President Trump took office promising more than $1 trillion in infrastructure spending over the next 10 years, supposedly bringing an end to the ‘American carnage.’ His bold claims prompted investors to pile into infrastructure funds and stocks over the course of 2017.
Since then, the US has had more than five so-called ‘infrastructure weeks’ – periods marketed as points in the legislative calendar when Congress would get to work allocating that $1 trillion to projects intended to fix the US’ crumbling national systems. Despite these various attempts, neither Congress nor the president has been successful in crafting any sort of comprehensive federal infrastructure package. It means that this week (beginning November 5) – as Americans go to the polls for the midterm elections – is shaping up to be the only infrastructure week in the past two years when anything gets done.
Infrastructure is largely the domain of state and local governments, which finance projects through municipal bonds, public-private partnerships and project finance. Major elections are when many of those projects get approval through ballot initiatives. During the 2016 election, voters gave the green light to $200 billion of infrastructure spending through local ballot initiatives nationwide. This month’s midterms will be no different, as voters will have the chance to approve tens of billions of dollars in additional projects and to pick 36 new governors – decisions which are likely to have a significant impact on the infrastructure project pipeline.
On your marks
Investors are already lining up ahead of the vote. A record $37 billion was raised for infrastructure funds in the third quarter, according to alternatives research firm Preqin. Much of that is going into infrastructure megafunds from the likes of Blackstone and KKR, but Preqin’s data also shows that there are more than 150 funds in the market targeting $142 billion in investor capital. Asset raising for infrastructure in 2018 is on pace to beat 2017, which also broke records.
‘Politically, this is the one issue that has bipartisan support and broad-based public support,’ said Alex Bertram, head of infrastructure finance for the Americas at ING. ‘The real issue, though, is what’s happening on the ground. In many cases, it comes down to who is the mayor or the governor. That determines whether and when these projects go forward. Even so, we are seeing projects pop up all over the place.’
So what is driving this shift? Historically, it has been hard to get big funding packages approved for infrastructure projects because of the political risk of spending millions of dollars on something, only for it to turn into a white elephant that goes over time and over budget.
But new data shows that the public is ready to spend. In a recent poll by transportation consultant HNTB, 46% of respondents said that they would be willing to pay higher tolls or other surcharges to cover the cost of road improvements.
Another survey by the Brookings Institution shows that infrastructure policy and potential spending is playing a key role in all 36 races for governor. Candidates willing to look beyond just transportation issues and provide specific plans about water, broadband and other issues are gaining traction among voters.
Seizing the initiative
The way that projects are financed may be changing too, and this could be a boon for infrastructure funds. The Tax Cuts and Jobs Act of 2017 created so-called ‘Opportunity Zones,’ which provide tax breaks for developers and private equity funds that finance projects in low-income areas. Changes in the tax treatment of municipal bonds could also make public-private partnerships and private financing more advantageous for certain projects. Localities are understandably taking a closer look.
‘The tax-exempt bond market for state and local governments has really created an overdose of debt at the municipal level,’ said Rob Collins, managing partner and head of North American infrastructure at private equity firm 3i. Collins was part of the business advisory group that worked with the Trump administration on its initial infrastructure policy discussions after the 2016 election. ‘From a fiscal discipline perspective, state and local governments are exploring more private investment in infrastructure to avoid adding to that debt load.’
What’s more, by turning to private capital via public-private partnerships or project finance, state and local governments would be taking a lead from how the rest of the world finances its infrastructure. ING’s Bertram pointed to recent terminal upgrades at LAX in Los Angeles and at JFK in New York as examples of successful improvements that were able to move forward because of project finance. ‘Project finance in the US is still a small part of the market overall, but it’s getting bigger each year,’ he said.