The Biden Plan: The most awaited infrastructure plan for the US
The need for an adequate infrastructure program for the US is well known. This program has taken several presidencies to see the light of day, but it finally took the form of a concrete and ambitious plan presented by the Biden Administration in March 2021 known as the American Jobs Plan. The reaction to this plan by companies with important interests in the energy and infrastructure sectors in the US was somewhat euphoric at the time. We can say that, after having passed the Infrastructure Investment and Jobs Act, Public Law No: 117-58 (the Act), despite the significant departure from the original infrastructure plan, the final result calls for great optimism in the expansion of the US infrastructure sector.
The original plan
The originally proposed infrastructure plan represented the most significant public domestic investment in the US since the 1960s, reaching an overall amount of USD2 trillion. It covered a repertoire of investment initiatives, including transportation infrastructure, renewable energy, water distribution, electricity transmission lines, digital connectivity, housing and social infrastructure, and R&D. In the area of renewables, in general, investment tax credits (ITC) for solar projects and production tax credits (PTC) for wind projects were proposed to be extended over the next ten years.
The objective of this plan was (and still is) to increase the country’s productivity, competitiveness and long-term growth, redesigning and rebuilding the US economy for the 21st century, introducing sustainability criteria throughout the value chain and correcting historical social injustices. The infrastructure plan was presented in conjunction with the Made in America Tax Plan, so the bill would be paid over 15 years with revenues derived from the tax reform, thus avoiding increasing the country’s debt. Republicans (who control 50% of the Senate) announced their rejection to the then presented plan as they considered that it went far beyond what is traditionally implied in an infrastructure program, but most importantly, because of the tax increase proposal to pay for it. Similarly, the initial infrastructure plan also met with the frontal rejection of powerful lobbying groups such as the US Chamber of Commerce.
Reaching consensus in the Senate
Biden’s wish has always been that his infrastructure plan achieves the support of both the Republican and Democratic parties, which is understandable and desirable given its magnitude and economic cost for the country. For that, he initiated negotiations with a small group of Republicans and Democratic senators to find points of agreement.
Negotiations were not easy, and both parties had to compromise. As a result, the revised original plan was trimmed down to USD1.2 trillion and the Act has passed with bi-partisan support. It has also been stripped of the “human infrastructure” component (known as the American Families Plan), the ambitious green energy and climate change initiatives that permeated the proposal, and the substantial tax reform, which are mostly now included in the Build Back Better bill. Democrats were determined to approve this new bill through a reconciliation budget process before the self-imposed deadline of 2021 year-end but such target date was not achieved. At this point in time, the Build Back Better bill is considered “dead” by many, at least as we currently know it.
The Act looks more like a conventional infrastructure plan with new investments in roads, rail, bridges, broadband internet, water and sewer pipes and electric vehicles. The group of senators also reached a compromise about the sources for this massive spending, and tax increases (with some exceptions) will not be one of them. Instead, legislators have agreed to more than a dozen different funding sources, includingstrengthening the Internal Revenue Service (IRS) to enforce tax collection and redirecting emergency relief funds, including unused unemployment benefits.
The Infrastructure Investment and Jobs Act
The Act affects every sector of infrastructure in the US, although priority has been given to transportation. It is not a new stimulus endeavor with short-term impact. It defines what type of projects and how these projects will be done, with a consequent impact on the US economy for the years to come.
Funding will be allocated to a variety of assets, or issues of concern, such as roads and bridges; ports, airports; waterways; passenger and freight rail; public transit; electric vehicles; safety; and reconnecting communities. In total, the Act assigns approximately USD1.2 trillion in funding over ten years, including approximately USD550 billion in new (or enhancement) spending during the next five. Of this new spending, nearly USD300 billion will be for improving the surface-transportation network (most funding reserved for highways, roads and bridges) and another USD266 billion will be for improving society’s core infrastructure, such as water, broadband, energy and power, environmental resiliency (coastal protection, flood mitigation), and environmental remediation. The remaining funding, will go to supporting existing programs until 2026.
A New Deal era starts for America. In fact, the amount allocated to this spending is even larger than during the New Deal. But even if these figures are extraordinary, the current state of the infrastructure in the US will require a combination of federal, states, cities, counties, and private investment finance. One of the expected effects of the Act would be attracting different sources of funding to complement the federal financing. To this effect, several programs require additional use of funds other than federal funds. Equally, certain evaluation criteria has been included in certain programs for competitive grants to promote projects with private investment and/or other type of non-federal funds.
Many of the existing programs funded by the Act have been around for some time but also new programs have been created to deal with relevant current infrastructure issues such as resilience or to address carbon reduction. Coastal resilience, cybersecurity, waste management, flood mitigation, ecosystem restoration, energy efficient vehicles, bicycle and pedestrian trails, electric buses and electric vehicle charges are some examples to which funds have been allocated in these new programs.
