President Trump's proposed budget has been hotly debated, but everyone seems in agreement that the U.S. needs to improve its infrastructure spending. In this week's episode of Industry Focus: Energy, host Sarah Priestley talks with Transport Topics' Capitol Hill reporter, Eugene Mulero, about the current state of infrastructure spending in the U.S.
Find out exactly what Project Neon is, and why it's so exciting; how infrastructure bills are (or aren't) progressing on Capitol Hill; some huge potential pitfalls of Trump's proposed plan; what the next few years will probably hold for U.S. infrastructure projects; a few companies and ETFs that interested investors can check out, and more.
A full transcript follows the video.
This video was recorded on June 14, 2018.
Sarah Priestley: Welcome to Industry Focus, the show that dives into a different sector of the stock market every day. Today, we're talking Energy and Industrials. It's Thursday, the 14th of June, and we're going to be giving an update on U.S. infrastructure spending. I'm your host, Sarah Priestley, and joining me in the studio is a very special guest, Eugene Mulero from Transport Topics. Welcome back to the show!
Eugene Mulero: Good to be here!
Priestley: Eugene spends a lot of his time up on Capitol Hill, and he's a regular on C-SPAN. For anyone listening who doesn't know Transport Topics, it's the go-to place for news in the freight industry, covering everything from regulation to new tech to major industry events. Eugene, you were first on the show back in March, I think it was March 1, to talk about the infrastructure budget proposal.
To recap that for listeners, President Trump made the improvement of infrastructure a big part of his campaign pledge. Earlier in the year, he proposed a $4.4-trillion budget that included $200 billion for infrastructure spending. The plan for that was that it would be leveraged up to $1.5 trillion through a mix of federal, state, and local government spending and private-sector spending, too.
The spending plan was pretty contentious, mostly for the deficit that it would create. But one thing that politicians and everybody else could agree on is that the U.S. really needed infrastructure spending, and it really needed to improve its infrastructure. We mentioned this same stat last time, but the American Society of Civil Engineers did their review that they do every four years, and I think they gave the country a D-plus.
Mulero: D-plus. The roads got a D.
Priestley: The roads got a D. Road, bridges, drinking water, ports, dams, school buildings, airports, and railways. So, not a good state for the country. It currently ranks 12th out of 138 countries, in terms of the quality of its infrastructure.
All that doom and gloom [laughs]. But recently, you visited a sizable infrastructure project in Nevada. I think it's amazing that you managed to go to Nevada for a work trip [laughs], off to Vegas for a work trip. Tell us about the project. It's called Project Neon, which seems apt.
Mulero: Yeah. I want to say about 10 years ago, the people in Nevada, the mayor, the leadership, and even the state Legislature agreed that the growing congestion downtown and the periphery, the periphery downtown of the Strip, was getting too chaotic. We were talking about a four-mile stretch that was, at times, during rush hour, seeing an hour, up to two hours, of bumper-to-bumper traffic. All of it was culminating and collecting in an interchange that they called the Spaghetti Bowl, which is where Interstate 15 meets with a local road. I forget the name of the avenue, but one just a few blocks down from the Strip. Essentially, the chamber of commerce met with all the members and said, "We need to do something."
The solution was to really just elongate and widen this strip of I-15. A bunch of permits later, we're talking 10 years in the making. It wasn't until 2016 that they actually got bond approval from the voters, they were able to get some federal loans, minimal federal loans, and they were able to get a lot of buy-in from the private sector. Of course, we don't have to remind people who's in Vegas: the big hotels, Marriott (MAR 1.82%), etc. All of them agreed that they needed to put in $1 billion worth of investment just to widen a 3.7-mile stretch of highway. It's that expensive, not only because of the real estate, but also because of the environmental protections that go along with a project of that size and in that terrain. We're talking the desert, so they find a lot of minerals, etc.
Project Neon broke ground in 2016. It's expected to conclude next summer. The goal is to reduce the average traffic time by 30 seconds. This is to alleviate congestion of 300,000 cars hourly traveling through this Spaghetti Bowl area. Their ultimate goal is to minimize the lane changes. They have, they say it's 25,000 lane changes a day in this strip of highway. They want to bring that down to something like 20,000.
Priestley: Sorry, that's 30 minutes, not 30 seconds, right? The time saving?
Priestley: It would presumably be a lot safer. I saw one report that was saying there's an average of three accidents daily, is that correct?
Mulero: That's right.
Priestley: And obviously, for your industry, the industry that you cover, in trucking, that's a huge expense for the trucking industry.
