President-elect Trump

WASHINGTON, DC–One of the promises Donald Trump made on the campaign trail was an investment program for infrastructure. To be sure, Hillary Clinton had a similar plan as well — but not nearly as encompassing as Trump's.

It was, in the beginning, a 10-year, $1-trillion-plus plan to rebuild highways, tunnels, bridges and airports as well as make investments in clean water and a modern and reliable electricity grid. As grandiose as any of his hotels, Trump likened the plan to to Dwight Eisenhower's creation of the Interstate highway system. This is to be expected: as a former builder of offices, casinos and resorts, Trump knows very well how essential first-class infrastructure is to overall growth, especially mass transit.

One theory explaining the gyrations in the global stock and bond markets of the last few days is that investors have become bullish about US stocks in the expectation that there will be fiscal stimulus forthcoming, which will in turn lead to more growth. Indeed more than $1 trillion was lost in global bond markets last week as investors shifted into stocks.

“Businesses are focusing on the spending Trump talked about on the campaign trail for infrastructure and border control,” Sandy Paul, managing director of National Market Research at Newmark Grubb Knight Frank tells GlobeSt.com.

But there are glimmers that Congress may be reluctant, perhaps even recalcitrant, in approving the funding for these projects.

Of course, in theory, much of Trump's plans call for a strong private sector role.

Late last month, a pair of senior policy advisors to the Trump campaign—private equity investor Wilbur Ross and Peter Navarro, a UC-Irvine business professor—released formal plans for US infrastructure upgrades.

The plan — which is now sized at $550 billion on the Trump transition team's website — calls for a somewhat circuitous structure in which tax credits are used to spur private-sector investment, this investment then creates jobs with taxable wages and the projects' revenue streams result in corporate profits that will also be taxed. All of this tax revenue will ultimately cover the tax credit expenditures, allowing the government to break even. It is not an infeasible scenario.

But as Ross and Navarro pointed out, “the difficulty with forecasting that revenue stream arises from trying to determine what the pricing, utilization rates, and operating costs will be over the decades. Therefore, an equity cushion to absorb such risk is required by lenders.”

According to their calculations, financing $1 trillion of infrastructure would require an equity investment of $167 billion, assuming a 9% to 10% total rate of return over a 20- to 30-year period (with interest rates between 4% and 5%). To encourage investment and reduce the cost of the financing, government would provide a tax credit equal to 82% of the equity amount, in other words, $137 billion in tax credits would leverage $167 billion in private-sector equity investment, in revenue- generating infrastructure projects. The balance would come from private-sector debt.

McKinsey Has Some Suggestions

There are other steps the Trump Administration could take to encourage private-sector participation. A McKinsey Global Institute report, published in June 2016 on global infrastructure investment, noted that:

….there is substantial scope to increase public infrastructure investment. Governments can increase funding streams by raising user charges, capturing property value, or selling existing assets and recycling the proceeds for new infrastructure. In addition, public accounting standards could be brought in line with corporate accounting so infrastructure assets are depreciated over their life cycle rather than immediately adding to deficits during construction. This change could reduce pro-cyclical public investment behavior.

As for the private sector, there are steps it can take to maximize their investment that would deliver additional returns, the report said.

Beyond ramping up finance, there is even bigger potential in making infrastructure spending more efficient and effective. Accelerating productivity growth in the construction industry, which has flat-lined for decades, is critical to this effort. Additionally, as our 2013 research showed, improving project selection, delivery, and management of existing assets could translate into 40% savings.

Conservatives, Fiscal Hawks Push Back

Infrastructure is one of the areas where Trump departs from conventional conservative Republican policy. Basically, the party does not concede that infrastructure investment, although necessary, leads to job growth or economic stimulus.

Marc Scribner, a fellow with the Competitive Enterprise Institute, with whom the Trump transition team has reportedly been consulting, posted a blog post shortly after the election discounting the infrastructure-investment-as-growth-driver theory. “Contrary to the dominant political narrative from members of both parties, which is parroted uncritically by most of the press, there is little evidence that these public works projects promote long-run economic growth,” Scribner wrote.

And in an article in Politico, Dan Holler, spokesman for the group Heritage Action for America, also questioned the job-creation claims of infrastructure investment.

“Conservatives do not view infrastructure spending as an economic stimulus, and congressional Republicans rightly rejected that approach in 2009,” he told the publication.

“It would be a mistake to prioritize Big Government endeavors over important issues like repealing Obamacare, reforming our regulatory system and expanding domestic energy production,” Holler said. “Along with confirming a conservative justice to the Supreme Court, these are the type of legislative efforts that will help anxious families and folks struggling all across the country.”

Ballot Initiatives Say Otherwise

President-elect Trump, though, has support from the voters this matter.

Many of the ballot initiatives last week were transportation related and about 70% of those were passed. In New Jersey, for example, voters approved a ballot question that dedicates the state's newly increased gasoline tax for use only in the parched Transportation Trust Fund. In Los Angeles, Measure JJJ, also known as the Build Better LA initiative, passed with tremendous voter approval. Not everything transport-related passed: San Diego shot down three ballot initiatives supporting development.

“The fact is, no one knows what is going to happen,” says NGKF's Paul. “The market is reacting as though these plans will go forward and while some of them probably will, the Tea Party could well influence the final number.”

