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Will the US infrastructure plan be effective?

Will the US infrastructure plan be effective?

The United States (US) presidential plan is to raise $1.5trn to $1.7trn to spend on US infrastructure over the course of the next ten years. The proposed plan aims to restructure the permitting process, which is currently inefficient and may have actually disincentivised investment efforts.

Where is the money coming from and what will it be invested in?

$200bn will come from the US Federal funds, and the rest will be raised by states, cities and private investors. The focus of the plan is on incentivising state, city and private finance companies to provide the bulk of the investment. Federal funds will be used to fund up to 20% of a project’s cost. In addition, certain Federal assets may be sold by states and cities in order to raise capital to reinvest in new infrastructure.

Importantly, a quarter of the Federal funds will be directed to rural infrastructure, where communities have been left behind in respect of broadband connections. The remaining funding will go to initiatives such as: highly risky investments which would struggle to attract private investment, expanding the financing program and establishing a financing fund.

Will the bill pass?

In order for the infrastructure bill to be passed by the Senate, it will need to pass with 60 votes. Therefore, the bill cannot be passed along party lines in the same way that the recent tax reform was. Democrats will need to vote for it. Therein lies the rub.

While both parties want to upgrade US infrastructure, and the country evidently needs it, they are ideologically opposed to the way it should be financed. Republicans want the bulk of the finance to come from private capital, and Democrats want the bulk to come from Federal funds. It seems unlikely that this can be easily resolved.

Both Republicans and Democrats recognise the need for regulatory reform. But again, they seem to disagree on what the end state of regulations should be.

There is potential to find some middle ground in all of this, but the current political environment doesn’t appear to lend itself to cross party working.

Will it have a positive effect on the economy?

The key to answering this question lies in understanding the:

  • ultimate size of the spending package
  • decision making process of which projects to approve
  • time taken to achieve project approval.

The size of the spending package is the subject of hot debate, but will depend on what the details of the bill are. Will spending that has already been approved be redirected or reallocated to the new plan? Will there be enough state, city and private finance available for the projects that are brought forward, which will depend on the certainty of the cashflows, and who will be providing them?

Well planned and organised projects, and not necessarily the most expensive ones, should improve the efficiency of the economy. Right now, we don’t know which projects will be brought forward, and how they will be incentivised. Therefore, this will need to be watched closely.

In the US it takes around six years to approve a project. This is more lengthy and inefficient compared to countries such as Germany and Canada where it can be as quick as one or two years respectively. If the US infrastructure spending package is to have the intended effect, this process must be more straight forward and regulations will need to be reformed.

Regulatory reform has been passed before, but has not always resulted in the desired outcome.

The way in which the reform is crafted will be critical to its effectiveness. Regulatory reform has been passed before, but has not always resulted in the desired outcome.

Who will benefit?

The beneficiaries of this spending plan will be dictated by the outcome of the negotiations over the bill. If a bill is passed it is likely to benefit:

  • Financial services
    • – Banks would be required to provide the leverage and infrastructure investment managers, along with their clients.
  • Service providers
    • – Machinery companies such as Caterpillar,
    • – Infrastructure construction companies such as Fluor.
  • Jobs market
    • – If the reform is privately financed rather than by the Government, this may result in fewer jobs being created in the US, as companies may bring people in from other countries.
  • The economy.
    • – In the long run, if the right infrastructure projects are pursued, workers are likely in turn to become more productive. But the impact is unlikely to be immediate.

Is now the right time for reform?

Infrastructure reform and spending could be positive for the US economy’s growth and productivity. But this success will depend on the way in which it is executed.

It is well known that the US is a growing economy with low unemployment levels. Typically, the US Government would pursue such fiscal spending packages in tougher times when the economy requires a boost to growth and employment. Therefore, this really doesn’t appear to be the obvious time to implement such a spending programme.

Nevertheless, procurement reform would be beneficial for the US and global economy in the long run. But gaining cross party support in the current environment may be challenging to achieve.

This is a potentially significant spending plan, but it will be a long and winding road to travel before we reach a point on the horizon where we will see its effectiveness and impact clearly.

Image credit: Jim West / Alamy Stock Photo

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