Karen G. Mills and Jan W. Rivkin
On the campaign trail in August, Donald Trump promised that his administration would oversee infrastructure investment that would “at least double” what Hillary Clinton intended to invest in roads, bridges, airports, public transport, and other structures. Given Clinton’s announced plans, Trump’s investment at that time would have been roughly $500 billion. After the election, Trump doubled down further, touting infrastructure investments of $1 trillion over ten years. The details emerging about his plans have important implications for city leaders.
The clearest explanation of President Trump’s infrastructure proposal comes from a white paper published in late October by two senior advisors: Wilbur Ross, a private equity investor and now nominee to be Secretary of Commerce, and Peter Navarro, a business professor at UC-Irvine and now head of the National Trade Council. The white paper makes clear that Trump does not intend to spend $1 trillion of federal money on infrastructure. Rather, Trump plans to offer $137 billion in federal tax breaks to spur private investors to inject $167 billion of equity into infrastructure projects. The investors will then leverage the equity with debt to obtain a total investment of $1 trillion.
We know in general that private investors will invest only in projects that generate revenue streams. Infrastructure projects such as roads with tolls or airports with concession fees do exactly that. But many other infrastructure efforts are unlikely to produce revenue. Take, for instance, programs to repair crumbling bridges, fill potholes, or fix old city water pipes. Those kinds of programs will attract little private-sector interest and will therefore get little boost from the Trump proposal.
City leaders who understand Trump’s plans can make a number of strategic moves. First, they can allocate existing infrastructure funding toward maintenance efforts that produce no revenue and steer clear, for now, of projects that might attract private investors once (and if) Trump’s plans are enacted. Second, they can soon approach local private investors and urge them to be ready to support projects in their cities if and when appropriate tax breaks become available. Third, they can start community discussions about the infrastructure efforts that are most needed in their city. It’s important to realize that the infrastructure projects most attractive to private investors might very well differ from the ones many feel will produce shared prosperity in a city. Steering private investors toward the city’s priorities will be a key challenge.
Finally, city leaders should be aware that Trump’s infrastructure proposal might never see the light of day. Even though Congressional Republicans and Democrats alike are touting the benefits of infrastructure investments, approval of the proposal is far from certain. Democrats are already decrying Trump’s plan as a tax gift to private equity investors. Republican budget hawks may balk at the $137 billion in extra spending or tax breaks without budget offsets. Trump’s advisors argue that the $137 billion will be recouped via tax revenues from the wages of construction workers and the profits of construction contractors who are working on the $1 trillion of projects. But to the degree that those workers and contractors would be working on other projects anyhow, without the Trump proposal, the taxes they would pay are not truly “new” and therefore not an offset to the extra spending.
In sum, city leaders should prepare for a federal infrastructure proposal that steers private investors to revenue-generating projects, but they shouldn’t count on it.
Regardless of federal plans, the principle of creating public-private partnerships to fund appropriate investment opportunities deserves additional time and energy at the city level. As city leaders prepare their lists of priority projects and cultivate deeper relationships with potential private-sector partners, they need to consider new financial structures that leverage scarce city dollars. How can local municipal funds be stretched or best leveraged in a responsible way to fund large investments that the community needs? How can private-sector partners be engaged in ways that satisfy their objectives but keep the public good front and center?
Existing tools at the city level generally focus on revenue bonds and tax credits. However, several cities, such as Gary, Indiana, have experimented with new partnerships that use government guarantees as a financing tool. One model, based on the Small Business Administration’s Small Business Investment Companies (SBICs), makes government-guaranteed subordinated debt available to help finance private projects that fill a public need. These can range from municipal airports to innovation hubs in underserved areas.
For city leaders who wish to explore the potential of new financing options, this may require developing new skills and new capacity—either inside government or in a local partnership. This means acting today to begin to plan and gather a leadership group to understand local priority projects and the financing capacity of the city. A Trump presidency and a Republican Congress might shift control over the funding from certain federal agencies (such as Commerce or Energy) to the state or local level. Those local governments with leadership groups in place will be better equipped to compete for these funding opportunities as they are redeployed.
Dear YALP participants, how do you see city infrastructure evolving during the Trump years? What have we misinterpreted or overlooked?
P.S. As you gather your thoughts on infrastructure and especially the role of public-private partnerships, don’t forget our colleague Rosabeth Moss Kanter’s book Move: Putting America’s Infrastructure Back in the Lead, which you received before coming to campus.