President Trump’s proposed infrastructure bill fell flat this Congress because the price was too high. With trillion-dollar annual budget deficits projected indefinitely, Republicans were never going to approve the major federal funding needed to upgrade the nation’s deteriorating infrastructure. Unless Democrats take control of both houses of Congress, the politics are unlikely to change.
But that need not prevent investment in infrastructure renewal. State and local governments are sitting on hundreds of billions of dollars in aging but revenue-generating infrastructure assets. Investment funds have raised hundreds of billions in equity to rebuild infrastructure and add new capacity. These two parties can be brought together through a process called asset recycling.
Asset recycling involves a long-term lease of an existing facility—like an airport, toll bridge or wastewater system—to a qualified company, which commits to rebuild and maintain the facility. Backed by infrastructure investors, the company pays most or all of the annual lease payments upfront. The government uses those proceeds to invest in other unfunded infrastructure.
Australia adopted infrastructure asset recycling nationally in 2014. It offered grants to state or local governments that sold or leased revenue-producing infrastructure, provided they invested the proceeds in new infrastructure. Six billion Australian dollars in federal incentive grants generated more than three times that much in new infrastructure investment.
One recent American example of asset recycling is the lease of the Indiana Toll Road. Under the 75-year contract, signed in 2006, the infrastructure firms Cintra and Macquarie paid $3.8 billion to the state for control of the road. After paying off the toll road’s debt, Indiana used the rest of the proceeds to fund 500 miles of new highway and 60 new or rebuilt interchanges, while also creating a $500 million highway maintenance trust fund. In 2015 a consortium of public pension funds led by IFM Investors bought out the original leaseholders. The San Juan International Airport was also modernized via private investments, generating proceeds for badly needed debt reduction in Puerto Rico.
A new Reason Foundation study estimates long-term leases of the 61 largest U.S. airports could generate between $250 billion and $360 billion for their state or local owners in upfront lease payments. Existing toll roads and bridges could generate $175 billion to $230 billion. Public-sector pension funds searching for better returns are ideal candidates to invest.
If Republicans and Democrats cannot agree on large new federal funding, reforms encouraging asset recycling might be an alternative. These might include expanding the scope of tax-exempt private activity bonds, removing the federal ban on interstate highway tolls, and offering incentives for state and local governments to lease revenue-producing assets to investors. This would answer Democrats’ (and President Trump’s) call for increased investment while respecting congressional Republicans’ concern about the federal budget deficit.
In 2014 a bipartisan task force of the House Transportation and Infrastructure Committee issued a report endorsing long-term public-private partnerships. And in 2018 the Bipartisan Policy Center announced its support for infrastructure asset recycling. A bipartisan asset-recycling bill should be on the table for 2019. Such an approach might appear modest in scope, but it could be the start of something very big.
This commentary originally appeared in The Wall Street Journal.