“Trump seems con­vinced that the prob­lem is a lack of avail­able pri­vate cap­i­tal, and thus has pro­posed a tax plan that in­cludes gen­er­ous cred­its to en­cour­age pri­vate in­vest­ment in in­fra­struc­ture. That is the wrong ap­proach”

Financial Mirror (Cyprus) - - FRONT PAGE -

In the United States to­day, with par­ti­san po­lar­i­sa­tion at record lev­els, there is still at least one pol­icy goal on which there is broad con­sen­sus, not only among Repub­li­cans and Democrats, but also among busi­ness and labour lead­ers, states and cities, and or­di­nary cit­i­zens: in­fra­struc­ture.

The US has been short-chang­ing in­fra­struc­ture for years. His­tor­i­cally, fed­eral, state and lo­cal gov­ern­ments have to­gether in­vested about 2.5% of GDP in non-de­fense in­fra­struc­ture as­sets. But, over the last 35 years, fed­eral in­vest­ment as a share of GDP has dropped by more than half.

For a long time, state and lo­cal gov­ern­ments were able to cover the short­fall, in­creas­ing their con­tri­bu­tion to three quar­ters of to­tal spend­ing. But when the Great Re­ces­sion hit, states and cities were forced to slash their bud­gets. As a re­sult, in the sec­ond quar­ter of this year, to­tal pub­lic ex­pen­di­ture on in­fra­struc­ture fell to an es­ti­mated 1.4% of GDP, the low­est share on record.

This is all the more wor­ry­ing, given the al­ready-poor state of US in­fra­struc­ture, which earned a grade of D+ from the Amer­i­can So­ci­ety of Civil En­gi­neers in its 2017 qua­dren­nial re­port. Al­most 20% of US high­ways are in dis­re­pair. The costs and con­se­quences of de­ferred main­te­nance are ap­par­ent ev­ery­where, and al­most ev­ery city and state has its hor­ror sto­ries: dys­func­tional sub­ways in New York City, lead­con­tam­i­nated drink­ing wa­ter in Flint, Michi­gan, the nearcol­lapse of a ma­jor dam in Oroville, Cal­i­for­nia.

The re­port es­ti­mates that restor­ing US in­fra­struc­ture to “a state of good re­pair” would cost $4.6 trln be­tween 2016 and 2025. That is $2.1 trln more than has been com­mit­ted so far. De­vel­op­ing new fund­ing sources for in­fra­struc­ture in­vest­ment is there­fore crit­i­cal.

An in­no­va­tive strat­egy un­der dis­cus­sion in Wash­ing­ton, DC, is linked to cor­po­rate-tax re­form – a pri­or­ity for Pres­i­dent Don­ald Trump and con­gres­sional Repub­li­cans. Un­der the cur­rent tax sys­tem, US multi­na­tion­als can de­fer tax pay­ments on their for­eign earn­ings un­til the earn­ings are repa­tri­ated. With for­eign earn­ings grow­ing and for­eign cor­po­rate-tax rates fall­ing, de­fer­ral has be­come in­creas­ingly at­trac­tive. As a re­sult, US com­pa­nies are hold­ing an es­ti­mated $2.6 trln in for­eign earn­ings abroad, rather than repa­tri­at­ing it and pay­ing taxes that could be used to fi­nance, say, do­mes­tic in­fra­struc­ture in­vest­ment.

Since 2013, the US Congress has floated sev­eral re­form pro­pos­als to in­crease rev­enues col­lected on the stock of for­eign earn­ings. Two re­cent bi­par­ti­san bills – which seem to have the sup­port of Speaker of the House Paul Ryan, among oth­ers – link such re­forms di­rectly to fed­eral in­fra­struc­ture fund­ing.

But Trump seems ea­ger for state and lo­cal gov­ern­ments, which are in the strong­est po­si­tion to as­sess the needs of their com­mu­ni­ties, to shoul­der much of the bur­den. Fed­eral fund­ing, he has sig­nalled, would be lim­ited to “high pri­or­ity,” “trans­for­ma­tive” na­tional projects and used as lever­age to en­cour­age pub­lic-pri­vate part­ner­ships (PPPs).

Pri­vate in­vestors have long been ea­ger to in­vest in pub­lic in­fra­struc­ture – such as trans­porta­tion or en­ergy – in ex­change for a share of those projects’ fu­ture rev­enues. Of course, pri­vate in­vestors are gen­er­ally not in­ter­ested in projects that don’t gen­er­ate rev­enue – such as, say, school li­braries, ur­ban “green­ways,” or low-in­come hous­ing – de­spite the im­por­tance of those projects for the econ­omy and so­ci­ety.

In some ar­eas, how­ever, PPPs can of­fer sub­stan­tial value. Though pri­vate fi­nance may be more ex­pen­sive than tax­ad­van­taged pub­lic fi­nance, over a project’s en­tire life, a PPP can ben­e­fit its govern­ment part­ner in nu­mer­ous ways: through in­no­va­tion; re­duced de­sign, con­struc­tion, and life­time main­te­nance costs; and risk mit­i­ga­tion.

To date, PPPs have played only a mi­nor role in in­fra­struc­ture de­vel­op­ment in the US. Trump seems con­vinced that the prob­lem is a lack of avail­able pri­vate cap­i­tal, and thus has pro­posed a tax plan that in­cludes gen­er­ous cred­its to en­cour­age pri­vate in­vest­ment in in­fra­struc­ture.

That is the wrong ap­proach. What is re­ally lim­it­ing pri­vate in­fra­struc­ture in­vest­ment is, to some ex­tent, pub­lic

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