Last week Kevin DeGood at the Center for American Progress released a critique of incoming President Donald Trump’s infrastructure plan. While the Trump plan may not be perfect, the CAP piece is misleading and ill-informed. Let’s examine what’s in the Trump plan as well as DeGood’s criticism. DeGood’s paper is available at
First, DeGood’s paper claims that equity capital, “can cost 300 percent to 500 percent more than capital raised through traditional municipal bonds.” The naÃ¯ve reader may take this to mean that a P3 project overall would be several hundred percent more costly. But the relevant comparison is the project’s weighted average cost of capital. According to Public Works Financing, of 26 U.S. design-build-finance-operate-maintain (public-private partnerships) transportation P3s, the average equity component of revenue-risk projects is 25%; for availability payment projects, it is a mere 6%. The equity component is a small part of the total.
Second, the paper assumes that the project’s total cost is the same regardless of delivery method (P3s or design-bid-build). The paper ignores design-build, which is the fastest growing project delivery method today. States that allow alternative technical concepts often find that the construction cost is less than their assumed design-bid-build case. Georgia DOT saved $200 million by accepting an alternative technical approach for reconstruction of the I-285/SR 400 interchange. In other cases, the first cost can be somewhat higher thanks to a more durable design that reduces life-cycle costs. Lower life-cycle costs are far more important than lower first costs.
DeGood labels the proposed tax credit for equity as a way to “shovel money at wealthy investors.” While a US income tax credit might be helpful to some investors, pension funds and international infrastructure funds cannot use them, so their effect is limited. What investors need most is a pipeline of projects, facilitated by the removal of federal obstacles.
DeGood tries to have it both ways in regard to equity and risk. He acknowledges the risk transfer element of P3s, but describes such projects as “relatively low risk” (Page 3). The original concessionaires of SH 125 California, the Indiana Toll Road, and SH 130 segments 5-6 in Texas each lost a lot of money when those P3 projects filed for bankruptcy. I doubt that they would consider P3s low risk! It is largely because of the genuinely high risks of mega-projects that investors seek a low double-digit return on the equity they invest in them.
The model the paper uses for typical highway project funding (Figure 1) is unlike any I have ever seen in the real world. It assumes that states finance half their project cost with muni bonds. In reality most states pay cash. The paper also assumes that the P3 alternative would replace the only the financing part, with more than half of the total support still coming from federal and state highway funding (Figure 2). This assumption is also wrong. The fraction of total project capital coming from state tax sources is 27% in the Public Works Financing list of 26 recent transportation P3 projects. Seven of the 26 projects got no state tax money at all.
The paper assumes that a concession company gets a guaranteed high rate of return on its equity, say 14% (Pages 3-4). Companies don’t demand a certain return on equity. That’s not how the P3 infrastructure market works. These companies receive whatever is left over after paying operations and maintenance costs and debt service. The return is often zero in the early years and it may never reach the low double digits. If the rate of return were truly 500% higher than the 3% muni bond rate, companies would receive an 18% return on equity. This incorrectly implies that the total cost of financing is 500% greater than if the project were financed via municipal bonds. But on page 5, the paper admits that the 14% rate would only apply to the portion of equity not covered by a tax credit. Using the paper’s goofy model a 14% return on $27M in equity of a $1 billion project is a trivial amount of money.
The most absurd statement in the report is, “The only real beneficiaries of this plan are elite investors.” Revenue-risk P3 projects could include replacing hundreds of obsolete Interstate highways and interchanges, replacing numerous 100-year old muni water systems, adding airport runways and terminals, etc. all with current or future user-fee revenue streams. Page 6 of the paper rails against huge tax expenditures but then says nothing will be built. Both statements cannot be true.
One quarter of all the miles driven in the country are on Interstate highways; not coincidentally, the majority of the Interstate system is nearing the end of its design life and will need to be rebuilt. U.S. airlines carried almost 900 million scheduled service passengers last year in the U.S. yet many U.S. airports feature rundown terminals and lack sufficient runways. More than 90 percent of Americans receive their drinking water from municipal agencies yet numerous muni water systems desperately need renovation. Is a needed stretch of roadway that reduces commute time a gift to a wealthy investor? Is a revamped water system something for the elite only? Does this sound like a solution only for major metro areas?
The only alternative DeGood offers is expansion of “traditional federal grant programs,” but where does he think the money from the grant programs originates? It comes from the hard-working, hard-pressed Americans that the paper claims cannot afford to pay new or increased user fees. Trump’s plan offers a way for major infrastructure projects to get built. DeGood’s plan decries the effect of user fee increases on ordinary Americans, but then argues for tax increases on them anyway.
On page 6, the paper claims that the Trump plan would, “haphazardly spray tax credits around the country.” But obviously, for investors and bond buyers to commit private funds to mega-projects, there will be project selection criteria. Criteria for P3 infrastructure projects benefit/cost analysis, return on investment, and bond ratings. Quantitative criteria are one of the major advantages of P3 projects. Unlike discretionary or formula funds nobody would be able to finance P3 projects for bridges to nowhere, so such bridges would never get built as P3s.
The Center for American Progress, along with many Democrats, is still in mourning over the election loss. They did not expect Donald Trump to be the 45th President of the United States. Once these analysts put the shock of the election behind them, I anticipate we will see better quality infrastructure briefs with realistic policy solutions.