Trump’s infrastructure plan

Q&A with Richard Elmslie Co-Chief?Executive?Officer of RARE Infrastructure

In general, what are the requirements for infrastructure investment in America?
Richard Elmslie: The first requirement is that you need bipartisan support. The Trump administration has that – because the Democrats are interested in doing some privatization of infrastructure.
He’s identified 50 assets that he thinks are prime candidates for infrastructure.
Many of the assets, though, that Trump has identified are not owned by the federal government. They’re owned by state governments, so the federal government needs to provide incentives for the state’s governments to want to dispose of those assets.
That’s not dissimilar to what’s happened in Australia. The federal government put in place a program whereby if the state government sold an infrastructure asset and then used the proceeds to go back into infrastructure, they provided a 15 percent boost to the sale price. I understand that Gary Cohn, one of Trump’s advisors, is actually talking with Joe Hockey, who is the treasurer of the federal government in Australia, about the Australian process.
The third requirement is a framework that’s put in place that will attract private equity and debt to build these new assets and maintain these assets. I mentioned the 50 assets. Many of them can be financed through the private sector without tax benefits. The framework, which has been put in place in many other parts of the world, is generally a concession type framework. The government would award a concession to a private consortium to build or rebuild a road or a piece of infrastructure, and then to maintain that piece of infrastructure at a certain level for a 20 year period, or 30 year period, a set period of time.
Historically, the American public doesn’t really like to pay for these assets. What has traditionally happened is the government has built the infrastructure, and they never maintained it. That’s the problem we have at the moment, because it’s in very poor condition because it wasn’t maintained. One way to introduce such a cost, say a toll, is to make the initial toll quite cheap and then increase it gradually year after year with inflation.

What incentives are required for owners of assets to recycle capital to fund new projects? Do you have any examples where privatization or incentivization has been example?
Richard: In order to get private capital involved, private capital really needs to know that there is a framework in place and that framework will be adhered to by the government.
That means that if I’m going to bid to rebuild a road, or to build a new road, or fix an airport, I need to know that if I’m going to spend the money on responding to a request for proposal (RFP), that that RFP is going to be adhered to, that there is a proper process for assessing the bids, and that the party will be awarded that asset on an unfettered basis, as outlined in the RFP, so that they can go about in rebuilding the road, or the airport, or whatever they have to do.
There are many examples all around the world where it’s been successful. It depends how you define a success, because in some cases assets might have been sold too poorly, so very successful for the people who came in, and maybe the government didn’t get the best price.

From an investment perspective, once privatization occurs in the United States, who do you think will participate?
Richard: You’ll get many of the international banks wanting to be involved by providing debt finance. You will get many of the infrastructure funds and infrastructure companies wanting to be involved on the equity end, also on being operators. That will be both listed and unlisted infrastructure companies.
On the listed front, the three largest operators of toll roads, as opposed to financiers, are all listed toll road companies around the world. You have Transurban in Australia. You have VINCI in France, Atlantia and Abertis in Italy and Spain. All of them would like to have some involvement if it’s successful. Except for VINCI, each of them have actually had a look in America, but America’s gone two steps forward, three steps backwards.
Obviously, there will be a side effect for consultants around the world who will be involved traffic consultants, and financial consultants, and engineers. Actually, it’s a big spin off if they did the privatization successfully for many different businesses, but it will benefit both the listed and the unlisted participants.

What are some of the challenges that you see Trump facing?
Richard: The biggest challenge is, as I said before, he’s got bipartisan support. He wants to do it, but he doesn’t own the assets. He needs to find a Republican Governor who is very keen to improve the infrastructure in his or her State, who is aligned with Trump.
Nevertheless, the administration needs to establish a framework that needs to be robust enough to provide the private equity and debt sufficient comfort that, over the life of that concession, they’re actually going to receive the funds they believe, based on their concession model.
To sum it all up, the biggest risks to Trump are:
• Finding a Republican Governor that’s of like mind to him
• Identifying the right asset
• Establish the right framework and ensure that framework isn’t changed during the RFP period
• The framework has to be able to survive the period of the concession without interference by government