FPC Blog


A Case For US Infrastructure

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US infrastructure policy has failed dismally over the past two decades. The nation’s decision makers must agree that American roads, bridges, plumbing systems and public buildings are falling apart. A trip to most of American urban centers leaves all in shock and wonderment at the failure of prior US governments to upkeep basic infrastructure needs of the American people. President Trump’s intention to pump US$1 trillion into America’s failing infrastructure is by no means an overestimation!

The US Congress’s dire inability to legislate on funding to support both new and retrofitted roads, bridges, public buildings and general physical transit communications has landed America in this mess. The majority of transit and road retrofits have stalled because the US Congress has managed only temporary funding for infrastructure maintenance, sometimes lasting for a matter of months. It is only from December 2015 that Fixing America’s Surface Transportation (FAST) Act was passed for a US$305bn to highway and transit maintenance over 5 years. From 2005 the US Congress depended mainly on funding extensions, nearly depleting the Highway Trust Fund. This lack of oversight has left America closer to third world status when it comes to infrastructure development.

US infrastructure should be a bipartisan issue and will be made priority over the course of the Trump administration. President Trump and his team proposed to immediately increase private sector spending on infrastructure projects with US$137bn in tax credits. The Federal gas tax has funded America’s infrastructure to date. However, this tax has not been increased, or adjusted for inflation since 1993. And since 1993 US politicos over various administrations have complained and whined on the need to come up with money for failing US infrastructure, without even considering basic economics such as an inflation adjusted gas tax rate. Due to this mismanagement, we will need more than pure fiscal spending to solve this maligned infrastructure funds drought.

The Canada Pension Plan Investment Board’s (CPPIB) US$18bn global infrastructure portfolio is a strong replication to follow for infrastructure investment outside of tax revenue. The CPPIB’s fund invests US$375m to US$1.5bn in single projects. In this sense, the fund has blanket management oversight in the project. According to Mrs. Hogg, Managing Director of the CPPIB, the Fund has gen­er­ated annual re­turns for the port­fo­lio of 12.8%, consistently for a five year period. While the CPPIB invests globally, we invite US institutional investors such as US public pension funds to actively step up and invest heavily in the nation’s infrastructure projects, and to also take a management oversight approach in investing where possible. Thus far, US pension funds such as CalPERS have made investing strides in domestic highway projects. This trend must continue if we are to have the funds America needs to both maintain and develop our infrastructure.

Private infrastructure funds will have a crucial part to play as well. According to Preqin’s 2016 Infrastructure Fund Outlook, while the majority of capital raised for infrastructure needs comprised a minority of global funds, 51% of private sector infrastructure investors are motivated to provide capital to first-time funds due in part to the US’s renewed infrastructure focus. Most infrastructure investors are interested in both global and boutique funds that are backed by businesses with long-term commitments from a healthy mix of public and private infrastructure projects.

We have a healthy rebound in mutual funds and ETF funds that are primed towards infrastructure companies and industrials. Morningstar has reported the asset base of such funds to be well over US$10bn. Capital concentration for unlisted infrastructure funds have almost skyrocketed from 2015 to present. Preqin’s Infrastructure Capital Concentration report for first quarter 2017 states that total fund size for unlisted infrastructure funds jumped by 73% from 2015 to 2016. These unlisted funds raised US$59bn in 2016. We can attribute such a jump in capital concentration in part to strong investor expectations regarding the Trump Administration’s infrastructure policy.

Suggestions and Recommendations:

  • The inability of US Congress to stand by infrastructure funding has failed America’s infrastructure in the past. We need bipartisan support on Federal infrastructure laws, acts, and bills that are introduced.
  • State legislature needs to step up to the plate when it comes to state enforcement of laws, acts and bills to strengthen funding for depleted infrastructure. This is not only a Federal issue.
  • Infrastructure projects will need to focus more on user fees and revenue. Both Federal and State projects have only focused on steady toll revenue on major highways within the past 5 years. User fees offer funds for maintenance, and projects with user fee projections are much more attractive to institutional and private investors.
  • Funds such as the Highway Trust Fund may need more private sector input on their Advisory Boards to ensure that the funds are well managed with consistent returns.

US infrastructure has lagged so far behind in build and maintenance over the past decades that it will take an intensive ground-war approach to getting prioritized projects up and running. We cannot afford to have stalling for even one year on proposed measures to begin fixing America’s roads, bridges, buildings, levees and all physical infrastructure systems. The Trump Administration has pledged full support in bringing US infrastructure up to standard. US political decision makers and citizens should stand by this pledge.

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