Funding to enhance broadband for all Americans, climate-focused environmental monitoring and R&D are among other areas covered by the Act.
The Act’s investments will be largely directed, and programs will have to be designed by the Department of Transportation, but other federal agencies will also play an important role, including the Department of Energy, the Environmental Protection Agency, the Department of Commerce, the Department of the Interior, Department of Agriculture and the Department of Homeland Security.
A good amount of the funds provided for in the Act (around USD300 billion) will be distributed based in formula grants, mostly for roads and bridges. These formula grants established by Congress offer predetermined funding to states based on different factors, which are aimed at making an equitable distribution of such federal funds.
Pursuant to the discretionary grant programs, States and local governments will be competing for these funds. Applications will be evaluated by federal agencies through certain criteria that will target national priorities. These criteria are already included in the Act or will be identified by the different federal agencies at the time.
In addition to the grants mentioned above, investments under the Act will also be allocated to agency programs and operations, loans, and the Highway Trust Fund. In particular, the transportation Infrastructure Finance and Innovation Act (TIFIA) program, the Water Infrastructure Finance and Innovation Act (WIFIA) program and the Railroad Rehabilitation and Improvement (RRIF) program will continue to be supported by federal investments, providing sources of low-cost funding for infrastructure projects.
The Act does not contain any of the tax increases previously proposed by the original infrastructure plan but in order to fund the bill there are sometax-related changes:
- increased required reporting to the IRS by individual and firms acting as digital assets brokers of these type of transactions;
- reinstatement of excise taxes on certain chemicals;
- highway-related taxes to help finance the Highway Trust Fund (extended until 2028); and
- a three-month early end to employee retention credits for certain employers which was in place to help offset employees costs during the pandemic.
In addition, current available tax exemption instruments are also enhanced and increased, such as the Private Activity Bonds (PABs), which cap has been doubled (from USD15 billion to USD30 billion for qualified highway or surface freight transfer facilities). With this increase in the current PABs program and its addition of two new categories of exempt facilities for private activity bonds (qualified broadband projects and carbon dioxide capture facilities), new opportunities arise for the private sector to take advantage of tax benefits that traditionally are available only to the public sector.
The arrival of such vast piece of legislation, naturally raises particular challenges or questions about its practical and immediate applicability. As the legislation unfolds and the different participants start interacting, there may be some tension balancing an efficiency in funds allocation; preserving the equity in the distribution of such funds; keeping national priorities at center stage; integrating the private sector; assigning resources of governmental agencies, and including sustainability principles into the mix.
Predetermined grant programs may be easier and quicker to deploy than discretionary ones, for which regulation will have to be put in place. In any of these cases, both federal granting agencies, and local and state governments receiving grants and other benefits, will need to boost their own resources to face the increasing number of projects, applications and opportunities. To implement, or take advantage of, the prospects granted by the Act, these stakeholders will have to enhance their capabilities and operations by hiring new employees and external resources, educating their employees in the new law and funding supply, fostering new skills, and learn how to re-mobilize their own assets and resources. By the scale of the programs and the number of stakeholders involved, in the near term, while public administrations and the private sector catch up with new demand, we may see a lack of skilled workers and professionals in the infrastructure sector that can hit the ground running. We anticipate a lagging reaction and mobilization in projects procurements and deployment.
The increase in infrastructure projects and funding also means that there will be a greater demand for raw materials, construction equipment, and redeployment of current assets which may create competition, globally, for the same goods. As the global supply chain is still backed up from the COVID-19 pandemic disruptions and its impact on labor supply, unprecedented logistical challenges, and material shortages, a sudden increase in demand for infrastructure materials, equipment and workers will likely add to the global stress, bringing construction costs even higher.
Good news for the private sector
Despite some uncertainties and challenges in connection with its initial implementation, it is clear now that a comprehensive infrastructure plan for the US is finally a reality. A USD1.2 trillion plan (including a good part of it in direct spending) is very good news for the US and for private companies in the infrastructure, energy and new technologies sectors.
As to whether the private sector will play a key role in the next phase of infrastructure development in the US, our conclusion is that it can and it should. There will be extended opportunities for businesses already established (with the possibility of increasing theircurrent market share) and for emerging ones eager to join as new players and contribute with their knowledge, technology, innovation and experienced human resources. Furthermore, unexpectedly, the current supply chain issues may also help develop additional opportunities of commerce from neighboring (or relatively closer) countries to the US. The opportunities will be there for those who want to take them.
Specifically, the Act recognized a confirmation for public-private partnerships. As mentioned above, in some cases the Act requires or encourages diversified sources of funds for projects, including private sector funds. We hope to see an increase in these funding, participation and initiatives from the private sector coming into the system.
The next steps towards a comprehensive framework in the US for a new and competitive economy for the next decades to come, would be complementing this wide-ranging infrastructure plan with climate-related policies, including incentives and tax credits for a transition to clean energy.