Infrastructure Spending – In the Works?
Switzerland is celebrating the opening of the world’s biggest rail tunnel, a project through which 65 passenger trains and 260 freight trains will pass each day, cutting travel times (and air pollution) as people and goods move between the north and south of Europe. Back at home, our infrastructure is crumbling. Or is it? The answer depends on what you mean by infrastructure. Internet download speeds and cell phone coverage have improved significantly, supported by an estimated 113,000 miles of long-haul fire-optic cable and 300,000 cell phone towers in the US. We’re focused on more traditional infrastructure such as airports, waterways, rail, roads, and tunnels – like the Hudson River rail tunnel project infamously shelved in 2010.
Without a doubt, there are issues. The American Society of Civil Engineers (ASCE) has given US infrastructure an overall grade of D+ due to delayed maintenance and underinvestment, estimating that $3.3 trillion needs to be spent over the next ten years. What does this gap mean for America’s economy? If unaddressed, the ASCE estimates that each household will lose $3,400 in disposable income to infrastructure deficiencies each year over the next decade while the US economy will lose almost $4 trillion in GDP, resulting in a loss of 2.5 million jobs. Those are compelling numbers, but we’ve been warned about this for years and not much, or at least not enough, has happened.
We may be approaching an inflection point where needs lead to actions. It appears that the remaining candidates for President agree on at least one thing – the need to increase federal spending on infrastructure. We believe they recognize the economic and practical necessities and not just the opportunity to score political points in stump speeches. Even if our hopes for action are not met, collapsing bridges and water supplies compromised by lead-leaching pipes may force the next president’s hand.
There are also indications that incremental monetary stimulus is losing traction with the global economy. Those who were motivated to borrow to invest or spend have largely done so. Historically low interest rates alone may no longer be enough. Should we hit a bump in the economic road or try to push the economy beyond sub-2% annual GDP growth, accelerated government spending on infrastructure is a possible next step.
Does fiscal stimulus work? Scholars remain divided over the effectiveness of the New Deal’s spending programs during the Great Depression. The jury is still out on the 2009-2010 Build America Bond program. Opponents of fiscal stimulus argue that government spending risks crowding out the private sector, constitutes undue interference in the free market, and too often leads to “bridges to nowhere.” How well it works is probably a function of where and how it’s done.
This time could be different. Specifically, we think public-private partnerships, or PPPs, could play an important role in revitalizing America’s infrastructure and boosting the economy. A PPP involves a contract between a public sector authority and a private partner, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project. In many cases, the cost of using the service is borne primarily by the users of the project and not by all taxpayers – think of a toll bridge. PPPs are not a panacea, but in many instances have proven to be an effective means for procuring and managing public infrastructure.
We are attracted to the infrastructure growth concept and continue to invest in direct and indirect beneficiaries of this theme. The expected surge in spending may remain just around the corner – a compelling need, but still not a reality. A sound infrastructure-related investment should not rely solely on increased fiscal spending as a catalyst for a higher valuation. Diversification further reduces the risk that we are wrong about the timing or magnitude of infrastructure spending or the eventual impact on associated investments. That said – summer is nigh – as the election heats up, so might infrastructure-related shares!