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Smith's Research & Gradings
Michael Ross
September 28, 2020

Smith's Research & Gradings

Will Infrastructure Promises Meet Expectations

Will Infrastructure Promises Meet Expectations?

Targeted Infrastructure programs will be one of the featured revitalization tools used for stimulating growth in the US economy post the COVID-19 pandemic. Many observers have anticipated massive large-scale infrastructure programs, but that may not be viable at this time, given the financial capabilities of many state and local governments.

Infrastructure projects that are dependent on matching funds from local governments may be required to scale-to-size based on the availability of local funds — taking into account higher costs incurred to fund normalized post-COVID-19 operating costs. New safety and testing regulations and operating procedures may impair pre-pandemic operating efficiencies and cause higher operating and administrative costs. The "new normal" may come with a higher price tag to operate safely, which could result in a reduction of surplus funds at the state and local levels.

At this point in the budgetary process, the forecasted revenues portion of the income statement is murky at best. Revenues from sales and use taxes, as well as income taxes are hardly normal for many states (especially those that experienced layoffs due to closure of retail stores, restaurants, and personal care services. Many states are still struggling with their plans to reopen. The timing for sustained operating normalcy remains unpredictable and is dependent on many variables.

Historically, the Federal Government funds around 20 percent of total infrastructure, but the level of Federal infrastructure investment varies by sector. For example, Federal government funding accounts for 28 percent of highway investment, but only 4 percent of water infrastructure investment, when you consider the capital, operations, and maintenance costs.

The pandemic's effect will have far-reaching implications on many aspects of opening the economy and the evolution toward normalcy, including the size and scope of the Nation's infrastructure program. The US government will play a major role; however, federal grants that require specific matches from local or state agencies will be required to develop alliances or cooperatives and develop public-private partnerships to provide capital for major projects. Such collaborations have occurred for toll roads, managed lanes, and airports in recent years.

The pandemic has garnered most of the attention. There has been little mention of shovel-ready projects in the pipeline. Finally, many governmental units are looking for federal aid and this demand could have a crowding-out effect on infrastructure projects.

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