Infrastructure Plan Underwhelms

On Feb. 12, the Trump administration released a 55-page outline of its long-touted infrastructure plan. After reviewing the 10-year, $1.5 trillion proposal, we’re left underwhelmed. In its current form, the plan isn’t the panacea that U.S. infrastructure desperately needs. However, given the importance of addressing infrastructure, we think this plan will serve as a starting point. Although there are significant challenges facing the passage of an associated funding bill, we continue to believe that infrastructure is in such critical need that a solution is inevitable.

In its 2017 Infrastructure Report Card, the American Society of Civil Engineers estimated that the United States needs $2 trillion in infrastructure investment to address the system’s poor and still-deteriorating conditions. At first glance, the $1.5 trillion Trump plan looks like a decent effort to address these needs. Upon further examination, however, we’re not optimistic that the plan will achieve the desired outcome.

First, as had been communicated by the administration before the official release of the plan, the federal government will be providing only $200 billion of the $1.5 trillion of funding. The Trump administration hopes to structure funding in such a way to offer significant incentives for state governments, local governments, and private companies to provide the difference. However, this approach has its shortcomings. Many state and local governments are not in the fiscal condition to direct tax dollars to infrastructure. This would leave the states in the best fiscal health--and not necessarily the ones in the greatest need--in a relatively stronger position to capture federal dollars. Additionally, private company investment isn’t necessarily suitable for certain types of infrastructure. Private investors require some sort of return, typically in the form of a toll. But tolling isn’t easily added for arterial roads and many other types of infrastructure.

Second, although it’s just a small piece of total proposed funding, the source of the $200 billion of federal funding is likely to draw significant political opposition from both sides of the aisle. On one side, many Democrats have already expressed that they believe the plan relies too heavily on the private sector and does not provide enough federal funding. On the other side, Republicans are likely to hesitate on more spending, given how large the federal deficit is expected to be following 2017 tax reform and the recently passed spending bill. The White House has proposed funding the federal portion through spending cuts in other programs, but we think this would only draw more ire from Democrats.

Last, even if the proposed plan worked perfectly, it would only add additional infrastructure funding for the next 10 years. While this would help pay for projects in desperate need across the country, it does not provide longer-term funding stability. A longer-term solution will be required to pay for ongoing repair and maintenance. For example, by failing to increase the gas tax in response to improving gas mileage and inflation, the plan leaves the Highway Trust Fund in its current dwindling state.

At the company level, we don’t plan to change our fair value estimates for any of the aggregates, cement, or steel companies we cover. Our existing forecast is based on the assumption that the federal government increases funding just enough to stem ongoing deterioration, which still represents a meaningful increase from current levels. If any future revisions provide a higher certainty of funding, we’d reassess our volume, pricing, and profitability outlooks assumptions across our aggregates, cement, and steel coverage.