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Congress Seen As Key to Trump's USD 1trn Infra Plans

11 November 2016

Donald Trump will have to contend with a penny-pinching Congress to deliver the huge investment in infrastructure promised during the election campaign, says specialists in US infrastructure.

Participants in the market for US infrastructure finance, which grew at a particularly fast pace in 2015 as the private sector stepped in to fill public sector funding gaps, have been weighing up the consequences of Trump’s extraordinary victory in the 8 November election.

“The view from the P3 [public-private financing] world is that Trump will favor private partnership because he is a developer-builder, appreciates getting deals done, and will demand quality, innovation, and efficiency,” said Karl Reichelt, senior vice president with infrastructure consultancy AECOM.

Trump doesn’t take office until January, but his plan for his first 100 days includes a planned American Energy and Infrastructure Act, which will leverage public-private partnerships and private investments through tax incentives.

The plan, which is revenue neutral is intended to spur an unprecedented USD 1 trn in infrastructure investment over a 10- year period.

Trump also plans to redirect government money from other sources. Around USD 3bn of money pledged by President Barack Obama for the United Nations’ Green Climate Fund, would instead by funnelled towards repairs for water and environmental infrastructure projects, the president-elect promised during the campaign.

Trump’s infrastructure plans also place a heavy emphasis on encouraging P3s and private sector involvement in national and local infrastructure projects.

“It’s a recognition that a USD 2trn national funding gap can’t and shouldn’t be funded solely by debt and higher taxes – that available government funding can be smartly levered with private investment and P3s to move the needle,” Reichelt added.

Trump’s infrastructure plan put an emphasis on projects that generate revenue, pointed out Adam Giuliano, counsel at Freshfields Bruckhaus Deringer. He added that airport and water sectors could see increased investor activity due to their revenue-generating nature and their presence in markets across the country.

Renewables prospects

However a Trump presidency, backed by a Republican congress, will likely try and roll back many of the incentives for renewables in Barack Obama’s Clean Power Plan, which in turn could slow growth of renewables.

The Clean Power Plan aims at raising the share of renewables in the US power generating mix by regulating carbon emissions from power plants and offering incentives for wind, solar and other renewables. However, the measure was already in a precarious position after a Supreme Court ruling in February to suspend it, pending further judicial review.

The Clean Power Plan is currently on “life-support” at this point, said Gregory Wetstone, president of the American Council on Renewable Energy, in the aftermath of Tuesday’s election result.

And the plug may be pulled on Obama’s flagship environmental policy completely if a new Republican appointee to the Supreme Court delivers the crucial fifth vote required to strike down the plan.

Trump’s presidency will also likely renege on US pledges under last year’s Paris climate agreement to cut greenhouse gas emissions 25-28% below 2005 levels by 2025, which could slow down deployment of low carbon energy.

However, some industry participants maintain the existing short-term drivers of clean generation sources – such as policies in states such as California and Iowa, and declining technology costs – will maintain momentum behind renewables.

Meanwhile, Trump’s intention to support the domestic coal industry, which has been in decades-long decline, is unlikely to overturn the dominant trend in US energy over the past decade – a big shift to cheap gas produced by a boom in fracking.

Mark Menezes, the vice president of federal relations at Berkshire Hathaway Energy, said during a webcast this week that the company would not seek to build new coal-fired power plants, even if the Clean Power Plan is scrapped.

Trump could, however, support the coal industry by rolling back air emissions standards – such as the Mercury and Air Toxics Standards – or by making it easier to lease coal mineral estates, said Menezes.

However Trump and the coal industry’s allies in Congress may also try to encourage new coal technologies, such as coal capture and sequestration, which allows coal-fired power plants to run with less emissions.

Tax credits

Industry participants have also said that it is unlikely that the investment tax credit (ITC) and the production tax credit (PTC) will be affected by Trump’s presidency.

The ITC provides a tax credit that represents 30% of expenditures on solar projects, fuel cells and small wind farms, and is available for projects that begin operating before 2017. The ITC steps down to 10% after that date.

The PTC provides a tax credit of USD 0.023 per kWh on wind project investments, is available for projects that begin construction this year. The credit will later step down to 80% for projects that begin construction in 2017, 60% in 2018 and 40% in 2019.

David Burton, partner at Mayer Brown, said in a recent commentary note that the tax credits are statutory and can only be changed through Congress. Moreover, tax credits for renewables have bipartisan support and will likely be left untouched in a Republican-controlled congress.

Clean sweep

Investors are also weighing up whether a Republican clean sweep of the presidency and congress unlock investment at a quicker pace. Trump’s infrastructure agenda may not fall victim to the partisan politics that would likely have marked a Clinton administration, pointed out Gregory Ciambrone, vice-President with the Walsh Group, a big US civil engineering firm.

Still, others question whether the new administration will be able to get Congress to sign off on big increases in spending at the same time that a Republican legislature will be pushing for tax cuts.

Wish list

As Trump makes appointments to his administration over the next 10 weeks, investors remain in the dark on much of the detail.

However there may now be better opportunities to eliminate some of the hurdles to private investment in infrastructure. Trump now has the chance to empower people who favour private-sector participation in infrastructure, said AECOM’s Reichelt.

The new president will also have the chance to take executive action to cut away red tape and speed up regulatory approvals.

“High on the wish list should be with Congress, establishing a Private Activity Bond framework and lending authority for social P3s and adjusting archaic Office of Management and Budget (OMB) scoring criteria that all but kills federal level P3s,” Reichelt added.

The scoring system is used to determine if it is entering into an operating or capital lease.

The US is poised for great change in a Trump administration. Only time will tell if the president-elect will be able to deliver on his campaign promises.

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