America’s transportation infrastructure is not “crumbling,” but there are still thousands of structurally deficient bridges, and the country’s aging Interstate highways have reached the end of their pavement’s life and need to be rebuilt and modernized. A 2018 report commissioned by Congress estimated the cost of rebuilding the Interstates at about $1 trillion over the next 20 years.
The Biden transition team is reportedly keen on infrastructure spending as a jobs measure and, setting aside the Infrastructure Week jokes, there seems to be some bipartisan support in Congress for some kind of infrastructure bill. The questions boil down to what the bill will focus on and when it might be shaped.
As of now, it appears likely that the Republican Party will retain a slight majority in the US Senate — pending the outcome of two run-off elections in Georgia. If that is the case, any infrastructure bill would need to be bipartisan, which could increase the likelihood of inviting private investment as part of the program.
Other countries are far ahead of the United States in routinely tapping private investment, via long-term public-private partnerships (P3s). Infrastructure investment funds raise close to $100 billion each year to invest as equity in revenue-generating projects, including, airports, seaports, toll roads, water and wastewater systems, and energy providers.
Most of these investments go to projects in Europe, Australia, some Asian countries, and Latin America. Most infrastructure investment funds would love to put more money into projects in the United States, but there is a dearth of projects here, for two reasons. First, only about a dozen states have workable legislation to enable long-term public-private partnership projects. Second, federal tax law discriminates against the private financing of infrastructure.
A major virtue of P3 infrastructure is that in order to get financed, it must pass a market test. In other words, an infrastructure fund will only invest equity in a project if it can forecast earning a return on that equity over time. Most projects involve 20-to-30 percent equity and with the balance financed by long-term revenue bonds. The bond-buyers also need a reasonable probability of the project earning enough revenue to pay the debt service they’ve signed up for, and the bond rating agencies assess whether the project is likely to deliver on that promise. Especially for transportation “mega-projects,” which have a global history of cost overruns and lower traffic than forecast, the P3 model shifts those risks away from taxpayers and onto the shoulders of sophisticated investors.
Most public-sector infrastructure projects are financed 100 percent by tax-exempt municipal bonds, whose interest rate is lower than that of taxable bonds used by the private sector. So, in 2005, Congress was persuaded to authorize up to $15 billion in tax-exempt private activity bonds (PABs) for use in privately-financed transportation infrastructure projects, creating a level playing field for bond financing.
It took a number of years for P3 transportation projects to catch on, but the several dozen that have been financed using PABs have—as of this year—used nearly all $15 billion that was authorized. (And, it is important to note that these are revenue bonds backed by the revenues of each project. They are not financially backstopped by taxpayers.)
If Congress wants to increase private investment in US infrastructure, getting rid of the $15 billion cap on transportation PABs would be a big step in the right direction.
Major projects now in the procurement stage, such as the $9 billion express toll lanes in Maryland, will be more difficult to finance if they must be done at taxable bond interest rates. To reassure taxpayer watchdogs, it would be prudent to include a requirement that such PABs have at least one investment-grade bond rating. And since rebuilding existing infrastructure is a much larger need than adding new projects, the P3 measure should also make clear that private activity bonds can be used to rebuild and modernize existing infrastructure such as the Interstates.
A measure such as this requires no new federal spending and needs only a few sentences worth of legislative language. Hence, it could even be included in any potential lame-duck pandemic stimulus bill that might emerge.
Alternatively, it would make sense to include it in the needed reauthorization of the expired (but extended to Sept. 30, 2021) surface transportation bill (the Fixing America’s Surface Transportation Act, or FAST Act).
Or, of course, if there is actually a stand-alone infrastructure bill next year, that could also be its home.
Not all infrastructure generates revenue, so no one suggests that P3s should be the main agenda in an infrastructure bill. But, during the Obama administration, its Treasury Department urged a major expansion of tax-exempt private activity bonds, called qualified public infrastructure bonds (QPIBs). Also during those years, a bipartisan task force of the House Transportation and Infrastructure Committee endorsed an expanded role for public-private partnerships in America’s transportation infrastructure.
In addition, U.S. public employee pension funds are increasingly seeking to diversify their investments by placing significant sums with infrastructure investment funds. Dozens of those pension plans have invested in the P3 company that now runs the Indiana Toll Road under a 70-year public-private partnership concession.
A union-managed investment fund also recently bought into the concession of Puerto Rico’s toll roads. Many U.S. pension plans would prefer to invest equity in U.S. infrastructure—if there were more projects to invest in.
Congress could help make that possible, by expanding the scope for privately-financed infrastructure modernization.