Institutional Investing in Infrastructure senior editor Drew Campbell spoke with Michael Likosky, Head of Infrastructure with 32 Advisors, about the infrastructure plans of incoming U.S. President, Donald Trump. The 10-year $1 trillion infrastructure investment plan was developed with Peter Navarro, an adviser to Mr. Trump and a public-policy professor at the University of California, Irvine.
Donald Trump will be the next U.S. president and he touted infrastructure investment during his campaign. What are his plans for infrastructure?
Infrastructure was at the heart of Donald Trump’s economic plan, yet his approach to infrastructure is not well known. I would say that prudent innovation is the cornerstone of his approach. It is revenue neutral and yet aims to bring $1 trillion of infrastructure projects to market within the next ten years.
Donald Trump, of course, is a well-known real estate developer. How does this affect his thinking about infrastructure?
Many think that Donald Trump found his way to the importance of infrastructure as a politician. It has been part of his real estate strategy on several occasions. Trump’s first great success was turning a run-down Commodore Hotel near Grand Central into a Grand Hyatt. He recounts the story in his best-selling book, The Art of the Deal. This investment was really one in Grand Central Terminal which was not in great shape at the time. He bet in the future of the Grand Central neighborhood. As Grand Central has grown and thrived, so has his Grand Hyatt.
You say President-elect Trump’s plan calls for prudent innovative financing. What does this mean?
Trump’s approach will likely include four prudent innovative financing tools. These tools are: (1) public-private partnerships or P3s, (2) a federal tax-credit bond, (3) rationalizing the regulatory process, and (4) repatriating U.S. dollars to pay for things together with tax reform. My view is that Mr. Trump has taken some of the most innovative bipartisan ideas for infrastructure financing and moved them from the periphery to center stage.
Let’s go through these tools one by one. First, how will P3s feature in a Trump infrastructure plan?
President-elect Trump has as the cornerstone of his approach equity participation in public infrastructure projects. His view is that much of infrastructure can be funded through private equity, which adds a discipline and involves cheaper design and building costs. However, he definitely does not see private participation in public projects as happening to the exclusion of government. In fact, government must play the role of active financing partner under Trump’s plan. It will provide credits to make projects more affordable and stable over the long term. On average, the expectation is that projects will return 9-10 percent.
How will tax credit bonds be used in the Trump plan?
Another prudent innovation financing approach is the introduction of a federal tax-credit bond. Today, a good deal of infrastructure financing happens through tax-exempt bonds. These bonds are only practically available to high net worth individuals who can benefit from their tax characteristics. Large institutional investors such as those ones who invest in P3s are largely shut out of the system. A tax-credit bond changes all this.
We have experimented with a federal tax-credit bond once. It was wildly successful, bringing $187 billion to market during the height of the financial crisis over six quarters. I assisted US Treasury as an internal Advisor on these Bonds. Interestingly, if you look at the use of these bonds and you find that they were bipartisan at the core — used not only in Republican and Democratic Congressional jurisdictions, but also for projects which crisscross Democratic and Republican communities. These bonds are also cheaper for U.S. Treasury too than tax-exempt ones.
Red tape is a oft heard complaint in the infrastructure development world. How does President-elect Trump’s plan affect the regulations and bureaucracy involved in project procurement?
Almost all Democrats and Republicans agree that environmental and other regulatory reviews are long-winded, duplicative and do not accomplish their aims effectively. For this reason, a bipartisan movement has started to streamline the regulatory process. This Trump approach is, as are most, not only bipartisan but moved from the periphery to the center.
Are there any specifics yet on what some of these streamlined process could be?
These streamlined processes are important for projects in places like California which have duplicative federal and state regulations, which can take several years to move forward. You see it often in water and transportation projects. Many projects sit on the sidelines now as a result in the face of a drought-stricken state. State and federal regulatory reviews would be closely coordinated and focused on achieving standards quickly through prudent innovation.
Turning to repatriation — what is the plan and how would it be accomplished?
Today, enormous amounts of U.S. dollars sit abroad. Companies do not want to repatriate them because of the tax hit involved. The Trump plan wants to give companies a tax break to bring those dollars back so long as they are invested in U.S. infrastructure. This approach has bipartisan credentials. He would charge 10 percent tax on repatriation.
Is their potential capital generated for infrastructure investment with this repatriation plan?
All of the taxes levied on the return home of capital would go toward infrastructure.
What is the biggest challenge of the Trump infrastructure plan?
To my mind, the biggest challenge for President-elect Trump’s infrastructure plan will be politics. Today, many projects do not happen not because of lack of private and federal money. Instead, P3 participants have difficulty dealing with government.
Over the last twenty-years, I have advised government at all levels as well as US international organizations, and major labor union pension fund on P3s. I can tell you that investors are not alone in wanting to do P3 deals. I have never advised a public official or labor leader who does not want a deal to happen. However, investors very often are not attuned to how government views the benefits of P3s.
It will be important to have a strategy that aims at getting everyone on board, and all stakeholder points of view and objectives understood.