Monday, January 8, 2018

A Paradox at the Crossroad of Crumbling Infrastructure and American Sovereignty

The following is from guest blogger Matthew Stiles. Stiles was born and raised in Ottawa, Ontario, Canada, and has earned degrees in engineering and economics from Concordia University in Montreal, Quebec, and a J.D. from West Virginia University College of Law. He has extensive experience working on international construction mega-projects in various capacities across North America and currently focuses on international construction and engineering law.

On August 15, 2017, the White House issued a press release highlighting President Trump’s plan that “[c]rumbling infrastructure will be replaced with new roads, bridges, tunnels, airports, and railways gleaming across our very, very beautiful land.” After successfully overhauling the United States tax system, in early 2018, the Trump Administration will turn its attention to President Trump’s “Rebuilding America’s Infrastructure” policy.

The President, however, is fast approaching a paradox at the crossroads of America’s failing infrastructure and the global resurgence of political realism, a philosophy that considers nation states to be the principal actors in the international arena, each primarily concerned with their own security, the struggle for power, and which act first and foremost in pursuit of their own national interests.

As the President continues to focus on protecting American interests and creating opportunities for U.S. businesses, American contractors face record-setting backlogs. All of a sudden, a roadblock emerges: Who in fact will build this infrastructure work?

A Closer Look at the Trade-Infrastructure Paradox

President Trump has painted a bleak picture of America’s infrastructure—and the American Society of Civil Engineers (“ASCE”) agrees. The fact is, it is crumbling. In ASCE’s 2017 Infrastructure Report Card, America received a disconcerting D+ grade, which ASCE estimates will require a multi-trillion dollar investment to rehabilitate.

At the same time, the Trump Administration has signaled its intent to steer the world’s nations towards a more nation-centric worldview. In his remarks at the 72nd Session of the United Nations General Assembly, President Trump stated:

To overcome the perils of the present and to achieve the promise of the future, we must begin with the wisdom of the past. Our success depends on a coalition of strong and independent nations that embrace their sovereignty to promote security, prosperity, and peace for themselves and for the world.

But the application of political realism has historically resulted in nations restricting access to domestic markets, under the guise of sovereignty. International contractors, in response to growing political uncertainty, have retreated to the safe harbors of their domestic markets.

If the Trump Administration acts on its stated beliefs, then the issue is how the international contracting industry will respond. And if international contractors assess the Trump Administration’s advancement of political realism as increasing political and legal risk in American markets, then governments should expect either higher project costs, or longer project time horizons. The negative impact of either effect could cascade throughout the economy.

A nation’s infrastructure acts as its economic nervous system, in which serious problems can be life threatening. For nations competing in an increasingly globalized marketplace, sound infrastructure is essential to future prosperity. Policy makers, and the international law community—especially lawyers acting in the trade dimension—should pay close attention to how the Trump Administration manages to reassert American sovereignty, as America’s failing infrastructure lurks around the bend.

Without knowledgeable policy makers who can anticipate and head off a collision between these two potentially competing issues, the Trump Administration could be doomed to fail in its pledge to Make America Great Again.

Only One Fifth of American Infrastructure is Under Federal Jurisdiction

The Trump Administration has pledged significant federal support, through its “Rebuilding America’s Infrastructure” policy, to help states rebuild critical infrastructure. But only one fifth of America’s infrastructure is under the jurisdiction of the Federal Government—the vast majority of America’s failing infrastructure is a problem under the jurisdiction of the states, localities, and the private sector.

On December 18, 2017, following an Amtrak derailment in Washington state that resulted in multiple deaths, President Trump tweeted: “The train accident that just occurred in DuPont, WA shows more than ever why our soon to be submitted infrastructure plan must be approved quickly.” A few days later, on December 22, 2017, President Trump tweeted, “At some point, and for the good of the country, I predict we will start working with Democrats in a bipartisan fashion. Infrastructure would be a perfect place to start.” There is widespread bipartisan agreement on the fact that America needs a plan to address its infrastructure.

The Trump Administration has vowed to “get out of the way” and allow state and local governments to find solutions to meet their unique infrastructure challenges. But will President Trump’s “America First” policies act as roadblocks?

West Virginia, under Governor Justice’s aggressive road building plan could be the first state in the union to find out.

Governor Justice’s Roads Building Plan Would Remediate West Virginia’s Infrastructure

Governor Justice has colored his roads building plan as vital to West Virginia’s future prosperity. It addresses two important policy issues, which are systemic across the United States: (1) the critical condition of existing infrastructure; and, (2) the critical condition of governmental budgets.