President-elect Trump

WASHINGTON, DC–One of the promises Donald Trump made on the campaign trail was an investment program for infrastructure. To be sure, Hillary Clinton had a similar plan as well — but not nearly as encompassing as Trump's.

It was, in the beginning, a 10-year, $1-trillion-plus plan to rebuild highways, tunnels, bridges and airports as well as make investments in clean water and a modern and reliable electricity grid. As grandiose as any of his hotels, Trump likened the plan to to Dwight Eisenhower's creation of the Interstate highway system. This is to be expected: as a former builder of offices, casinos and resorts, Trump knows very well how essential first-class infrastructure is to overall growth, especially mass transit.

One theory explaining the gyrations in the global stock and bond markets of the last few days is that investors have become bullish about US stocks in the expectation that there will be fiscal stimulus forthcoming, which will in turn lead to more growth. Indeed more than $1 trillion was lost in global bond markets last week as investors shifted into stocks.

“Businesses are focusing on the spending Trump talked about on the campaign trail for infrastructure and border control,” Sandy Paul, managing director of National Market Research at Newmark Grubb Knight Frank tells GlobeSt.com.

But there are glimmers that Congress may be reluctant, perhaps even recalcitrant, in approving the funding for these projects.

Of course, in theory, much of Trump's plans call for a strong private sector role.

Late last month, a pair of senior policy advisors to the Trump campaign—private equity investor Wilbur Ross and Peter Navarro, a UC-Irvine business professor—released formal plans for US infrastructure upgrades.

The plan — which is now sized at $550 billion on the Trump transition team's website — calls for a somewhat circuitous structure in which tax credits are used to spur private-sector investment, this investment then creates jobs with taxable wages and the projects' revenue streams result in corporate profits that will also be taxed. All of this tax revenue will ultimately cover the tax credit expenditures, allowing the government to break even. It is not an infeasible scenario.

But as Ross and Navarro pointed out, “the difficulty with forecasting that revenue stream arises from trying to determine what the pricing, utilization rates, and operating costs will be over the decades. Therefore, an equity cushion to absorb such risk is required by lenders.”

According to their calculations, financing $1 trillion of infrastructure would require an equity investment of $167 billion, assuming a 9% to 10% total rate of return over a 20- to 30-year period (with interest rates between 4% and 5%). To encourage investment and reduce the cost of the financing, government would provide a tax credit equal to 82% of the equity amount, in other words, $137 billion in tax credits would leverage $167 billion in private-sector equity investment, in revenue- generating infrastructure projects. The balance would come from private-sector debt.

McKinsey Has Some Suggestions

There are other steps the Trump Administration could take to encourage private-sector participation. A McKinsey Global Institute report, published in June 2016 on global infrastructure investment, noted that:

….there is substantial scope to increase public infrastructure investment. Governments can increase funding streams by raising user charges, capturing property value, or selling existing assets and recycling the proceeds for new infrastructure. In addition, public accounting standards could be brought in line with corporate accounting so infrastructure assets are depreciated over their life cycle rather than immediately adding to deficits during construction. This change could reduce pro-cyclical public investment behavior.

As for the private sector, there are steps it can take to maximize their investment that would deliver additional returns, the report said.

Beyond ramping up finance, there is even bigger potential in making infrastructure spending more efficient and effective. Accelerating productivity growth in the construction industry, which has flat-lined for decades, is critical to this effort. Additionally, as our 2013 research showed, improving project selection, delivery, and management of existing assets could translate into 40% savings.

Conservatives, Fiscal Hawks Push Back

Infrastructure is one of the areas where Trump departs from conventional conservative Republican policy. Basically, the party does not concede that infrastructure investment, although necessary, leads to job growth or economic stimulus.

Marc Scribner, a fellow with the Competitive Enterprise Institute, with whom the Trump transition team has reportedly been consulting, posted a blog post shortly after the election discounting the infrastructure-investment-as-growth-driver theory. “Contrary to the dominant political narrative from members of both parties, which is parroted uncritically by most of the press, there is little evidence that these public works projects promote long-run economic growth,” Scribner wrote.

And in an article in Politico, Dan Holler, spokesman for the group Heritage Action for America, also questioned the job-creation claims of infrastructure investment.

“Conservatives do not view infrastructure spending as an economic stimulus, and congressional Republicans rightly rejected that approach in 2009,” he told the publication.

“It would be a mistake to prioritize Big Government endeavors over important issues like repealing Obamacare, reforming our regulatory system and expanding domestic energy production,” Holler said. “Along with confirming a conservative justice to the Supreme Court, these are the type of legislative efforts that will help anxious families and folks struggling all across the country.”

Ballot Initiatives Say Otherwise

President-elect Trump, though, has support from the voters this matter.

Many of the ballot initiatives last week were transportation related and about 70% of those were passed. In New Jersey, for example, voters approved a ballot question that dedicates the state's newly increased gasoline tax for use only in the parched Transportation Trust Fund. In Los Angeles, Measure JJJ, also known as the Build Better LA initiative, passed with tremendous voter approval. Not everything transport-related passed: San Diego shot down three ballot initiatives supporting development.

“The fact is, no one knows what is going to happen,” says NGKF's Paul. “The market is reacting as though these plans will go forward and while some of them probably will, the Tea Party could well influence the final number.”

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Erika Morphy

Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.