Amidst all the blood being curdled in the US Presidential campaign, Donald Trump’s pledge to double Hillary Clinton’s $275 billion commitment to domestic infrastructure was a welcome respite. (Energy is a separate topic which I will consider later). US infrastructure has been much neglected since it was built, largely in the 1950s – think of the I-35W bridge in Minneapolis which collapsed into the Mississippi river in 2007, for example. The Trump manifesto considers that a further 60,000 bridges are “structurally deficient”, most major roads are rated as “less than good condition” and that traffic delays cost the country more than $50 billion annually. Infrastructure brings short term construction jobs and (usually) long term benefits to all; and these benefits accrue more to the less well off than to the rich, a point long recognised by the World Bank and other multilateral agencies but, given Trump’s electoral base, ironically not by his campaign. So what’s not to like?
I confess to not having bought the official President Trump T-shirt (first edition; minimum contribution $45) and I am cautious in several other respects too.
We don’t know much about the Trump plan yet except that it is a good plan and will “… transform America’s crumbling infrastructure into a golden opportunity for accelerated economic growth …”. The missing buzzword here is “sustainable”, i.e. environmentally responsible, because during his campaign, Trump claimed to know more about climate change than the overwhelming majority of climatologists. However, like almost every pledge in his campaign, as President – elect he is thankfully reconsidering his position on climate change – or the markets hope that he is.
What could the impact be in the US? The Trump plan will be revenue – neutral, for which read the private sector will provide most of the funds via Public Private Partnerships (P3 in the US, PPP to everyone else). (The government contributes via tax credits but these come only in future years and only if the projects get built then turn a profit.) But as countries such as Indonesia have demonstrated, it is one thing to throw out huge numbers on behalf of the private sector; it is quite another to deliver Projects which have been Properly Prepared (the other PPP) for the private sector to invest in then deliver on. The US arrived much later at the PPP party (the PPPP, perhaps) than did the likes of the UK, Australia or Canada. PPP is always more expensive than government borrowing so needs to be justified via increased efficiencies in delivery, innovation not found in the public sector or bringing funding when the government cannot. Not all of these will apply to the US. Nor does PPP come free: the first P in PPP needs to contribute, whether this is payments to a project for being made available for use by the government so that it is the government which takes revenue risk, contributions in kind, revenues foregone, contingent support which may not show up in the budget, or more.
The Trump plan will target substantial new infrastructure investments. But have these been identified, sized, evaluated, located, approved? Is there a list of shovel – ready projects just waiting for this green light? Almost certainly not because political will, not provision of finance, has long been the binding constraint on getting infrastructure actually underway. Preparing the projects will take time so the most immediate route to improving infrastructure will be repair and maintenance of the existing stock which requires government expenditure or privatisation of existing assets.
The Trump plan places emphasis on “putting American steel made by American workers into the backbone of America’s infrastructure”. Good luck with that. There is a worldwide glut of steel so not buying the cheapest brings with it a significant bill which needs to be paid for somehow by someone, presumably the US taxpayer.
What could the impact be outside the US? Like everything else in the Trump campaign, infrastructure spending comes with an America – first emphasis. But infrastructure is a largely domestic business and American companies have not been active in Asia, at least, since the Asian financial crisis of 1997 – 8 anyway (just ask USEXIM).
Of far greater impact would be the hit to world trade and economic growth brought on by Trump’s overt protectionism and potential retaliation thereto by China and others. Most pundits think that he will rein back his wilder promises – but then most pundits thought that he wouldn’t be here in the first place. There are also concerns about how he intends to go about things: reopening deals sows illwill in counterparties; geopolitical issues are complex and nuanced so may not be best managed via Twitter; having been the first candidate in living memory to not disclose his tax returns, he is also the first to not separate his family business from his public office. The Chinese may not worry about such niceties and could, for example, offer his family the chance to build a signature tower or two as part of trade negotiations. The potential is there to distort sovereign decision making whilst building a First Family in the US akin to those in the Philippines, Indonesia and elsewhere. One way or another, though, growth will slow or decline which is unequivocally Bad News. Will this encourage governments worldwide to take the bold Keynsian approach, take advantage of depressed prices and still low interest rates and invest counter – cyclically? Or will they cut their cloth and wind back infrastructure spending along with everything else?
A stronger dollar will obviously make it more expensive for Asian borrowers to raise hard currency funding so will encourage further progress towards domestic currency funding. Interest rates are now likely to rise sooner – this had to happen sooner or later, though, so should not be significant when taking a, say, thirty year view; and the fact that projects will now pay slightly more than almost zero will impact expected shareholder returns but not sufficiently to stop the projects going ahead.
Having so little to go on at the moment enables us to speculate wildly and then allows us to revisit the issue as details do emerge. A first assessment of the Trump plan for infrastructure spending, then, is that prospects are some stopping distance from an optimistic green; they may, in fact, be a downright stationary red as Paul Krugman, for example, fears; or a more cautiously optimistic yellow; or even somewhere between these last two which would make them, er …, orange.
Without the aid of clear market signals, it s very difficult and maybe impossible for governments to determine the optimal amount and nature of infrastructure spending, even with the best of intentions.
There is no doubt that governments at times need to make decisions when there are no market signals; or unclear signals; or no market. Further, the market tends to be efficient but not necessarily equitable. In the face of such uncertainty, it is best to share the upside as well as the downside risk which can be done (but all too often, is not) via the project contract documentation.