Ensuring the continued viability of American roads will require the state governments that manage them to attract private investment. Given the political drawbacks to major deficit spending on infrastructure, the gradual depletion of the Highway Trust Fund and the decrease of revenues garnered through the gas tax, government transportation agencies must be afforded the flexibility to enter into public-private partnerships (PPPs) whenever major transportation projects need to be quickly undertaken. Unfortunately, Congress’s current policy of restricting PPPs is at least partially responsible for the relative scarcity of such partnerships.
Employing private capital to manage public highways holds potential benefits for both development companies and the public. “Brownfield” partnerships, or partnerships that lease a pre-existing public facility to a private concessionaire, are particularly attractive to investors. Being able to observe traffic volume and average speeds on existing roads, concessionaires can model toll rate structures with a fair degree of predictability. Even in the event that actual profits underperform the concessionaire’s expectations, taxpayers are never held liable; one of the major advantages of PPPs is that concessionaires take on the risks of infrastructure projects. If the concessionaire goes bankrupt or fails to perform its contractual obligations, the state can lease the road to a new private concessionaire. Lenders revalue the project at a lower amount that more realistically estimates the facility’s risk-adjusted profitability.
Notwithstanding the low risk posed by PPPs, the Federal government has resisted PPP expansion. Currently, federal legislation prohibits Brownfield partnerships that toll Interstate lanes for all but three freeway segments. Though the Obama administration has proposed lifting this ban, trucking industry lobbyists and some conservatives have expressed vocal opposition. Congressional approval seems distant.
More intrusively, Congress has placed stringent limitations on the use of Private Activity Bonds (PABs) for PPPs. As tax-exempt bonds, PABs allow creditors to charge lower interest rates, thus decreasing the concessionaire’s cost of accruing debt. PABs are subject to the Alternative Minimum Tax (AMT), a measure that impairs these investment instruments’ cost-reducing advantages. Additionally, federal law caps PAB financing for highway improvements at $15 billion. At best, this cap is redundant; current law requires bond agencies to accredit PABs before they are used. At worst, it precludes states and private sector contractors from tackling major improvement projects, many of which require multi-billion dollar commitments.
In spite of these serious challenges to PPP financing, recent legislative developments are far less damaging than they might have been. The final draft of the 2012 “Moving Ahead for Progress in the 21st Century Act” (MAP-21) omitted several particularly misguided policy proposals. These included, among others, lengthening the period of amortization and depreciation for PPP projects to 45 years, reducing federal funding for states that engage in Brownfield PPPs and even prohibiting the use of PABs to finance long-term improvements. If these clauses in the Senate’s version of the bill had survived reconciliation with the House, they would have increased the risk for lenders extending credit, discouraged money-strapped states from pursuing PPP opportunities and stymied a critical means of financing.
Set to expire in September of 2014, MAP-21’s successor legislation should liberalize at least three aspects of PAB regulation. First, it should lift the aforementioned $15 billion PAB cap and re-exempt PABs from the AMT. Second, it should loosen the restriction on PABs used to purchase land from 25% of PAB receipts to 25% of total project costs. Land acquisition is not only a significant budgetary item, but also an essential action to building the project and, consequently, must be financed without operational revenue. Third, it should allow lenders to issue PABs as capital appreciation bonds, thereby decreasing the reinvestment risk of periodic bond yields.
While the current state of national transportation policy is not nearly as dismal as it might be, neither does it permit the market-based dynamism and innovation needed to revitalize our crumbling infrastructure networks. Lenders engaging in decades- or even century-long projects must not be denied access to plentiful and sophisticated financial instruments to ensure profitable and regular returns on their investments. To this end, Congress must cease subjecting PABs and PPPs to the uncertainties of the political process. A robust and sustainable transportation network moving forward will require the federal government to grant states a greater degree of autonomy in upgrading America’s roads.