President Biden has had a good month. After weeks of wrangling, he finally signed his infra bill into law, with more to come in The Build Back Better Bill (BBBB), pre-Christmas.
At a triumphant speech in Minnesota, he affirmed “we’re back in the game” and “ we’re going to help America win the competition of the twenty first century.” He boasted that for the first time in twenty years America would be investing more than China in infrastructure, and that it is making the “largest investment in seventy years, the biggest in public transport ever.”
It has been quite a struggle. I wrote previously how opposition to the bill was intense, with Republicans calling it a Trojan horse that seemed to be about anything but infrastructure. But the President has worked tirelessly to secure its passage. He split the original proposals into two bills, with the direct infra proposals confined to this first bill, and his broader measures relegated to the Build Back Better Bill.
In the remaining slimmed down bill, there were cuts negotiated across the aisle of some $800 bn., which is a shame. After twenty years of doing very little, US infra is in a real mess. The American Society of Civil Engineers 2021 report card gives eleven categories of US infrastructure a ‘D’ grade, and observes “Sectors like transit and wastewater have staggering maintenance deficits.” It notes 42% of bridges are at least fifty years old and 7.5% are structurally deficient, while leaks mean 6 billion gallons of water are lost each day in the US.
The situation with tap water in America has got particularly bad. It is noteworthy that in Minnesota the President referred to making sure no child in America would have to drink dirty water again, and pledged to remove 100% of lead pipes.
The bill allocates some $55bn to clean drinking water, $50bn to water structure improvement, and $17bn to ports and waterways. It also puts an impressive $108 bn into upgrading the electric grid and energy, and $65 bn to bolster broadband. Transport is a key focus – $110 bn is given to improving the nation’s roads and bridges, $66bn to Amtrak, and another $39bn to modernize public transit. $25bn will begin to upgrade US airport infrastructure which was much welcomed by the Airport Council of America. President Trump hit home when he talked about how arriving at an American airport feels like arriving in the third world. Indeed.
I remain concerned that expenditure on the scale we are seeing ($1.2trn from the Infra bill, and perhaps another $1.75trn from the BBBB) will inevitably stoke inflation. Elliot Hentov, the Global Head of Macro Policy and Research at State Street, tells me not to worry, and that “there’s nobody on the Street who is seriously concerned about the inflation implications.” Maybe I’m just getting cranky.
Hentov believes it will “add no more than 0.25% to GDP, perhaps as much as 0.4% in some years.” He also thinks spending in some areas like childcare is likely to be anti-inflationary as it “will free up productive capacity in the labour force.”
Having said that, he adds: “The bill, as it has survived in its bipartisan form, is a proper pure infrastructure play and it will therefore have a high fiscal multiplier effect.” Hentov estimates that this will be something like one and a half to two times overall, and as much as three to four times in specific areas. Let’s see what happens.
Meanwhile, the question remains – just how green is what has got on the statute books? Biden frames the whole infra debate in terms of climate change. He told the audience in Minnesota: “when you build back a road, you're going to have to build it a foot or two higher, they have to be built so they are more resilient."
Certainly, Dan Walters at GRESB’s Head of Americas tells me: “Accelerating the clean energy transition in the US requires infrastructure investments at scale.”
This bill does a lot. “With heavy emphasis on clean energy transmission, electric vehicle infrastructure, and low carbon technologies, the stage is set for significant progress over the coming decade,” says Walters.
However, I remain to be convinced that the $7.5bn devoted to establishing EV charging stations is sufficient, given Biden’s belief that half of all vehicles on US roads will be electric by 2030.
Still, there’s a lot that is good. $73bn is allocated to improve the electric grid, $65bn for rural broadband (helping inclusion), $21bn for environmental projects, the efforts to clean up mines and polluted areas, and $47B for climate resiliency – addressing wildfires and coastal flooding risks.
Carlos Sanchez, Executive Director at The Coalition for Climate Resilient Investment, tells me he welcomes “resilience elements across most other allocations” which “signifies a determined step forward in terms of integrating physical climate risks into national upstream and downstream infrastructure decision-making.”
The Bill establishes a national ‘Center of Excellence for Resilience and Adaptation,’ and advances resilience solutions for transportation networks. FEMA’s Building Resilient Infrastructure and Communities (BRIC) Program, includes a pre-disaster risk mitigation program.
However, Sanchez notes: “the extent to which this bill will achieve its full potential in the resilience space will depend on… defining how physical climate risks will be integrated in each stage of infrastructure.”
More to come
The folks at BNP Paribas Investment Partners think “more meaningful impact is in the Build Back Better Bill, which has not yet passed.” According to Pam Hegarty, Senior Portfolio Manager, “As written today, it includes $555bn for clean energy and climate initiatives, including incentives to grow domestic manufacturing/ supply chains for solar and wind, and investments in clean energy projects in targeted communities.”
Hegarty’s colleague, Whitney Jiranek, Portfolio Manager, US & Global Thematic Equities, goes further. “(BBB) is definitely more heavily skewed towards green economy support.” It will provide “a much-needed bridge for getting us from a very early phase of adoption in industries critical to achieving net zero by 2050 – wind, solar and EV – to a point where they can scale and begin to establish a degree of economic viability.” She adds: “This means everything from a prospective investor’s standpoint.”
In addition, Tom Osbourne, Executive Director at IFM Investors, the specialist infrastructure fund manager, points out that the: “BBB bill has the potential to be very consequential for investors in infrastructure and renewables in particular because …it would extend and expand the availability of investment and production tax credits …(to) new technologies like hydrogen, battery storage and carbon capture.” He also notes that “direct pay” proposals will enable more investors to monetise the tax benefits associated with investing in renewables as they will no longer have to have tax liabilities that they can offset.
Elliot Hentov puts both bills into context as being part of a “green mosaic” that the Biden administration is building. If you add in the achievements at COP26 and the international focus the US now has on combatting climate change, finally holding China’s feet to the fire, you start to see what he means.
Biden’s starting to seem a lot more than the “Gaffe Machine” he once called himself.
Christopher Walker is a writer on business and politics. He sat for several years on the asset allocation committee of a major asset manager.
The RI USA conference runs from December 7-9 and will feature in-depth discussion on the Biden Build Back Better programme. You can sign-up for free by clicking here.