While the nation’s infrastructure scored a dismal D+ grade by ASCE, many states, including West Virginia, fared even worse. In West Virginia, ASCE asserts that driving on poor roads costs each West Virginian an extra $515 per year.

Unfortunately, the only thing more broke than state infrastructure is state budgets. The National Association of State Budget Officers anticipates that 31 states will “bust their budgets” in the 2018 legislative session. A 2017 study from George Mason University showed that most states are under fiscal stress, with each state carrying massive debt obligations.

West Virginia was ranked 42nd in fiscal strength in the George Mason study, with long-term liabilities at $4,223 per capita and unfunded liabilities at 33 percent of state personal income. West Virginia Cabinet Secretary of Revenue Robert Kiss stated that West Virginia faces a budget deficit of over $400 million for fiscal year 2018.

Governor Justice found a way to address the state’s empty treasury. On October 7, 2017, West Virginia held a special election to authorize the state to issue bonds over a four-year period, a step that would qualify the state for matching funds from the Federal Government.

Governor Justice was staggered by the overwhelming support for the “Bonds for Roads and Bridges Measure,” which was fundamental to executing his roads building plan. Of the state's over 120,000 voters, nearly 73 percent supported the measure. Governor Justice spent months promoting the roads building plan as a way to boost the state's crumbling economy, consistently arguing:

This is a not a Democrat, Republican or Independent issue. It’s about jobs, safety, your roads and bridges, and hope for our state. The overwhelming majority of our elected leaders, along with myself, are in favor of the Road Bond Referendum . . .

Governor Justice’s rhetoric echoes President Trump’s. Governor Justice’s bond measure will raise the capital necessary to begin important infrastructure repair in West Virginia. Unfortunately, no such option is politically viable for the Federal Government. But the like-minded Trump Administration is also thinking outside the box, signaling that it plans to turn to the private sector for support.

Private Equity Can Help to Rehabilitate America’s Roads and Highways

ASCE has estimated that governments across the nation need to invest $4.5 trillion by 2025 to remedy America’s infrastructure problem. On December 5, 2016, former Speaker of the House Newt Gingrich, “Chief Planner” during President-elect Trump’s transition into the White House, stated that the Federal Government plans to turn to the private sector for innovative infrastructure solutions.

Similarly, United States Transportation Secretary Elaine Chao said that the United States needs a new approach to remediate “aging, congested and technologically lagging” infrastructure. “Previous attempts to address this problem relied upon massive borrowing and top-down federal control,” Chao said. “This administration takes a different approach. To avoid saddling future taxpayers with unsustainable debt, the plan seeks to unleash billions of dollars in private capital for infrastructure investment.”

With all levels of government pledging to begin major infrastructure work, the issue is whether American contractors have the capacity to build it. 

American Contractors Face Record-Setting Backlogs

According to an article published by Princeton University on international competition in engineering and construction, American contractors previously faced little international competition for large, high-margin domestic government contracts because domestic firms had the capacity to build it all.

Today, however, domestic contractors face a record-setting backlog. The Washington, D.C.-based Associated Builders and Contractors’ Construction Backlog Indicator, which measures the average length of backlogs among all its contractor members, rose to nine months during the first quarter of 2017, up 8.1% from the fourth quarter of 2016, says Chuck Goodrich, president of Gaylor Electric Inc. and 2017 ABC chairman.

“For the first time in the series’ history, every category—firm size, industry and region—registered quarterly growth in the Construction Backlog Indicator,” Goodrich said. “The Construction Backlog Indicator is up by 0.4 months, or 4%, on a year-over-year basis.”

With backlogs approaching 12 months for work exceeding $100 million, governments must turn to international contractors to keep costs down, and to expedite project delivery. This is an increasing practice worldwide, as well as among American states.

Infrastructure Graphic

Figure 1 - Construction Spending Projection (Source: FMI 2016 Quarterly)

On June 29, 2006, the Indiana Toll Road Concession Company, a joint venture between Cintra Infraestructuras S.A, a separate Spanish construction firm, and Macquarie Atlas Roads, an Australian toll road company, was awarded the contract to construct and operate the Indiana Turnpike.

In Florida, over five years beginning in 2009, a Spanish multinational contractor, Actividades de Construcción y Servicios S.A. (ACS) Infrastructure Development of Madrid, constructed the $1.8 billion I-595 Expressway.

In 2017, in North Carolina, I-77 Mobility Partners LLC, another joint venture led by Cintra, began to construct the 26-mile I-77 Express Lanes Project, as part of a public-private partnership with the North Carolina Department of Transportation.

Construction spending is set to rise to an all-time high in 2018 (Figure 1). Consequently, governments will soon compete for a narrowing market of domestic contractors. This fact could slow down, or even worse crash, the Trump Administration’s policy proposal and state infrastructure initiatives, like Governor Justice’s roads building plan.

