Infrastructure Investment Spending A Key Component

Infrastructure Investment Spending A Key Component
new sense photo brian selzer

OCEAN CITY — The fiscal stimulus package approved by the U.S. Congress in December may have come at the right time to spur the economy. It’s been slowing from annual rates of growth in real Gross Domestic Product (GDP) of around 3% in the 1990s and 2000s to the low 2% range in recent years, and BofA Merrill Lynch (BofAML) Research is projecting 1.7% for this year.

A consensus is emerging that monetary policy alone can’t stop or reverse this trend, and fiscal policy needs to be added to the mix of solutions. Spending on infrastructure investment is a central part of this package, and a matter that’s been a focus of this year’s presidential campaign. Infrastructure serves as an important motor of economic growth by raising the productivity of labor and capital and thus boosting economic output. Together with factors such as education and health, access to quality infrastructure for energy, transportation, communication and water helps determine a society’s well-being.

In developed economies, infrastructure has been aging, plagued by chronic underinvestment. In the developing world, the needs are even greater. According to the McKinsey Global Institute, $57 trillion in global infrastructure investment would be needed through 2030 just to stay on track with projected GDP growth.

Infrastructure is in no better shape in the U.S. than it is in other developed countries. In its 2013 infrastructure report card, published every four years, the American Society of Civil Engineers assigned a below-average grade to it. In the report card, the organization estimated that annual investments of about $450 billion through 2020 — a total of $3.6 trillion — would be required just to keep it in a state of good repair, before consideration of expansions or upgrades. Of these funds, little more than half were available. The environment at this juncture favors an increase in infrastructure investment in the U.S., due to a confluence of factors.

First, Congress passed spending bills in December that include significant funding for infrastructure investment over several years, with state funds likely to augment federal dollars. The long-term nature of this package reduces funding uncertainty and can enable larger-scale projects with a longer-term impact.

Second, politics during a U.S. presidential campaign favors infrastructure investment, and the two most likely candidates both support increased spending for it. Hillary Clinton’s proposals would amount to $500 billion in federally supported funds over five years, while Donald Trump has suggested that he would undertake sizable investments in new infrastructure. Strategas Research Partners believes a Clinton administration would come through with the larger increase and Trump would also bump up spending but by a smaller amount.

Third, the current regime of ultra-low interest rates, expected to remain in place or slowly give way to increases over the coming years, makes funding infrastructure investments relatively inexpensive. Some proponents of infrastructure spending as a means of stimulating economic growth argue that there should be even more borrowing for it to take advantage of the unique opportunity to lock in low financing costs.

We believe infrastructure investments can be better executed and managed if governments and private-sector firms undertake them together through public private partnerships. These allow governments to share the risks of construction, maintenance, operation and management of infrastructure with companies that may be able to perform these tasks better and, since they’re profit-driven entities, more efficiently. Governments need to be careful in selecting private sector partners — assessing their financial capacity, experience and track record — as choosing the wrong ones can lead to delays, re-negotiation of contracts and other problems. Private partners can benefit from the monopolistic nature of typical infrastructure assets, such as bridges, roads and water supply systems, and their relatively stable and predictable returns over extended periods of time.

The most direct beneficiaries of a ramping up of infrastructure spending would be engineering and construction firms, which would should see an increase in projects, with benefits running over several years since once construction is completed they may provide maintenance and even operate the assets. Manufacturing firms should also see incremental business in the form of demand for equipment used in the construction and operation of infrastructure. Technology and telecom equipment manufacturers may see growth due to telecommunications infrastructure projects, especially those aimed at improving global connectivity.

(A Merrill Lynch Wealth Management Advisor who can be reached at 410-213-8520.)