President Trump’s plan to rebuild the nation’s roads, bridges, rails and water systems is most likely to favor projects that will rain cash on Wall Street, economist Leonard S. Hyman and energy analyst William I. Tilles said in a blog post.
“What would matter the most under the plan are projects that might produce cash flow for investors rather than benefits for the public,” they wrote on the Wolf Street website.
The Trump administration on Monday released an infrastructure plan that says $100 billion in federal incentives over 10 years may spur more than $1 trillion in total investment, with a provision that Washington shouldn’t pony up more than 20 percent of a new project’s cost. The plan would shift the responsibility for funding major new public works from the federal government to cities and states.
“The document released by the White House is anything but clear on how private investors would horn in on the goodies, so to speak,” Hyman and Tilles said. “But it looks as if private investors could collect incentives for their own projects and do all sorts of lease deals with the governments that financed the projects. We would expect investment firms of every stripe to be interested. Terms this generous are seldom on offer.”
The Trump plan has a scoring system to evaluate eligibility for potential government funding that gives a 70 percent weighting for funding “capital and operating expenses without federal support.” Social benefits to the community and new technologies are each given a 5 percent weighting.
“To put it simply, the criterion is: Will you charge tolls and high tariffs to generate hefty revenues for the project?” Hyman and Tilles said. “Is the private equity tail wagging the public infrastructure dog? Not clear at all from the text. But seems likely given the people in charge.”
Private-equity firms raised a record $33.7 billion for North America-focused infrastructure funds last year, The Wall Street Journal reported, citing data from Preqin. In addition, Blackstone Group LP, the biggest private-equity firm, plans to raise as much as $40 billion for infrastructure but may put only 10 percent in public assets, a person familiar with the matter told the newspaper.
Still, private-equity firms are wary of the plan’s incentives to put money into projects they’re not interested in. They’re also worried about overpaying for projects whose prices get bid up.
“Most firms are probably scratching their heads, saying, ‘how do I put the money to work apart from buying existing assets and paying high premiums?’” Roger Wood, a Moelis & Co. infrastructure investment banker, told the WSJ.
The dependence on private capital and funding from cash-strapped municipalities likely will skew what actually gets built, Hyman and Tilles said.
“With so much depending on collecting revenues to pay off the debt, the builders will build what is economically attractive,” they wrote. “Toll roads have much better economics than municipal water systems. We doubt the people of Flint will see much benefit.” More than 100,000 residents of Flint, Michigan, were possibly exposed to high levels of lead after the city changed its source of drinking water to the Flint River in 2014.
It’s not clear how the federal government will find $200 billion in direct spending that’s outlined in the Trump plan. The administration asked Congress to come up with the money, but it’s likely to face resistance from Republicans who don’t want to add to the ballooning budget deficit. Moderate Republicans and Democrats blocked Trump’s proposals for deep cuts in transportation and infrastructure grant programs in his first budget proposal last year.
“It is hard to believe that a spread of small subsidies here and there, none even big enough to finance even a major highway, will do much more than fund what local governments might have spent anyway,” Hyman and Tilles said. “But now public and private priorities are being reversed.”