For construction and civil engineering businesses, Donald Trump's inauguration speech included a very welcome promise: The president vowed to make rebuilding America's aging roads, bridges, and tunnels a priority.
Of course, the devil is in the details--and there are going to be a lot of details to hammer out on this one. The vast majority of construction companies in the U.S. are small businesses with fewer than 250 employees, according to the U.S. Census Bureau, and many of them are already thinking ahead as to what this might mean for future project opportunities and hiring plans, even though they know that massive infrastructure plans don't roll out quickly.
Trump has yet to unveil an official infrastructure plan, but a white paper by two of his advisers offers a glimpse into what his eventual proposal might look like. The theme of the paper, co-authored by Commerce Secretary nominee Wilbur Ross and White House National Trade Council head Peter Navarro, an economist and University of California at Irvine business professor, is shifting the ownership and operation of public works to the private sector. It's not a new idea--some toll roads have been built this way--though the paper suggests this shift should happen on a broader scale. The plan can be summed up as follows:
- The goal: Use "public-private partnerships" to stimulate $1 trillion in infrastructure spending over 10 years.
- Where the money will come from: The federal government would hand out $137 billion in tax credits to encourage private investors to finance new projects.
- The promise: Trump's advisers claim the plan wouldn't cost the federal government any money because the new tax revenue generated by investors' profits on projects and by the income tax on new construction jobs would cover the cost of the tax credits.
Digging into the Details
Proponents of privatization say that it's simply not financially feasible for the government to pay for trillions of dollars in projects, and that even if it were possible, bureaucracy tends to lead to cost overruns and inefficiencies. These are the main reasons that Republicans are likely to ignore a proposal put forth by Senate Democrats shortly after the inauguration, which hinges on the government paying directly for infrastructure projects.
In its current form, the Ross/Navarro plan has run into criticism from industry experts and economists on both sides of the privatization debate. Here are a few of the main issues on the table:
- Tax credits are problematic. Critics argue that tax credits could amount to massive corporate discounts for companies that were planning to complete large infrastructure projects anyway. For Steve Hanke, who advised President Ronald Reagan on infrastructure issues and is a professor of applied economics at Johns Hopkins University, the problem is one of transparency. He's in favor of privatizing public works projects and yet disagrees with the tax credit method. "It's not transparent at all. In the end, you can say $1 trillion was spent, but you'll have no clue how much was really spent. And you can wind up with a lot of projects with benefits that are less than the cost," Hanke says.
- The most necessary infrastructure projects aren't always the most attractive. Brian Pallasch, the managing director of governmental affairs at the American Society of Civil Engineers, says any infrastructure plan will need both the right kind of capital and the right kind of projects. Although the private sector will undoubtedly need to help solve the financing part of the puzzle, it's tough to attract investors to projects, such as repairs and maintenance, that don't have an ongoing revenue stream. "Some are public goods that are not going to generate revenue, but they're really important," Pallasch says. Case in point: the Oroville Dam emergency in Northern California, which recently displaced more than 100,000 residents when a deteriorated spillway led to massive flooding. On the other hand, if private investors build new toll roads, they get to keep the toll revenue.
- The job creation benefits could be overblown. If infrastructure projects are going to generate a significant number of new jobs, here, too, it matters what kind of projects ultimately win funding, says Wayne Klotz, president of Houston-based RPS Klotz Associates, a 150-person civil-engineering company focused on public works projects. Klotz points to the stimulus package passed during the Obama administration. "When the money was allocated, it went to 'shovel-ready' projects. What that meant was, ready-to-go construction projects," which included things like maintaining street overlays, patching water line leaks, and replacing street signals. Those were all necessary projects, Klotz says, but not the kind of infrastructure investments that require armies of new workers.
The Outlook for Business Owners
If Trump pursues a tax credit-driven infrastructure plan, Hanke believes it will turn into more of a public spending project than it seems. "The whole scheme is designed so that the government can spend more money," he argues, and taxpayers will still be on the hook, even with credits. Business owners who want to capitalize on the contracting opportunities that will arise should start lobbying now.
"Like any other pork barrel project, you buttonhole your congressman and lobby like mad," Hanke says. Still, you can expect Republicans in Congress to try to slow the process down and keep an eye on earmarks, he warns.
The civil engineers and project managers who do the infrastructure building are less skeptical about the role of the public sector than privatization advocates. Government involvement may not be perfect, but it's necessary, they say. "It's in the Constitution that the federal government should build the roadway system. The framers knew this was a public good," Klotz says. "You have to have public money behind systems intended to benefit the public."
Regardless of the details of the eventual plan, Klotz is thinking about the future, even if there isn't much immediate action to take. "We have a large number of public sector clients. We're asking them what their plans are. We're already talking to the Texas Department of Transportation on other things and the city of Houston. This is all part of maintaining business relationships. If you're not already doing that, you're not going to be an entrepreneur in this sector for long," he says. He advises other business owners to learn the rules of private-public partnerships now. For instance, states have rules about what kind of businesses can bid for projects and guidelines dictating how they evaluate eligible companies.
Sheila Montgomery Mills, who is a senior project manager of design and construction for the Birmingham Jefferson Convention Complex in Alabama and has also run her own company, says now is the time to think about any skills gaps you might have, both in your business and in the local labor pool. If the president unveils an infrastructure plan and Congress agrees on the funding for it, construction companies eligible to bid on the work are likely going to need to staff up.
"We're losing a lot of industry tradesmen and women. They're aging, and we need to fill that gap," Mills says. Alabama is trying to address this by reaching out to high schools and even middle schools to provide a path for work force training.
If there's one thing everyone seems to agree on, it's not to expect a pot of gold anytime soon.
"The funding won't get turned on in 15 minutes," Klotz says. "The wheels grind slowly--and that's not necessarily a bad thing."