US Policy Changes Vol.23 (Infrastructure/Economy Vol.2)

Here are excerpts on Trump’s infrastructure plan from Trump Versus Clinton On Infrastructure (PDF; 10/27/2016) | Wilbur Ross & Peter Navarro.

The Trump Private Sector Financing Plan
…on average, prudent leverage will be about five times equity. Therefore, financing a trillion dollars of infrastructure would necessitate an equity investment of $167 billion, obviously a daunting sum.
…the interest rate in today’s markets will be 4.5% to 5.0% with constant total monthly payments of principal and interest over a 20- to 30-year period. The equity will require a payment stream equivalent to as much as a 9% to 10% rate of return over the same time periods.
To encourage investors to commit such large amounts, and to reduce the cost of the financing, government would provide a tax credit equal to 82% of the equity amount. This would lower the cost of financing the project by 18% to 20% for two reasons.
First, the tax credit reduces the total amount of investor financing by 13.7%, that is, by 82% of 16.7%. …82 percent of the commitment has been returned. …
Equity… requires twice as high a return as the debt portion, 9 to 10% as compared to 4.5 to 5.0%. Therefore, the 13 percent effective reduction in the amount of financing actually reduces the total cost of financing by 18 to 20 percent. …
… Two identifiable revenue streams for repayment are critical here: (1) the tax revenues from additional wage income, and (2) the tax revenues from contractor profits.
A Tax Policy/Repatriation Interaction
…Companies paying the ten percent tax on the repatriation of overseas retained earnings could use…
… Repatriate $1 billion, incurring $100 million of tax, and invest $121 billion in the equity of an infrastructure project. The 82 percent tax credit on the $121 thereby fully extinguishes the repatriation tax so at the end of the day they have a $121 million infrastructure equity investment and no tax bill while the US has more and new infrastructure. Any revenues in excess of the basic amounts needed to support the financing, as well as any long term residual values remaining after full repayment of the financing could go for recoupment of the extra $100 million. …

The Trump Plan In Historical Context
… First, somewhat lower quality revenue stream projects need an equity component or a guarantee by a creditworthy public authority or municipality. …
Second, construction costs tend to be higher when projects are built by the government rather than the private sector… These higher construction costs more than offset the benefit of lower interest rates, especially in today’s low rate environment when spreads between taxable and tax-free bonds are so small.
Third… In today’s especially low short-term rate environment this means the project will have to pay a negative interest rate arbitrage on money it actually doesn’t need yet or get a short term construction loan and run the risk that interest rates will rise between the date that the loan is taken down and the date of the long term refinancing. In the tax exempt market it is expensive to obtain fixed rate commitments years before the draw down.
…used historically to target real estate investment. However, the concept of offsetting a major portion of project cost with income tax credits that are repaid as issued by means of the tax revenues generated just by the construction is new. …

Conclusion
With the Trump plan, there is no need to create a new government bureaucracy to make infrastructure loans. The private sector is well equipped to do so, provided enough equity is invested, and that is what the Trump plan provides. …