Real Assets Viewpoint: Infrastructure Investment and Jobs Act

Key themes for investors

The Infrastructure Investment & Jobs Act (IIJA), passed on November 2021, should result in greater infrastructure investment from private capital in the United States. The Act totals USD $1 tr over the next decade, including USD $550 bn of new spending on top of USD $450 bn that renews existing transportation funding. The funds will be distributed through grants and loans from federal agencies including the Department of Transportation and Department of Energy, as well as in the form of tax credits and other financial incentives.

Key takeaways include some of the following:

Net positive for investors: A primary goal of the Act was to leverage the effect of Federal programs with private capital, according to Sen. Rob Portman. The Act provides funding for projects that can drive economic growth as well as prepare the U.S. economy for the transition to net-zero, but with the aim of tapping both private equity and private debt. In addition, the legislation made it easier to greenlight projects, thus accelerating the permitting process.

Public investment where it is needed: Many of the programs listed in the Act cover assets that are hard for private investors to underwrite due to a combination of high risk and low return. While transportation was the headline, there will be more money flowing to the Department of Energy (DOE). This investment provides important groundwork that can enable future private investment.

Potential for new equity investments: The Act unlocks surface transportation (e.g. rail, road, etc.) for new concessions that allow private investors to come in as operators. It also encourages the use of public-private partnerships (PPP), which could lead to even more assets coming to market.

Components of new spending from the Infrastructure Investment and Jobs Act of 2021 (category, $ billion USD spending)

Components of spending from IIJA

Source: Senate Committee on Environment and Public Works (EPW), Infrastructure Investment Jobs Act. August, 2021.

Much needed funding for critical projects that encourage growth

We believe many of the projects included in the Act should lead to stronger economic growth and open the door for greater private investment in certain infrastructure sectors in the future. These range from cyber-security measures, to electric grid modernization and the development and deployment of new technology such as carbon capture and hydrogen. Private capital currently invests in these on the fringes, but we believe greater public funding and development will make these sectors more investable in the future.

Carbon capture, for example, could be a massive opportunity for infrastructure investors but the technology needs improvement to be economical. As the economy moves to net-zero, demands from customers and regulators will force businesses to greatly reduce their emissions. For many industries, carbon capture could be one of the best ways of accomplishing this.

Hydrogen fuel is another example of an infrastructure technology that could be in high demand in the future, with the ultimate goal of having hydrogen hubs around the country. Utilities are quickly moving generation to renewable sources, but the two most prominent types of clean energy, solar and wind, are intermittent and peak generation does not always match peak demand. Natural gas ‘peaker’ generators, which utilities use during peak demand times, are one way to fill in the gap, and grid-level batteries can help.

However, utilities believe that hydrogen could be the key to mass deployment of renewable energy on the grid scale, but costs need to improve.1 Private companies are investing in hydrogen as a fuel, but government support can hasten the move from the fringe to a more serious component of the US energy stack.

Carbon sequestration is essential in the road to net zero by 2050


Carbon sequestration and net zero

Source: Goldman Sachs Global Investment Research; as of June 23, 2021.

The renewable energy sector did not get as much direct assistance as originally expected, but the sector should benefit from supporting infrastructure. Renewable tax credits, which were included in the first version of the plan released in April were ultimately removed. However, the Act does include plans to increase grid resilience, reduce red tape on approval of transmission and provide necessary infrastructure around storage, including end-of-life recycling of grid-level batteries.

Funding for ports should alleviate some supply-chain bottlenecks that is contributing to higher inflation today. The Act also puts aside $7.5bn for electric vehicle charging through grant programs and funding through the States which has been distributed. The focus on EV charging networks in the Act has resulted in more interest by municipalities, utilities and EV charging companies.

Real estate should see ancillary benefits

While real estate is not explicitly included in the plan, the sector inherently needs strong infrastructure to be useful for tenants.  Improvements to roads and bridges are generally positive for all types of real estate.  New public and, potentially, private capital supporting intermodal facilities should reduce friction for logistics tenants such as retailers and 3PL companies. Urban apartments and offices should benefit from improved public transit and congestion relief measures. Investment in broadband infrastructure would also help the growth of more tertiary metro areas as this may have previously been a barrier for population inflows. Further, programs around drought response included in the Infra Act will likely be necessary and especially supportive of real estate in the western region. Programs related to flood mitigation and FEMA response should support eastern and southern parts of the United States.

The Infra Act could lead to more assets

The Act should expand the availability of debt assets by broadening what qualifies as tax-exempt collateral and increasing existing caps. Qualifying broadband and carbon capture facilities are now eligible for tax-exempt status. This should bring more bonds to market backed by these types of assets. Additionally, the Act increases the national cap for tax-exempt highway bonds from USD $15 bn to USD $30 bn. Currently, USD $14.9 bn of the cap is used, according to the Bond Dealers of America, so further expansion will unlock a crucial funding source for state and local governments on their infrastructure. This spending may cause ancillary projects to be funded, which could need additional taxable bonds, although it is likely too early to speculate the potential supply.

U.S. Infrastructure debt issuance in 2015 vs. 2021

Infrastructure debt issuance in 2015 vs 2021

Source: Inframation, infrastructure debt issuance in 2015 and 2021

The Infra Act creates a path for new equity opportunities. Within the law there is an entire section dedicated to new asset concessions for ‘surface transportation,’ which would give private investors the right to own and operate these assets. Surface transport includes highways, rail and intermodal facilities. It does prevent concession holders from taxing or tolling taxpayers earning less than USD $400k, so investors will likely focus on assets geared more towards businesses, such as intermodal terminals rather than toll roads. Language regarding public-private partnerships (PPP) is also sprinkled throughout the rest of the Infra Act, covering other types of infrastructure. In general, this will contribute to more public-private partnerships in the near term, but it may also be a harbinger of greater use of PPPs in the future within the US. Public-private partnerships with the Federal government have been especially difficult to implement due to red tape, and the law has provisions to lessen this hurdle. There are also many new loan and grant programs available for private investors. For example, the Act authorizes the Department of Energy to extend grants to transmission and generation owners and operators for improving resiliency. Another provides matching funds to implement ‘smart grid’ features.

One sign of the potential growth of PPPs is that the Act requires value-for-money analysis on certain highway and railroad projects totaling over USD $750mm. This would require the project sponsor to price out a PPP option before moving ahead with only public funding. While this does not directly increase PPP usage, it opens the door for more growth over the next few years.

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