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September 16, 2018

The Outlook for Infrastructure

The Metals Service Center Institute’s recent Economic Summit brought together analysts and experts from across industries to discuss the future of the North American economy and how it relates to metals producers, service centers, processors, and metals users.

Tony Nash, CEO and founder of Complete Intelligence, a data technology firm that uses artificial intelligence and machine learning to forecast commodities, currencies, equity markets, economics, and international trade addressed an issue that has plagued U.S. policymakers for several years: how to tackle the nation’s yawning infrastructure investment gap.

U.S. infrastructure spending has declined 20 percent over the last two decades and has not kept up with population or economic growth, Nash said. As a result, the gap now exceeds $2 trillion. (Funding for roads, bridges, and transit is alone responsible for half of that deficit.)

While political commentators worry little will get done in Washington, D.C. if Congress is divided after the November 2018 elections, Nash said the outlook for infrastructure spending is “positive.” Nash predicted that, even if Rep. Nancy Pelosi (D-Calif.) is sitting across the negotiating table from President Donald Trump next January, federal lawmakers and the White House can successfully negotiate an infrastructure package—but it might not be the full $1.5 trillion outline the Trump administration has proposed. “Democrats will want to save some part of the investment in case their party takes over the White House in 2021,” Nash said.

In the event Democrats control the U.S. House of Representatives in 2019, Nash puts the odds at 60 percent that Congress will send an infrastructure bill to the president to sign. If Republicans manage to retain control of both houses of Congress, expect a robust package focused on private spending to pass, Nash said in an interview after the MSCI Economic Summit.

To set the stage for that outcome, Nash noted the Trump administration has been working to identify projects that truly are “shovel ready.” “That’s important,” Nash said. “Having projects ready to go is as necessary as the funding itself.”

Driving the desire to reach a deal is the understanding among policymakers that infrastructure investment is one of the safest economic choices they can make. According to a Congressional Budget Office analysis, every dollar invested in infrastructure generates $1.80 in economic activity, double the impact of a tax credit for new job creation and more than four times the bounce from a capital gains or dividend tax rate reduction.

A $1 trillion infrastructure package would result in an additional $330 billion in spending by the construction sector; $65 billion by the electric power generation, transmission, and distribution sector; and $40 billion by transportation equipment manufacturers. Under a $1.5 trillion federal package, spending by those sectors would rise to $495 billion, $98 billion, and $60 billion respectively.

Even if Washington can’t agree on an infrastructure reform package over the next two years—how to pay for the new investment and the environmental review processes will remain sticking points between the two parties—Nash is bullish on the infrastructure market. Several states, like Texas, are on strong fiscal ground and will look to make new investments absent a federal share. Private sector investors also are eager to get moving and will go directly to local and state officials if there’s a stalemate in Washington, Nash said.

In his presentation to MSCI members, Nash drew comparisons between U.S. infrastructure investment and China’s. After infrastructure investment lagged, China, through its Belt Road Initiative (BRI), is now using infrastructure as a means to build hard and soft power domestically and internationally. The Chinese government made attempts to get the private sector to pay for the $1 trillion investment in greenfield infrastructure but ended up stuck with the bill. (In our interview with him, Nash reiterated a government-only investment in the United States is not a viable approach.)

Nash also noted China’s BRI has been devoid of transparency and warned that U.S. lawmakers must learn from that mistake. Nash said federal lawmakers and the White House should develop a clear monitoring and evaluation of project milestone framework; a system for portfolio planning and program management; cross-agency cooperation capabilities; and a plan to reform regulations and streamline approval. (Nash said fewer steps in approval processes mean there is less opportunity for corruption.)

One option is to create a website where citizens can explore the bidding process for all projects, Nash said. This website should go much further than the site established by the Obama administration to provide transparency to its $1 trillion infrastructure package, passed by Congress in 2009.

Nash estimated that China’s lack of transparency efforts eventually could mean up to 30 percent of spending is lost to waste, fraud, and abuse. The country already has spent $1 billion on a port in Sri Lanka where no ships will dock. Other projects have been cancelled due to lack of oversight, or to regulatory hurdles. If the U.S. doesn’t enact the proper administrative infrastructure, the potential for corruption will be immense and could “rob” the American people of essential investment.

U.S. lawmakers will have plenty of details to negotiate regarding infrastructure investment in the 116thCongress, but, if Nash is right, the potential that the federal government will increase spending is strong.

Before launching Competitive Intelligence, Nash built and led the global research business for The Economist and the Asia consulting business for IHS (now IHS Markit). He has also been a social entrepreneur, media entrepreneur, writer, and consultant and currently is international advisory board member for Texas A&M University and a non-executive director with Kredit Microfinance Bank in Cambodia.