US Infrastructure Investments: Identifying the Risks on the Road to Opportunity
One of President Donald Trump’s stated goals is to initiate significant investment in US infrastructure — bridges, roads, airports, seaports, pipelines, fiber optic cables, and water projects. As with any major spending measure — and the most common number being tossed around for this one is $1 trillion — there will be political hurdles. However, the US House of Representatives Transportation and Infrastructure Committee held its first hearing of the new Congress in early February, bringing in business and labor leaders to begin laying out a “vision for building a 21st century infrastructure,” according to a committee press release.
Infrastructure spending of such magnitude will bring many opportunities for construction and infrastructure companies. Organizations need to be strategically positioned to capitalize on the opportunity, well-prepared to engage in the heightened competition facing the industry, and flexible enough to absorb an increasing level of risk.
In December 2015, Congress passed and President Barack Obama signed the Fixing America’s Surface Transportation Act (the FAST Act), which increased the collection of gasoline taxes to pay for transportation infrastructure projects. The FAST Act authorized $305 billion for highway and motor vehicle safety, public transportation, motor carrier safety, hazardous materials safety, rail, and research, technology, and statistics programs. Although FAST Act funds are to be allocated to rehabilitate the country’s transportation network, there remains a significant infrastructure deficit in the country.
During his campaign, Trump called for $1 trillion in infrastructure investment in transportation, telecommunications, water, power, and energy. Before his inauguration, Trump’s transition team circulated a list of 50 priority emergency and national security projects. Since then, Trump has given every indication that he plans to continue pushing to enhance infrastructure. For example, on January 25, he signed an executive action related to one of the more controversial project proposals, a wall along the US-Mexican border that many experts suggest would cost $15 billion to $25 billion.
Against the same funding challenges the Obama administration faced, Trump’s plan calls for much of the infrastructure investment to be driven by the private sector through a series of tax credits and private funding as a means to incentivize infrastructure investment in a revenue-neutral fashion. Moreover, his proposal outlines tax revenue streams to offset any federal government expenditure in the form of taxes on construction worker wages and profits from developers and contractors. Trump’s plan also calls for the relaxation of various regulations that are cited as way to accelerate project delivery times and reduce cost.
Challenges and Headwinds
Most Democrats and Republicans agree on the need to improve this country’s infrastructure. A key difference, however, is how to pay for the upgrades.
On January 24, Senate Minority Leader Charles Schumer introduced a $1 trillion infrastructure plan that relies heavily on direct government funding rather than on tax credits and private investment. Democrats generally argue that although tax breaks may encourage investment, they will not necessarily bring about those infrastructure projects that are most needed. In this case, the current Democratic criticism of Trump’s plan to leverage private financing as the key funding mechanism is that many worthy individual projects may not draw the private investment needed to initiate them since the underlying economics may not make such projects profitable.
Despite these political differences, it is likely that some form of Trump’s plan will secure support as infrastructure renewal is a common interest. If an infrastructure spending bill is passed by Congress, we believe organizations in the construction and infrastructure industries will be affected in a number of ways, including:
- Increased competition: With an economic slowdown in some areas of the world and increasing volatility, we expect a large inflow of foreign capital as international contractors seek opportunities to invest in and build US infrastructure projects. We also expect consolidation of market share in the sector in the near future.
- Talent and labor shortage: Already facing a shortage of skilled professionals, the construction industry will need to compete with other industries to attract and retain talent.
- Private investment: Regardless of which infrastructure plan takes hold, we believe that public-private partnerships will be a pivotal model to deliver infrastructure in the immediate future. Consider that more than 30 states have enabling legislation in place and are poised to act immediately on already identified projects.
- Increased risk: We are witnessing an ever-increasing trend of infrastructure projects being delivered through complex delivery methods, including design-build; design, build, operate, and maintain; and integrated delivery. All such contracts result in increased risk being assumed by contractors. With competition expected to heat up, contractors will be expected to have greater risk bearing capacity. Another consideration is that infrastructure and construction companies are increasingly tied to the “Internet of Things,” including their operational technology and its electronics, software, and network connectivity that bring significant cyber exposures. And design considerations will need to address the fact that infrastructure itself is increasingly a target of cyber criminals.
- Risk financing: Insurers and others continue to develop new risk consulting and risk transfer products and services. Not only do insurers absorb performance and hazard risks associated with infrastructure development, they are increasingly becoming infrastructure investors as well. It remains to be seen how this level of infrastructure exposure will lead to new products and services or new alternative risk structures.
The American Society of Civil Engineers (ASCE) estimates that the US will face a $1.6 trillion infrastructure deficit in 2020. Although it is too early to know exactly how the new Congress and the Trump administration will proceed, we believe it’s safe to expect that infrastructure and development will be a hot topic this year and for many to come. If you’re not doing so already, now is the time to discuss with your advisors the risk and insurance considerations at the advent of a likely major US infrastructure investment initiative.