Mulero: Yeah. And not only was the congestion really bad, but there's also the safety factor. You had a lot of trucks that were getting caught in traffic. Statistically, nationally, about 20% of car accidents involve a truck. When you looked at Nevada, the safety was a component, and then the state Legislature really wanted to expand and enhance the freight connectivity. It was all about mobility. And while there's not going to be truck-dedicated lanes, widening the interstate is going to facilitate the truck traffic, because you're going to have exit-only lanes that are going to be dedicated for cars, actually. So this is going to free up the highway for the trucks.
This is all expected to enhance productivity. The chamber of commerce expects to see a reduction in congestion and a boost in commerce. They're actually calculating this in the hundreds of millions over the years.
Priestley: Wow, that's incredible. You mentioned a couple of things about issues that they're trying to resolve. I was reading, in one of your articles, actually, that the number of stop lights that trucks were facing was causing fuel consumption in that area to be high, and the air pollution to be high. So, air quality will be another consideration for this move.
You mentioned a few challenges that they're facing. Can you talk a little bit about this? Because I feel like it's a really good example for people, if you're at home and you don't really understand how big and momentous it is to get a construction project off the road at this scale. But, in terms of time and legislation and all those kinds of things?
Mulero: Like I said, it was 10 years in the making. Delays. Well, not delays, but the time --
Mulero: -- yeah, is primarily the environmental process, just getting the permitting. You have not only the federal agency has to come in, but then, you have the state and county. Clark County, Nevada, is where Las Vegas is, and they actually have some very stringent environmental protection laws. We're talking, just the EPA, at the federal level, it could take anywhere between three to seven years.
In Nevada, what the city officials have been aiming to do is to create an interconnectivity model. So this is to connect all the modes, the airport, the highway, and then bring in, they actually have established a monorail, so, transit, so they can all connect and enhance the mobility of not only the pedestrian but also the truck and the freight.
Because of that, you've had the local agencies coming in and meeting with the contractors. In this case, it was a firm called Kiewit that came in and worked with the city. And then, just putting the bids alone is something that could take up a year. Then, once you actually break ground and start with the construction, there's something that every three months, you have some surveyors from the state that have to come in and assess what's happening to make sure the air quality is not being impacted, you don't bump into some gas that's being leaked out into the atmosphere, etc. And then, every six months, you have a federal inspector, ideally, who comes in and also reviews the project. This is all to ensure the protection.
This is if it goes smoothly. This didn't happen in this project, but let's say -- I'm not trying to be funny -- you come across dinosaur bones or something like that. That really delays your project, because now you have to bring in a whole different set of people to analyze it. And, let's say they come across some burial grounds, that also delays the project. Not to digress too much, but that actually has happened in Hawaii with their transit project, and that's been the cause of that delay.
In Project Neon, it's been relatively smooth with the environmental permit process. The big lift was with the financing, getting all those state bonds approved, getting the buy-in from the federal loans and grants, and getting the private sector to put in the money. If we take a step back, streamlining the environmental process is something that is at the top of the list for the Trump administration. Trump has talked about this extensively, that he wants to reduce, it's not the average, but he says, bring the environmental permitting process from 10 years down to two years.
Priestley: For private companies, that really boosts the return that they can get. Because they're spending all this money up front, and then, especially if it's things like ports and toll roads and things, they need to reduce the amount of time that it takes them to get their money back out of that project. And it certainly seems like the example you're giving here in Nevada is prime example of state, federal, and private investment to get something off the ground in a more organic fashion than I think President Trump put forward.
Mulero: That's right. Project Neon and Nevada as a whole, they're actually being studied by not only infrastructure firms, but also other states and cities, as a model for interconnectivity across the modes, airport, transit, cars, and trucks. And, also, how you finance big-scale projects, how you bring in the private sector and establish a public-private partnership. That's the anchor of the Trump administration's infrastructure plan. But Nevada was very fortunate that they had some really big companies and really big investors who were willing to pump in a lot of money because they knew that they could get the return eventually with the tourism business. They knew that they had such an anchor destination allure that there was enough of an incentive to invest money there.
The problem comes in when you look at states such as Wyoming, that desperately needs money for repairs on their freight corridors, their highways, etc. They struggle to bring in private investors because they lack the requisite vehicular traffic to, if you set up a tolling booth -- I'm making up the numbers, but let's say you need 1,000 cars a day to recover some sort of investment. You won't see that in Wyoming. In Nevada, especially in Las Vegas, I didn't know this going in, but the majority of the tourists who visit Nevada actually drive to the city. They don't fly.
Priestley: That's interesting.
Mulero: Yeah! They'll come from California, they'll come from Phoenix, they'll come from the West Coast. That's why this project, Project Neon, was so important. And actually, when I met with the mayor, she said this was more important than revamping their airport. Everybody drives around. It's the West Coast mentality, so the car is really a big part of people's lives. And it was all about reducing congestion.
