PropertyFeb 27 2017

Where the populist train is taking us

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Where the populist train is taking us
As President Trump prioritises US infrastructure investment, revenue-producing schemes such as toll roads and airports may well benefit

What is clear is that the underlying political climate is shifting to more populist agendas. This is placing a renewed focus on infrastructure investment as a core policy objective.

While infrastructure investments generally benefit from widespread support from across the political spectrum in many countries, it has been remarkably embraced by the populist movement, most notably by US president Donald Trump.

The attraction of infrastructure investments to many populist politicians is that it entirely fits within an economic nationalist agenda and supports protectionist trade policies by creating local employment. Social infrastructure, such as public transportation projects, is also seen as a means to promote social equality and enhancing quality of life by improving communications for many of those citizens that believe that globalisation has not benefited them.

So, what is happening in the US?

Undoubtedly, the US urgently needs to boost its infrastructure investment in order to upgrade and modernise assets, expand capacity and reduce system bottlenecks. The current situation is considered to be more acute than many other developed countries due to long-term underinvestment and often inadequate maintenance programmes, which has left many ageing infrastructure assets in a dire state of repair.  

President Trump’s signature $500bn (£402bn) infrastructure campaign is being focused on ‘people first’ projects. This generally means social infrastructure and public transportation schemes such as airports, ports, roads, rail and waterways, which are expected to free up the movement of people and goods across the US and stimulate economic growth.

It is unclear how Mr Trump proposes to pay for the new infrastructure plan, although the early indications from his policy advisers are that it will be funded mainly by a user-paid model and additionally supported by tax credits to encourage private investment. They argue that any government spending to support the infrastructure programme is expected to be paid back through taxes on the wages of new jobs and business profits generated by the newly created infrastructure assets.

One disadvantage with a user-paid infrastructure funding model, as opposed to a government-funded model, is that it tends to concentrate projects on high revenue-producing schemes, such as toll roads and toll bridges, airports or public utilities in higher-income areas. The user-paid approach may often ignore the wider social and economic benefits of infrastructure and, consequently, can make it more difficult to bring forward new developments in lower-income areas and rural locations.

The scale of Mr Trump’s infrastructure plan is likely to provide significant opportunities for investors. In order for the programme to be successfully implemented, it is also likely that investors may benefit from a more streamlined approach to infrastructure procurement and faster delivery timetables. 

The scale of the US programme is further expected to give rise to wider opportunities in associated support services, materials, construction, plant and equipment sectors. A greater focus on infrastructure spending is also positive for the US commercial and residential real estate market located in the regions of improved infrastructure development and communication links.  

Investors do need to be aware of the risks, of course. The US programme is clearly targeted at specific infrastructure sectors, including social infrastructure and public transportation projects. Public utility projects may also benefit, although the renewable energy sector is not expected to fare so well.  

While infrastructure developments may support protectionist ideals by creating local employment, the risk is that the wrong protectionist trade policies could also restrict international competition, best practice and technologies for new US infrastructure projects, which could ultimately result in higher delivery costs and lower-quality assets.

Alistair Perkins is head of project finance at NN Investment Partners