Why US Infrastructure Needs More Impactful Money, Not Just More of It

Cherian George
May 1 · 4 min read

President Donald Trump, the Speaker of the US House of Representatives and the Minority Leader of the US Senate are on the right track in seeking a $2 trillion dollar down payment on US infrastructure. In principle, this is consistent with the President’s 2020 budget request to up investment to revamp the United States’ badly lagging infrastructure. The POTUS in fact had proposed putting responsibility for directing the money in the hands of lawmakers.

The other key items discussed are also on point — the need to find a reliable funding source which experience tells us will need to be a combination of taxes and user fees, and the need to provide a state match mechanism that is pragmatic.

That said, the key issues at play here in spending this money wisely given the decades-old problem are:

  1. The need for a short-term strategy to meet urgent infrastructure needs and extend the current economic growth cycle

Short-term Investment:

The needs are large so a $200 billion proposal would be a good start provided it represents a net increase in investment. Every state, regional or local transportation, water or power department or independent authority can use an infusion of funds to accelerate projects already in planning and development. Local funds are limited so to make this work a limited state match, akin to the historical 20% range, will have to be considered in order to get the money to work soon. The ramp-up in 2021 and 2022 will need to be rapid to make a dent so multiplying that investment by 2–3 times over three years and communicating it now will allow planners to plan and construction companies to ramp up labor and resources to meet the need without materially driving up prices. This short-term investment strategy will allow immediate needs to be addressed while supporting the health of the underlying economy.

Long-term Investment:

Rebuilding a $20 trillion economy with a multi-trillion dollar investment gap will ultimately need an annual new investment of about $1 trillion a year for a while, i.e. 5% of GDP, to meaningfully catch-up. That may be 3–5 years out but is what will be needed to sustain economic growth and build the infrastructure resilience needed given the impacts of climate change. Politicians are not best suited to make this decision. As discussed in my article last year, The Infrastructure Footrace: Why is the US Stuck in Reverse?, the US needs a meaningful plan to significantly address its crumbling infrastructure which includes:

  1. Addressing infrastructure governance,

This is a job for independent, non-partisan infrastructure commissions with experts, not a job for politicians. Elected officials need to accept that fact and that for this to work, accepting the commission’s recommendations should be treated as mandatory not optional.

Ramping up Funding and Certainty Makes More Sense

A rush to provide all the funds upfront will create perverse incentives on the part of decision-makers and almost certainly drive up bid prices given that the planning, design and construction industries will not be ready with the onslaught of new work. This will also almost certainly drive down quality. As a result, it is critical for Congress to provide a clear guide-path to funding and certainty that allows for good decision-making and efficient investment.

Such a plan will also create an ability to transfer primary funding responsibility over time back to state and local governments by ramping up the state match. A publicly disclosed and decreasing federal match over 5 years, for example, would provide incentives to state and local governments to increasingly bear that responsibility using combinations of uses fees and taxes. This would provide longer-term state and local control of their infrastructure decision-making and investment. Regional and national priorities will still warrant a federal role and a federal match that is more defined and limited.

Conclusion

Lawmakers do have things working to their advantage: For one, the broader economy is still in good shape but that cannot be assured to last. If lawmakers act swiftly and decisively, they could extend the current growth cycle and help ward off the threat of recession. As evidence, transportation volumes at airports, roads and ports throughout the country, which are strong indicators of economic activity, are still quite healthy. And lastly, the economic multiplier on infrastructure investment is positive. This investment can pay for itself. See Why Now Represents A Window Of Opportunity For U.S. Infrastructure.

Why? Forum

Commentary from Fitch on why we think what we think.

Cherian George

Written by

Cherian George is a managing director and head of the Americas in Fitch Ratings’ global infrastructure and project finance group. He is based in New York.

Why? Forum

Commentary from Fitch on why we think what we think.