A quick point: In the freight industry, congestion actually, studies have found, it impacts productivity somewhere around $63 billion annually. That's the cost to the trucking industry.
Priestley: Wow, that's incredible. We're going to talk a bit more. Obviously, Eugene, your specialty, essentially, is politics and following Capitol Hill, so we're going to talk a bit more about that.
You recently wrote an article that used an amazing analogy. You described it as the capital's equivalent of spotting a white rhino in the wild, the leadership of the U.S. Senate announced that the chamber intends to remain in session for some of August, which is usually their vacation. Is that correct?
Mulero: That's right. I have to tell you, I'm not exaggerating, I've been covering Congress for more than 10 years. I remember the last time a leader insinuated that they were going to work in August, that was former speaker Nancy Pelosi. This was during the whole Obamacare debate, when they were trying to get the bill into law. I'm telling you, people were going mad and just losing it, the lawmakers.
McConnell, the leader of the Senate, said, I believe it was last week, that they were going to stay in session for -- he was going to cancel the August recess, except you're going to get one week off. So, they're still going to have the first week in August to go on vacation, but then they're going to work the next three weeks.
It's really worth noting -- I'm actually not trying to pick on the Senate, but they technically only work three days a week anyways, from Tuesday through Thursday. So, come on!
And they're off the whole week for Labor Day!
Priestley: Oh, wow.
Mulero: So, they're working collectively nine days in August.
Priestley: They're going to be the only organization that wants Labor Day to fall on a Wednesday, then.
Mulero: Exactly. But, what was interesting is that, there's a political component as to why McConnell did this, and it's to take time away from incumbent Democrats, cut into their campaign time. Typically, in August, the incumbents, who are up for re-election in the Senate, they go back home and really hit the campaign trail. That's the political theory here. But McConnell said that they're going to stay in session so they can work on the nominees that President Trump has put forward, and also the spending bills, the appropriation bills.
Priestley: That's our infrastructure spending.
Mulero: That's right! One of them is the transportation fiscal 2019 bill that has passed at a committee, and in the House, it passed their committee, as well. This is actually quite interesting. All the indications at the start of the year, even from President Trump, were that this was going to be the year of infrastructure. And we saw the infrastructure plan unveiled on Feb. 12 out of the White House, this $200 billion down payment. No indication as to where they will come up with the $200 billion, by the way, to take you to $1.5 trillion over 10 years. And, that would be by getting Goldman Sachs and other people to put in the money to get to $1.5 trillion. By the way, Goldman Sachs never said, "Yeah, we'll go along with this!"
Here comes the appropriations season in May and earlier this month. The chairman of the Transportation Funding Committee in the House said, and I'm paraphrasing, "I understand that we're not going to an infrastructure bill," because that's what the White House said, "but this appropriations bill is going to be the infrastructure bill for the year." Well, that's not necessarily the case because we have an appropriations bill every year anyway, and they're technically not a long-term infrastructure bill to begin with. They're actually the bill that keeps the lights on at the Department of Transportation for the next fiscal year, for the upcoming fiscal year. It'll have some sorts of incentives here and there, and boost some funding for infrastructure grants, formerly known as the TIGER grants, now they've been renamed to BUILD.
And in the Senate, likewise. I interviewed the chairwoman of the Transportation Funding Committee there, Susan Collins, Republican of Maine. She said, "Yeah, our appropriations bill is actually the down payment for President Trump's infrastructure bill," which, again, that's remarkable, because she's been the chairwoman of that committee for several years, and she didn't say that when President Obama was trying to get his infrastructure package passed into law.
So, the shifting of the messaging, to tell the public that, while they're not going to work on this long-term infrastructure package -- that is, as we talked about, badly needed -- that the appropriations bills are the ones that are going to be the substitute for whatever Trump really wanted to carry forward.
To put a bow on the whole thing, it's actually very unlikely that the Senate and the House are going to pass the appropriation bills anyway. They haven't done that in more than 10 years. What Congress has been doing is, they've been jumbling all the appropriations bills into one giant bill they call an omnibus, and the transportation component is one of those 12 bills in that giant, massive bill. And they send it over to the White House for the signature. So, this down payment on infrastructure, and calling the bill the infrastructure bill, myself and people I talk to say that really misses the mark.
Priestley: What does this bode, really, for the industry? Does this mean that they're essentially postponing the creation of a proper infrastructure spending plan? Or does it mean that, each year, we're going to see the same old debate?