While perhaps American governments can accommodate extended time horizons, failing infrastructure cannot.

International Builders Hesitate to Depart from Safe Harbors

In response to increasing global political uncertainty, foreign contractors with the capacity to help reconstruct America’s infrastructure in America are reticent to leave the safe harbors of their domestic markets.

President Trump’s America First policies threaten to deepen already growing uncertainty in the international contracting market, as shown by the results of the Engineering News-Recording (“ENR”) Top 250 International Contractors list.

In 2016, the Top 250 International Contractors reported $468.12 billion in contracting revenue from projects built in foreign markets, which represents a 6.4% retreat from 2015. ENR reports that 2016 is the third straight year showing a decline in Top 250 revenue earned in foreign markets. Moreover, according to ENR, in 2016, the Top 250 reported $927.94 billion in revenue earned in domestic markets, a 3.4% increase.

Before President Trump’s election, international contractors had to assess the impact of Britain’s exit from the European Union as well as growing political turmoil in the Middle East and elsewhere. Now, international contractors must assess what effect the Trump Administration’s hostility towards international law will have on project risk profiles.

The Trump Administration has Expressed Hostility Towards International Law

According to the Financial Times, the United States has lost about 5.6 million manufacturing jobs between 2000 and 2010, while arguably complying (generally at least) with the rules of international trade law.

On the campaign trail in 2016, President Trump stated that international trade has had a negative impact on American prosperity, and promised to place tariffs on the “unfair” trade of international goods and services. In its international trade policy, “Trade Deals That Work For All Americans,” the Trump Administration isolated international trade law, and allegedly nefarious actors operating in its realm, as a primary causal factor in growing political unrest:

For too long, Americans have been forced to accept trade deals that put the interests of insiders and the Washington elite over the hard-working men and women of this country . . . the President understands how critical it is to put American workers and businesses first when it comes to trade. With tough and fair agreements, international trade can be used to grow our economy, return millions of jobs to America’s shores, and revitalize our nation’s suffering communities.

With his bold, repeated, and consistent commitment to reestablish American sovereignty and promote American interests, President Trump has raised policy concerns within the international trade law community, and within the international political class. European Union Trade Commissioner Cecilia Malmström and the minister of economy of Mexico Ildefonso Guajardo said in a joint statement that President Trump’s actions have triggered a “worrying rise of protectionism around the world.”

Is President Trump’s philosophy consistent with American international law obligations established by the General Agreement on Tariffs and Trade (the "GATT"), one of the World Trade Organization (“WTO”) agreements?

Can The Trump Administration Legally Implement Its America First Policies?

The issue is whether the Trump Administration can legally implement its America First policies under the existing international legal framework.

Following World War II, 23 countries, including the United States and major European powers, ratified the GATT, which became law on January 1, 1948. Under the GATT, Member States committed to eliminating or reducing tariffs, quotas, and subsidies, while maintaining meaningful economic regulations. The original purpose of the GATT was to boost economic recovery through trade liberalization and consequently mitigate the risk of international conflict.

Since 1948, the GATT has been revised numerous times, which, on January 1, 1995, ultimately led 123 nations to create the WTO. Thus, what began as an international treaty designed to mitigate the risk of international war by boosting national economies has evolved into a major supranational structure of self-regulation by Members States.

Although the WTO is not a sovereign body or a world court, as it has no sovereign enforcement power, from a legal realist perspective, WTO rules in fact compromise Member State sovereignty. From this perspective, the WTO operates as a de facto regulatory body, wielding some of the powers that come with acting as a sovereign body. For example, the WTO decides to apply provisions of WTO agreements to economic interactions between nations, and exerts very real pressure on Member States to conform to those interpretations through the threat of retaliatory suspensions of concessions by other Member States. In any case, it cannot be disputed that the WTO represents a strong force in international relations that, the Trump Administration has argued, is increasingly out of sync with American interests.

Notwithstanding this fact, international trade agreements, which are fundamentally based upon anti-discriminatory protections for international corporations, mitigate risk for international contractors. With President Trump reasserting American sovereignty, prudent international contractors must understand whether international trade agreements will continue to provide protection in America.

Rehabilitating America’s Failing Infrastructure Demands Foreign Contractors

International trade law scholars may disagree that the blame for America’s current economic issues belongs at the feet of the WTO and the actions of nation states in international trade. But most would likely agree that the existing international trade law framework has created a global marketplace in which nation states compete, often fiercely, based upon the principle of comparative advantage and generally “free market” economics. Ultimately, this framework results in winners and losers.

