm Morrison & Foerster, explains. “I don't know if they can follow through on what the executive order promises with the personnel and budget approach that they’ve taken.”
Not everyone in the industry is dismissive of Trump’s actions to date. Michael Likosky, head of infrastructure at 32 Advisors, believes Trump’s outline is already driving action in Congress and at the local level. Along with the build-up of private capital, he sees this as “a sign that the logic of the Trump approach is working its way through”. Most in the industry are less bullish but see positive developments taking place outside the Beltway.
SLOWLY BUT SURELY
With the world’s largest economy and a funding gap measured in the trillions of dollars, US infrastructure holds the potential to dwarf that of more mature markets such as Canada, Europe and Australia.
“If you look at US infrastructure needs, however many trillions of dollars they actually are,” explains Michael Pikiel, head of infrastructure, mining and commodities for Norton Rose Fulbright, “most people will tell you that you only need to deliver a small percentage of America's infrastructure needs using P3 methods to have a very successful market.”
Speaking to fund managers, it would seem the process has already begun. They point to several recent high-profile deals in the transportation space, including the $4 billion LaGuardia airport modernisation and the $2.9 billion Chicago Skyway project.
“We are starting to get to an inflection point where you are going to see increased flow of private capital,” says Peter Taylor, a co-head of The Carlyle Group’s Global Infrastructure Opportunity Fund. “The US market is starting to get a reasonable cadence on the use of P3s for project delivery.”
If there is a positive trend in the US infrastructure space, it has not been a straight upward line. The first half of 2017 saw a drop in deal volume from the second half of last year and an even steeper decline from the first six months of 2016, according to PwC. Deal value was $22.5 billion, down 39 percent from the same period last year.
This drop itself is not a cause for concern, as these numbers fluctuate on a year-to-year basis. But if the PPP market is preparing for take-off, for the moment it remains on the launchpad.
Fundraising, on the other hand, has taken off, with more than $100 billion in dry powder targeting North American infrastructure. This mismatch, with record capital chasing a limited number of projects, has led to weariness among some investors. Infrastructure funds may have to accept lower returns to deploy their capital.
This could be good news for governments looking to privatise their assets, as any major project that goes out to bid is sure to get plenty of attention. It is local governments, however, that have been slower to embrace privatisation than their counterparts in other developed economies.
“The reality is that we have been underperforming because we cannot get our act together from a policy standpoint,” says Cherian George, head of Fitch’s infrastructure group for the Americas.
Privatisation is a heavy lift for elected officials in cities, counties and states, which are typically the owners of US infrastructure. A city mayor who even seeks bids for a project risks a backlash from voters. And should a PPP project turn out to be successful, they may no longer be in office to reap the political benefits.
Still, governments across the US are beginning to take this risk. Thirty-five states – as well as the District of Columbia and Puerto Rico – now have PPP-enabling legislation, and those in the industry point to a steady stream of requests for qualifications or proposals coming from all levels of government.
“The good news is that there has been progress,” notes Raj Agrawal, global infrastructure co-head and head of infrastructure for North America at KKR. “It has been slow, methodical progress, but there has been progress.”
Several significant transportation projects, capable of shifting the landscape, are now at various stages in the procurement process. In the airport space alone, 2017 has seen Denver approve a $1.8 billion PPP for a large hub, while Kansas City has selected a preferred bidder on a $1 billion project for its medium hub. Westchester, a suburb of New York City, is considering offers to privatise its small hub airport.
In the early months of Trump’s presidency, hopes were high that sweeping legislation to incentivise privatisation would propel the sector. Some hope remains, with initiatives such as ‘asset recycling’ gaining steam. Now, though, the expectation is that the P3 model will grow slowly over a five- to 10-year period, as states and cities see their neighbours benefit from privatisation.
“Success breeds success,” says Darin Siders, PwC’s US infrastructure deals leader. “In terms of the stars aligning, there are grounds to be optimistic.”