I am writing this column during yet another “Infrastructure Week.” Despite the lack of action during the current Trump administration, I think the stars may be aligning for some kind of infrastructure bill next year, regardless of who wins the White House and the two houses of Congress.
While there will likely be bitter battles over how much the federal government should directly spend on infrastructure, there is a case for bipartisan agreement on policy changes that cost the government nothing but would increase the extent to which private capital is invited to invest in rebuilding America’s aging infrastructure.
First, there is growing awareness that global infrastructure investment funds want to invest billions of dollars in U.S. infrastructure—their largest remaining untapped market. This money would mostly fund the equity portion of revenue-generating infrastructure projects such as toll highways and bridges, airports, seaports, and municipal utilities. There is no way to invest equity in government facilities, so these deals must be structured as long-term public-private partnerships (P3s).
Second, public pension funds in Australia and Canada have long track records of investing equity in revenue-generating infrastructure (and are in much sounder financial straits than most U.S. public pension funds). CalPERS and a growing number of other U.S. pension systems have tip-toed into this market but can find few U.S. (as opposed to overseas) projects to invest in. A large expansion of revenue-risk P3s to refurbish aging U.S. highways and airports would attract significant pension fund investment.
Third, besides the bipartisan appeal of helping to secure the retirement of millions of public employees, there is other evidence of bipartisan support for P3 infrastructure. In 2014 under then-chairman Bill Shuster (R, PA), the House Transportation & Infrastructure Committee produced a bipartisan report embracing infrastructure P3s. And in 2015 the Obama administration’s Treasury Department likewise did research on increasing the scope for P3s, most notably in proposing a very large expansion of tax-exempt private activity bonds (PABs), called Qualified Public Investment Bonds (QPIBs). A similar measure was part of the Trump White House’s 2018 infrastructure proposal drafted by P3 expert D. J. Gribbin.
To give the 2021 U.S. Department of Transportation and Congress a head start, Reason Foundation has drafted a pair of modest proposals aimed at (1) expanding the scope and amount of PABs/QPIBs and (2) opening the door to the toll-financed reconstruction of the aging Interstate Highway System. My colleague Marc Scribner has translated these concepts into specific revisions to existing federal legislation.
The PABs reform section has three parts. First, it would broaden the kinds of projects eligible for federally tax-exempt revenue bonds, to include ports and waterways, rural broadband facilities, hydroelectric facilities, and a broader class of surface transportation infrastructure. It would also clarify that these bonds could be used to rebuild and modernize existing (brownfield) facilities, which is where the greatest investment need is. If P3s are a valuable way to develop and operate critically important infrastructure, why limit this to new facilities, when our greatest need is reconstruction and rehabilitation of existing infrastructure?
A second part of this reform is to eliminate the current $15 billion PABs volume cap, consistent with the major expansion in scope in the first section. And finally, the measure would eliminate the alternative minimum tax (AMT) on the interest on PABs.
The other proposal would open up the Interstate Highway System to toll-financed public-private partnership reconstruction and modernization. A special committee of the Transportation Research Board, authorized by the Fixing America’s Surface Transportation Act, or FAST Act, to make recommendations on the future of the Interstates, concluded that the system is aging beyond its original design life and needs major reconstruction, some widening, and redesign and replacement of numerous bottleneck interchanges. The estimated minimum price tag is $1 trillion over the next 20 years. The report discussed the merits of toll financing this very large set of megaprojects but did not actually recommend this.
Our proposal would expand the existing Interstate System Reconstruction and Rehabilitation Pilot Program (ISRRPP) by:
- Opening it to all states, not just three;
- Allowing any state using to plan and rebuild all its Interstates using toll financing, instead of just one; and,
- Condition approval of state participation by agreeing to four public-interest provisions.
The public-interest provisions were developed based on years of discussion with organizations representing motorists and the trucking industry. They aim at ensuring that rebuilt Interstates financed by tolls are a genuine value proposition for motorists and truckers. They would do this by protecting toll-paying customers from four major concerns:
- Toll roads used as cash cows by state governments (revenue diversion);
- Double taxation (i.e., paying both tolls and state fuel taxes for the same highway);
- Uncertain value-added (being charged tolls first, with an improved highway promised for years later); and,
- Discrimination against non-residents or trucks.
These provisions have been worked out as revisions to the existing ISRRPP. That pilot program has not led to a single Interstate reconstruction project, for several reasons. One is that allowing only one Interstate to have tolls is a political nightmare for state legislators and the state transportation department. A responsible DOT would create a 20-to-25-year Interstate reconstruction and modernization plan, ensuring that all the corridors would be modernized in their turn, and motorists and truckers would only pay tolls once they have an improved corridor to use. A small but growing number of state legislatures are authorizing detailed studies along these lines, including Indiana, Michigan, and Wisconsin, and others have needs for tolled megaprojects to replace major bridges.
If enacted, our proposal would not require any state to use long-term P3s to rebuild their Interstates. That decision would be up to each state. Those states (like Florida) with a well-run state toll road agency might opt to have that agency do the reconstruction projects. But those without would be wiser to use long-term public-private partnerships to shift megaproject risks to investors and to ensure proper long-term stewardship of the rebuilt corridors.
In the interest of furthering discussion of these proposals, I would be happy to share them with Public Works Financing readers, on request.
A version of this column first appeared in Public Works Financing.
Stay in Touch with Our Pension Experts
Reason Foundation’s Pension Integrity Project has helped policymakers in states like Arizona, Colorado, Michigan, and Montana implement substantive pension reforms. Our monthly newsletter highlights the latest actuarial analysis and policy insights from our team.