President Trump is correct to point out that, from a legal realist perspective, America compromises its sovereignty upon the altar of international law. A large American constituency, primarily responsible for President Trump’s election, rejects submitting to what it views as supranational governance in the form of multilateral trade agreements and their application by international organizations.

Ironically, however, the Trump Administration can look to existing international trade agreements to resolve the apparent paradox between its goals to rebuild American infrastructure and to protect, secure, and promote American interests.

On March 30, 2012, the United States adopted the WTO’s revised Agreement on Government Procurement (the “GPA”), which provides foreign contractors with certain protections when executing work for the Federal Government. The GPA, which is a plurilateral international trade agreement that the Federal Government and 47 Member States currently apply, has been an instrument in globalizing the construction market, by harmonizing construction law norms and protecting international contractors operating on the world’s stage.

Discriminatory regulations and prohibitions on the free flow of capital act as barriers to trade in international goods and services. The GPA aims to tear down these barriers and establish protections, in part, for the trade in construction services, by requiring open, fair, and transparent conditions in competition for government procurement. Results suggest that GPA membership has had a positive impact on the trade in construction services.

GPA Members promise to provide “national treatment” (i.e. non-discrimination) to services provided by firms head-quartered in other Member States. The GPA guarantees fair and non-discriminatory conditions for international competitive tendering, for example by requiring that Member States put in place domestic procedures by which aggrieved private bidders can challenge procurement decisions and obtain redress in the event that such decisions are found to be inconsistent with the rules of the GPA.

The revised GPA, which entered into force on April 6, 2014, extends the GPA’s provisions to sub-central government procurement, where adopted. Although international trade agreements normally only apply to national governments, most GPA Members, including Japan, Korea, Israel, and Canada, have added sub-central entities. For example, Canada provides access to its provinces under the revised GPA. In the United States, 37 states have voluntarily adopted the GPA, including major construction markets like California, Florida, Texas, and New York.

International Law Mitigates Political and Legal Risk for Foreign Contractors

States like West Virginia, where major infrastructure spending is imminent, and which have not yet adopted the GPA, should consider doing so, to reassure foreign international competitors that its market offers fair treatment. Alternatively, West Virginia should consider adopting the anti-discriminatory measures into its state law—likely a more politically salient option.

Such provisions could make the difference between, for instance, an Australian international contractor pursuing work in Germany, which has completely adopted the GPA, and pursuing work in West Virginia. Provisions such as the following would match the spirit of the GPA’s purpose:

(a) Construction Services. “Construction services” means services that have as their objective, by whatever means of civil or building works necessary, the realization of major infrastructure projects.

(b) Scope of Protection. This law applies to government procurement, by any procuring entity, by any contractual means, including public-private partnership contractual frameworks, for which the value of the construction services equals or exceeds $10,000,000 USD.

(c) Unconditional Non-Discrimination. Any procuring entity shall accord immediately and unconditionally to any qualified contractor, whether American or foreign, treatment no less favorable than the treatment the procuring entity accords to firms domiciled in West Virginia.

(d) Domestic Protections. This law shall not exclude successful contractors, whether American or foreign, from their obligations to meet minimum lower-tier or disadvantaged business enterprise procurement requirements.

These anti-discriminatory provisions are based upon the fundamental economic principle that resource development is maximized by increased competition in a free market, unfettered by arbitrary discrimination.

States that are philosophically aligned with the Trump Administration, such as West Virginia, should understand that under the revised GPA, the United States maintains all of its current exclusions and exceptions, including set-asides for small and minority firms. Additionally, consistent with GPA general rules, commitments for construction services are only triggered if a project exceeds $7,358,000 USD.

The Crossroads Between Failing Infrastructure and American Sovereignty 

America’s winding road to crumbling infrastructure was likely paved with good intentions—but the unintended consequences have led to infrastructure in a desperate state of disrepair. On this fact there is widespread bipartisan agreement, at all levels of government.

The Trump Administration has pledged to help rebuild America’s infrastructure, and to “get out of the way” of states that face unique infrastructure challenges. But the Trump Administration’s strong assertion of American sovereignty and its skepticism towards international law may act as a roadblock, deterring necessary support from the international contracting industry.

The Trump Administration should closely monitor the countervailing effects of its policies and rhetoric on state infrastructure initiatives. States like West Virginia could mitigate these potential effects by either adopting the GPA, or by directly enacting nondiscrimination procurement standards for foreign contractors into state law.

These technical modifications to America First policies may be necessary to achieving President Trump and Governor Justice’s goal of putting America and its workers back on a stable road to prosperity. By understanding the potential conflict between American sovereignty and failing infrastructure, policy makers can help to keep the Trump Administration on track in its effort to Make America Great Again.

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