Infrastructure spending persists as a popular election issue, often viewed as an ideal solution to drive growth and visions of the future against a backdrop of aging roads, bridges and outdated utility systems. Infrastructure investment is one of the few bipartisan issues to consider this election season, as both Donald Trump and Joe Biden have outlined clear infrastructure proposals. Both political parties seek the benefits of improved infrastructure, but momentum for initiatives typically wanes when the conversation turns to funding sources.
The Current State of Infrastructure
While the federal government plays an important role in infrastructure advancement, the majority of infrastructure is funded by state and local governments. States and locals were just about fully recovered from the GFC right before the COVID-19 pandemic hit. They did not meaningfully commit to any infrastructure investments over the last decade, instead focusing on addressing post-recession deficits, balance sheets and their increasing pension liabilities. In addition, the challenge of multi-jurisdictional stakeholders with varying incentives and limited coordination, glaring upfront costs and ever-changing economics served as a headwind against meaningful infrastructure progress. The federal government historically sought to overcome these hurdles by subsidizing or incentivizing private-public partnerships (P3s) via the Transportation Infrastructure Finance and Innovation Act (TIFIA) and the Private Activity Bond program.
The TIFIA program has provided over $32 billion of aid to 74 projects with a total cost of about $117 billion in the 20 years through 2018. The TIFIA program supports the creation of P3s and leveraged private capital for transportation projects. TIFIA credit assistance is limited to a maximum of 33% of the total eligible project costs. TIFIA has been proven successful in supporting the P3s due to its ability to foster better security features, lower borrowing costs and offer flexible repayment terms. However, the application process for federal funding is robust and overall funding will remain constrained by federal limits.
The federal government also supports infrastructure through the allowance of tax-exempt private activity bonds (PABs), which encourage state and municipal governments to collaborate with sources of private capital to meet a public need. The partnership approach makes infrastructure repair and construction more affordable for municipalities and ultimately for users and customers. The 2020 volume cap per state is $105 multiplied by the state population or $322 million, whichever is greater. This is up 1.5% from $317 million in fiscal 2019. Approximately $24 billion or 7% of total municipal bond issuance of 2018 was in the form of PABs, just 27% of total capacity. We tend to believe that PAB capacity is underutilized due to misalignment of demand with underlying capacity, as populous states with higher infrastructure demands tend to use full PAB capacity, while less dense states tend to underutilize capacity.
Although these initiatives were meant to incentivize infrastructure, application hurdles, a lack of consistent policy and constant dangling of additional phantasmagoric federal incentives typically impede the progress of infrastructure funding.
Election Implications
Trump’s infrastructure proposal details $1.5 trillion of infrastructure spending, focused on traditional infrastructure. Over 10 years, the Trump package would spend $810 billion on highways & transit and $190 billion on rural broadband, 5G cell services and other non‐transportation infrastructure. The plan is less focused on clean energy. Biden’s proposal details a larger $2.0 trillion infrastructure investment over four years. Biden’s plan includes massive investments in clean energy infrastructure and would provide all Americans in municipalities of more than 100,000 people with quality public transportation by 2030. Biden’s proposal also ties funding and investment to minimum wages and union jobs.
While infrastructure spending is a bipartisan issue, there is limited visibility on how each candidate’s plan would be funded. Biden favors increased taxes on the wealthy and corporations, which would likely be incorporated within his proposal. Given the current recessionary environment, we would look to a potential return of the Obama-era Build America Bonds (BABs) program, which offered subsidies to municipal issuers to issue $181 billion of taxable debt to a larger buyer base. While the BABs program was supportive for shovel-ready projects, its temporary nature was a missed opportunity to capitalize on robust infrastructure ideals.
Trump does not propose any revenue increases to fund infrastructure spending and is seeking to eliminate the 3.8% Medicare surcharge tax along with making the 2017 Tax Cuts and Jobs Act tax structure permanent.
The Path Forward
Given pandemic-induced economic conditions and bipartisan support for infrastructure initiatives, reducing federal regulatory red tape may no longer be the largest impediment to actually promoting infrastructure. However, we believe true policy progress on infrastructure investment requires the alignment of a list of priorities to balance public financial incentives with compelling projects. These include state and local responsibilities, risks, returns, operations, maintenance and an appropriate public-private sector mix for the coming decades. Improved government interagency coordination is also essential to bringing the best value to all parties, including citizens and investors.
The appropriate vision should be evolutionary rather than revolutionary. New construction is not required for every project and shovel-ready projects may not always be the best investments. Years of pent-up demand combined with new technologies in materials, engineering and information-gathering allow a publicly sponsored enterprise to leverage every possible revenue stream to create and capture value. Ideas can embrace more than transportation, renewable energy or water projects. Information technology investments can streamline operations and improve cost savings for additional reinvestment. Social infrastructure is also ripe with opportunities, such as those found within the areas of healthcare, education, and multi-family and senior housing. Climate change-induced infrastructure disruptions offer blunt reminders that essential services cannot be taken for granted, and costs of addressing these issues are dwarfed by the mitigating benefits.
The Opportunity
In a world of low-to-negative rates, we believe the infrastructure opportunity is primed to support economic growth and benefit both issuers and global investors.
As the US continues to be faced with stubbornly high unemployment due to the pandemic, incentivizing infrastructure investment should be supportive of employment and state and local spending, which account for 14% of GDP (according to the BEA).
With global government interest rates at or near all-time lows, we believe issuers have an opportunity to capitalize on infrastructure initiatives at a relatively low cost. We believe increased issuance will likely be met with increased foreign demand. Positive nominal yields, declining hedging costs and favorable regulatory capital treatment will continue to drive global demand for infrastructure-like assets. We believe this foreign demand, coupled with growing ESG opportunities to complement the available capital, is already present to fund these initiatives. Now, it’s just a matter of finding the political capital to move ahead.