The global infrastructure investment community is perplexed by what President Trump is reported to have said yesterday in a meeting with members of the House Ways & Means Committee. According to several participants, and confirmed by White House sources, President Trump downplayed private investment and public-private partnerships as the core of the administration’s long-promised $1 trillion infrastructure plan. The president even dissed Indiana’s largely successful experience with P3s.
President Donald Trump told a bipartisan group of lawmakers Tuesday that he didn’t favor public-private partnerships to finance public works, casting doubt on a central pillar of his administration’s infrastructure building plans.
Speaking to members of the House Ways and Means Committee about his plans to change the tax code, Mr. Trump said such partnerships, in which private investors help fund the construction or operation of roads and bridges in exchange for a share of future revenues, are “more trouble than they’re worth,” said Rep. Brian Higgins (D., N.Y.). Another attendee, Richard Neal (D., Mass.), gave a similar account.
Mr. Higgins said the president pointed to the experience of Vice President Mike Pence, who was governor of Indiana when a private consortium formed to operate a major toll road filed for bankruptcy.
“He said, ‘They tried it in Mike’s state and it didn’t work,’” Mr. Higgins said.
If Trump said that, he was badly misinformed. Indiana has done three major public-private partnership (P3) infrastructure projects. The $1.3 billion East End Bridge across the Ohio River was a major success. The $3.8 billion long-term lease of the Indiana Toll Road fully funded a 10-year highway improvement program, and when the original concession company failed, the leased facility was taken over, at an even higher value, by a consortium of U.S. and Australian public pension funds, which has already invested another $260 million in improvements. Only the relatively small $590 million P3 project for section 5 of the new I-69 failed, due to a poorly-qualified contractor.
That’s hardly a record of failure, and the investment by 70 U.S. pension funds in the Indiana Toll Road buyout points toward a way to broaden support for a P3-focused national infrastructure program. But first let’s focus on the case for private investment via long-term P3 concessions.
We do have a shortfall of investment in US infrastructure, but the problem is not just insufficient spending. Far too much infrastructure “investment” goes to projects with high political value but low economic value. Creating “more jobs”—in a full-employment economy—is not the objective. Sound infrastructure investments that make our economy more productive is the real need.
And that’s where private investment can make a real difference in infrastructure projects. The private sector won’t fund “bridges to nowhere.” It seeks projects where user revenue streams can provide a long-term return on investment. Some worthy projects (modernized schools and courthouses) are not of this type, but airports, seaports, highways, and water/wastewater systems are. All over the world these categories of infrastructure are attracting billions of dollars in private capital investment via long-term P3 concessions.
In these kinds of deals, the focus is not on the lowest initial construction (or reconstruction) cost, but is rather on the lowest life-cycle cost. And a key aspect of these deals is guaranteed maintenance for the life of the long-term agreement. That would address major U.S. problems of deferred maintenance.
Over the past decade, infrastructure funds have raised an estimated $350 billion for equity investment in public-purpose infrastructure. Since equity is typically 25 percent of the financing (with the rest being debt, such as revenue bonds), that equity could support projects worth $1.4 trillion. Most of that investment is currently funding infrastructure in Europe, Latin America, and Asia. Those funds, along with U.S. pension fund funds, would dearly love to invest more in the United States. But there are only handfuls of projects to invest in.
America’s largest public pension fund, CalPERS, bought a portion of London Gatwick Airport (since New York’s JFK, Miami International, and Washington Dulles are not available). Other U.S. pension funds have invested in European toll roads and overseas seaports—again, because such facilities in the United States are off-limits to equity investment. Yet many U.S. airports and seaports need billions of dollars’ worth of improvements. Nearly the entire Interstate highway system needs to be rebuilt and modernized—and that alone is at least a trillion-dollar endeavor. And many hundreds of aging, leaking municipal water systems need major renovation. These are all candidates for long-term P3 concessions that pension funds and infrastructure funds are eager to invest in.
Given the political realities of our divided Congress, is there some way to get to yes on a large-scale, 10-year infrastructure program? I see no way that most Republican members would support a massive increase in federal outlays with no obvious source of funding. Yet Democrats mostly seem to equate P3 investment with “privatization” that they see as anti-union and a gift to Wall Street. How can we square this circle?
One ingredient, long championed by Rep. John Delaney (D-MD), is to dedicate at least a portion of repatriated tax revenue to the federal spending portion of the infrastructure program, primarily aimed at rural states and small cities with few P3 opportunities. To incentivize states and cities to designate specific facilities for long-term P3 reconstruction and modernization, existing federal grant programs could be modified to be used as state or municipal portions of the public/private funding package for such P3 deals. Existing federal credit programs such as tax-exempt Private Activity Bonds (PABs), Transportation Infrastructure Finance and Innovation Act (TIFIA), and Water Infrastructure Finance and Innovation Act (WIFIA) could also be expanded.
Another key ingredient could be direct involvement of public sector pension funds as equity investors. The retirement benefits of millions of state and local public employees are at risk due to chronic underfunding of the majority of those pension plans. A growing number of these funds are broadening their portfolios, via selected investment in long-term revenue-producing infrastructure. If Democrats in Congress came to see public-private partnership infrastructure projects as a key step toward more-secure retirement for public employees, they might be more amenable to a national infrastructure program with a P3 focus.
There is a far stronger case for P3 infrastructure investment than has been evident in discussions inside the Beltway. We need far more debate and discussion on this vital subject.
Robert Poole is director of transportation policy at Reason Foundation.