Donald Trump made America a $1 trillion campaign promise to rebuild its infrastructure, and investors are now waiting to see if and how the president-elect makes this come true.
On the stump, Trump made a vague but ambitious proposal: $1 trillion over 10 years for infrastructure. That would go a long way to filling the $3.3 trillion infrastructure deficit that will exist between 2016 and 2025, according to the American Society of Civil Engineers. But it is still unclear how this proposal will be paid for.
“Congress loves this idea on a sort of hypothetical basis,” says Ted Brooks, portfolio manager for globally listed infrastructure at CenterSquare, the real assets investment division of BNY Mellon. “But when you start to project that we allocate $100 billion a year out of the public budget to pay for investments, they need to know where the $100 billion is coming from.”
Since his election night victory, where Trump again promised he will “rebuild our highways, bridges, tunnels, airports, schools, hospitals” so that they are “second to none”, details of his plan have started to emerge.
A presidential transition website launched the week he won posted a statement saying Trump plans to invest $550 billion in infrastructure. There was no mention of where the funding will come from.
Peter Navarro, a University of California, Irvine public-policy professor and senior advisor to Trump, released a document shortly before the election that gives an idea of how Trump's infrastructure plan might work.
He wrote that Trump's plan would feature a “major private sector, revenue option”. Tax credits of up to 82 percent of the equity amount would lure in private investors. To offset the credits, Trump would raise tax revenues from additional wage income from workers and from additional contractor profits.
Brooks says there are a few other ways Trump could pay for his infrastructure plan. One is to use proceeds from repatriated business capital brought back from overseas through corporate tax reform. Another, to fund projects private capital typically does not flock to, like highways, is to offer more concessions. Brooks calls this a “zero-sum game”, where investors make an upfront payment for the concession and are responsible for maintaining the asset and collecting revenue, usually from tolls.
“That's a pretty attractive model to incentivise private investment,” Brooks says. “Not only does it not cost the federal government any money, it doesn't cost the state government any money, but results in cash inflows to these bodies and reduces their future financial burden to support and maintain them while they're being operated by a private company.”
The infrastructure sector that could see the most volatility from a Trump presidency is energy, both conventional and renewables. Trump has said numerous times he will loosen regulations on the fossil fuel industry, promising to roll back restrictions on shale gas and coal production on his first day in office.
Brooks believes this will likely mean more traditional energy projects being pushed through at a quicker pace. “My early belief is he's probably going to be a lot more amenable to these projects,” he says. “That could mean a shorter review period for projects. It could [also] mean more 'yes's' than 'no's' for projects from the regulatory agencies that oversee these matters.”
And while most investors think Trump, a climate change denier, will not help the clean energy industry, Brooks argues there is likely enough momentum already to keep the market going forward. State-level policies and congressional bills have already been enacted. California is not likely to change its mind that it wants to decarbonise its economy, he adds. Even in some Republican-voting states, there is a compelling business opportunity to see clean energy sources flourish.
Only time will tell what effect Trump's administration will have on the US infrastructure sector. While it seems likely core projects will receive a boon in investment and private sector support, burgeoning sectors like solar and wind may face a tougher time finding a firm footing in the market.
The most important thing, however, is that all of this infrastructure talk now gets followed through.