One of the inevitable, and at times depressing, features of working in the infrastructure space is its propensity to become a political football.
The recent US presidential election is a case in point where the incoming POTUS has had a national infrastructure plan as a central plank in his campaign. President Trump’s commitment to infrastructure was cemented in his inauguration speech when he stated that America’s infrastructure had fallen into disrepair and decay promising that “we will bring new roads and high roads and bridges and tunnels and railways all across our wonderful nation”.
So what do we know of this new plan to boost infrastructure spending?
The plan is being drawn up by billionaire Wilbur Ross and university professor Peter Navarro and their proposal is to stimulate $1 trillion in capital expenditure over 10 years, and as part of this the Government should hand out $137 billion worth of tax credits to the private sector. The federal tax credit would leverage a flood of private money covering 82% of the equity needed for new projects argue Ross and Navarro and they say the tax credits would cost the Government nothing because of increased tax revenue from new private spending, economic activity and employment.
There are however critics coming forward to point out that this will only work for well-conceived projects with clearly identifiable revenue streams – which would be funded in any event by the market, so why give tax credits away? The proposals appear to be solely weighted to the investor and contractor side of the industry. They do not address the single biggest impediment on projects coming to market – affordability. States and municipalities simply may not have the resources to repay the investment over a project’s life. No amount of financial alchemy can mask this economic truth.
One other aspect of the use of tax credits that needs to be considered would be their term/period. If they are only available for the construction period, will that create a very real refinancing risk?
There will be people in the Infrastructure community who will worry about the risk alignment of an investor who invests purely for tax shelter purposes as opposed to whole life of project return.
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