Mulero: Right now, we haven't seen any state formally announce that they're going to delay a project. That's not to say they won't. The country is still operating under a highway law that authorizes projects through fiscal 2020. When we are in fiscal 2019, that is when I suspect we're going to see the vulnerable states that are really hurting for money -- typically, these are rural states, like Arkansas. We saw Arkansas be one of the states five years ago to announce that it was going to delay projects because it was missing a reliable federal partner. That's going to happen, I think, sometime next year.
What we've been seeing right now is the trend of states authorizing massive amounts of money for infrastructure projects, emulating what Nevada did 10 years ago and then five years ago so they can get that boost on Project Neon and some other big projects. Right now, the latest state to be working on a big infrastructure package is Missouri. Then, there's an expectation that other states are going to follow. Texas has a big infrastructure bill in the works. There's also Oregon that is doing a very intricate pilot program on a vehicle-miles-traveled fee. There's a very strong indication that that program is going to be successful, according to Oregon officials. They're going to really make that a bigger pilot program that actually could become a federal program.
I think the states and cities are just going to hang back and see what happens sometime next year. And that's when we can start seeing some announcement on delays.
Priestley: OK. I guess, at this stage -- I think we said this when we initially talked about the infrastructure spending -- investors shouldn't rush in to infrastructure stocks just on the basis of this. However, there are so many other trends that are indicating that it's just inevitable that we will reach a tipping point for infrastructure spending and products. Nevada, that you visited, there was pressure there just internally from population expansion. The population grew, between 2000 and 2010, over 31%. Between 2011 and 2016, it grew 8.5%, in just that time. And we're seeing this in other areas, too, and this whole trend toward urbanization, which we talked about previously on the show on an episode about homebuilders.
We're starting to see the scales tipping toward rectifying some of these infrastructure issues. If investors do want to get exposure into this segment as the U.S. seeks to reduce this infrastructure investment gap, there are a few stocks out there that I think will be interesting. You mentioned earlier, Eugene, some of the things that infrastructure covers, like utilities, water --
Mulero: Broadband, the ports, waterways, canals.
Priestley: So, just a few stocks for people to put on their radar.
McDermott International (MDR). They're in the process of buying Chicago Bridge & Iron (CBI). They are possibly a little overvalued right now, but they are a big project company. They've been struggling recently with a lack of spending in energy and mining, which we've seen across the board with energy. That should be starting to shake out now.
And, Fluor (FLR 1.21%). The stock recently took a hit after a disappointing quarter. They lowered their earnings-per-share guidance for the year due to a cost overrun at a power project. Investors are also concerned about declining project backlog. However, just to put that into perspective, the cost overrun is definitely isolated to this project, and although it obviously raises management questions, it is an isolated incident. Their backlog is larger than most of their publicly traded competitors. It may be worth digging deeper on this stock and seeing if it's slightly undervalued right now. They're industry-leading, they get a lot of awards for energy infrastructure projects.
The last stock I'll mention is AECOM (ACM 2.16%). They're well placed to handle large government contracts. Specifically if you're bullish on these state-funded projects like in Nevada, they are well placed to take advantage of that, design, build, finance, and even operate infrastructure assets for the government and for businesses. They recently merged with a competitor, URS, to increase their exposure to energy and to transportation. Anyone who regularly listens to the show knows that we like a little bit of energy exposure here because of the growing price of oil, and liquid natural gas, and those kinds of things.
And if you are an investor who prefers ETFs and mutual funds, there are a couple of options for you: iShares Global Infrastructure ETF (IGF 0.71%), and Lazard Global Listed Infrastructure (GLIFX). I would caution anybody to check the percentage of utilities that are within these baskets, just to check the utilities exposure. But, generally, not bad options to check out.
Eugene, have I missed anything? Is there anything you would want to add?
Mulero: I just want to clarify that Project Neon stems from Interstate 15 between Charleston Boulevard and Bonanza Road. Just a little fact-checking on my end. And, the main contractor is Kiewit Infrastructure West Company. Then, like I said, it's going to be debuting, the project is going to finalize sometime next summer. They're expecting to have a big celebration. They're going to invite President Trump, and they're going to do the whole Vegas treatment and have showgirls and everything there.
Priestley: [Laughs] Are you going to have to make another case to get back to there?
Mulero: You know, I've been really suggesting that we need to follow the project through. We need a presence. We need a man on the ground.
Priestley: It would only be right.
Priestley: Well, that's it from us today. If you would like to get in touch, please feel free to email us at email@example.com, or tweet us on Twitter @MFIndustryFocus. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thank you, as always, to the marvelously patient Austin Morgan -- he's been particularly patient today -- for mixing the show. For Eugene, I'm Sarah Priestley. Thanks for listening and Fool on!