WHEN the White House caravan headed to the Arabian Desert last weekend, Donald Trump’s team were keen to score big “wins”. Stephen Schwarzman, head of the president’s business advisory council, duly obliged: on Saturday Blackstone – which Mr Schwarzman just happens to run – announced plans to create a $40bn infrastructure fund, using $20bn from Saudi Arabia’s biggest sovereign wealth fund. This will be dedicated towards upgrading US infrastructure, and is far bigger than anything ever seen before. What should investors make of this? One obvious lesson is that dancing around Mr Trump’s caravan is already paying handsomely for some business leaders: Blackstone’s share price has subsequently surged.
A second point is that financiers and non-American governments alike have noticed that one way to Mr Trump’s heart is to play the infrastructure game. After all, the president has repeatedly pledged to deliver a trillion-dollar infrastructure plan. His team has a strong incentive to keep banging this drum, since infrastructure has bipartisan appeal, and other elements of his policy plans, such as healthcare reform, have stalled. However, a third point that the Blackstone deal inadvertently highlights is how much uncertainty is wrapped around infrastructure plans. When Mr Trump first made his pledge last year, most observers assumed it would be largely funded by taxpayers’ funds and government debt. This is how the lion’s share of US infrastructure is currently funded, and Mr Trump is not a man scared of leverage.
However, when the White House actually released its budget proposals this week, these appeared to cut the public infrastructure funding. According to the budget plan, some $200bn of federal money is earmarked for infrastructure plans. But that is spread over 10 years, with a mere $5bn slated for 2018, and, crucially, even more money is being cut from existing infrastructure pots. The Department of Transportation, for example, is slated to lose 12.7 per cent of its funds. Thankfully, this budget is unlikely to fly; it is Congress that actually delivers bills. But it is a striking signal of intent – and reveals a yawning black hole in the Trump plans. So the White House team is scrambling to plug the gap in innovative ways.
Hence the carefully-timed announcement of the Blackstone-Saudi initiative. Earlier this month, Elaine Chao, transport secretary, told investors at the Milken conference that the White House would hit $1tn by experimenting with a mixture of direct federal funding, tax reform, the sale of government assets and public-private partnerships (3P). The White House is keen to copy an Australian initiative known as “recycling”, where public assets, such as airports, are sold and the revenue invested in new projects. “We like this Australian idea a lot,” says Gary Cohn, head of the White House national economic council, who stresses federal funds will only be used to supplement local initiatives. “We are not in the handout business.”
There is also enthusiasm for the type of public-private partnerships that have been used in Canada and the UK, as well as Australia. “We will be incentivising public-private partnerships,” Ms Chao says. “They are not the only option, but there is great promise [there].” In some respects this makes sense: the global financial system is flush with cash, and the US badly needs infrastructure investment. Since public sector infrastructure projects are often slow-moving and bureaucratic, they might benefit from private sector energy. But private money is not a magic wand, even when waved by a Saudi prince. Some projects, such as toll roads or airports, can generate revenues to repay investors. Many others cannot. Similarly, insofar as 3P projects have been tested in America, some have worked well (in places such as Virginia, California and Maryland) but an attempt to use 3P for a Chicago parking programme was a disaster.
Even fans of the idea concede that it usually only works where there is clear, strategic, government planning and a dedicated pool of public money to supplement private finance. Maybe this will materialise. One sensible, overdue step would be to raise the petrol tax to pay for infrastructure; another would be to use proceeds from repatriated overseas corporate cash. But these ideas were notably not mentioned in this week’s White House budget plans and therein lies the hole. Until this is fixed, Mr Trump’s infrastructure vision is likely to remain something of a mirage – even with Mr Schwarzman and the Saudi government dancing as 21st-century genies.