Fitch: Trump infrastructure plan may boost US E&C backlogs
US engineering & construction (E&C) and capital goods firm backlogs could increase materially if President Trump’s infrastructure plan comes to fruition, according to Fitch Ratings. We note that the ultimate credit impact will be based on the contract terms, margin profile and execution of any potential projects. Fitch further notes the global nature of the U.S. E&C industry, as domestic infrastructure projects only represent part of their credit story.
E&C backlog trends have been negative in recent years driven by a global slowdown in energy and commodity projects beginning in late 2014. Fitch considers the likelihood of any material uplift for capital goods producers, such as Caterpillar, in 2017 to be remote given the traditional time lag between major legislation and significant project activity.
President Trump’s potential infrastructure plan, which was originally unveiled in October, would be largely funded through private investment with tax credits going to investors willing to put up an equity stake in revenue-generating projects like toll roads, airports and utilities. Fitch notes that there is currently much uncertainty regarding any potential plan.
Suggested plans indicate a possible total size of $500 billion to $1 trillion over 10 years, partially funded by as much as $137 billion in tax credits to promote private investment. President Trump has also discussed the possibility of an infrastructure bank. Senate Democrats have introduced their own infrastructure plan totaling $1 trillion of investment.
Industry participants are advocating for significant increases in investment. In December 2015, President Obama signed the Fixing America’s Surface Transportation Act (FAST Act), which funds surface transportation programs including, but not limited to, federal highways at over $305 billion for fiscal years 2016 through 2020. The Highway Trust Fund (HTF) is the source of funding for most programs in the Act. Federal motor fuel taxes are the major source of income into the HTF.
Although it became law and was funded more than a year ago, the HTF has been on hold since the federal government is currently operating under a Continuing Resolution passed in December that sustains 2016 fiscal spending levels through the end of April but postpones the planned $2.4 billion increase in infrastructure spending in 2017 that FAST authorized.
Prior to the FAST Act, the last major national infrastructure bill passed was the $800 billion American Recovery and Reinvestment Act of 2009 (AARA), commonly referred to as the “stimulus.” This comprised $288 billion in tax cuts, $224 billion in extended unemployment benefits, education and healthcare spending and $275 billion in federal contracts, grants and loans that went toward stimulus efforts such as state fiscal relief. Although it was a 10-year package, $720 billion, or 90%, was allocated for the first three years. In aggregate, $30 billion, or roughly 4% of ARRA, went toward transportation infrastructure projects such as roads, bridges, transit systems and railways.