Full Study: Asset Recycling to Rebuild America’s Infrastructure
Executive Summary
Infrastructure asset recycling is a means of increasing investment in infrastructure, both existing and planned. The basic idea calls for long-term leasing of aging existing facilities to well-qualified private partners and “recycling” the lease proceeds into new (but currently unfunded) infrastructure.
In typical long-term leases, most or all of the lease payments are provided up-front. These proceeds are dedicated to investment in needed, but currently unfunded, infrastructure projects. Provisions in the long-term lease of an existing facility include performance requirements, which in most cases of aging infrastructure, will require significant additional private investment to refurbish and modernize the facility. Hence, asset recycling is intended to fix both of America’s serious infrastructure problems: aging and inadequate existing facilities and lack of funding for a large array of new infrastructure facilities.
Infrastructure asset recycling is being discussed today for several reasons. First and foremost, there is national concern about the poor condition and/or inadequate capacity of much U.S. infrastructure, which relates in part to a lack of readily available funding.
Second, there is a growing track record of state and local governments (which own nearly all U.S. non-military infrastructure) making use of long-term public-private partnerships (P3s), in which investors and well-qualified developer/operators design, build, finance, operate, and maintain (DBFOM) infrastructure facilities under long-term contractual agreements (35 to 70 years, typically). Most uses of this kind of long-term public-private partnership (P3) have been to develop new (“greenfield”) facilities, but there are also cases of using this kind of agreement to refurbish aging existing (“brownfield”) infrastructure, such as the Indiana Toll Road and the San Juan International Airport.
Third, private capital is increasingly available for infrastructure projects of this kind. Global infrastructure funds have amassed hundreds of billions of dollars in equity to invest in DBFOM infrastructure, both greenfield and brownfield. Insurance companies and sovereign wealth funds are also starting to make equity investments of this sort. A newer player is public-sector pension funds, led by those of Australia and Canada. These investors and a growing number of U.S. pension funds are primarily interested in brownfield refurbishment, which is lower risk than greenfield projects.
Fourth, the White House infrastructure proposal is based largely on private-sector investment, for both aging existing infrastructure and new facilities. It includes important policy reforms that would widen the market for asset recycling of the kind discussed in this study. The U.S. Department of Transportation’s February 2018 document on how this policy would apply to transportation infrastructure devotes several pages to explaining asset recycling.
Australia’s federal government was the first to implement a policy to encourage state and local governments to engage in infrastructure asset recycling. It offered those governments grants of up to 15 percent of the proceeds from leasing existing facilities if the state or local government committed to using those proceeds for new infrastructure. Four of Australia’s states and territories took part, realizing a net A$20 billion from leases of existing infrastructure and garnering an additional A$6 billion in federal incentive grants.
U.S. experience with infrastructure asset recycling is more limited. The purest example is the long-term P3 lease of the Indiana Toll Road, which generated a $3.8 billion up-front lease payment. After paying off toll road bonds, the state funded a 10-year highway investment plan called Major Moves as well as creating a $500 million trust fund to maintain the new infrastructure. Other examples, not all of which used the proceeds for new infrastructure, include:
• Chicago Skyway lease
• San Juan International Airport lease
• Bayonne, NJ water/wastewater system lease
• Maryland’s Seagirt Marine Terminal lease
• Ohio State University parking system lease
How much potential is there in P3 leases of existing U.S. infrastructure? To illustrate this, the author estimated potential net lease proceeds from the 61 largest airports ($250 billion–$360 billion), the 42 largest toll systems ($175 billion–$230 billion), seaports ($50 billion), water/wastewater systems ($110 billion), and state university parking systems ($60 billion). The total is $720 billion–$885 billion.
Several federal policy changes would encourage infrastructure recycling by state and local governments. One would be an incentive-grant program similar to that used successfully by Australia’s federal government. Another would be small grants that help those governments pay for financial and legal expertise to develop procedures to invite private- sector proposals and to negotiate long-term P3 lease agreements. And a third would reform the existing narrowly focused program of tax-exempt Private Activity Bonds (PABs) to apply to more categories of infrastructure and to include refurbishment of existing aging infrastructure as well as brand-new facilities.
Few question the need to invest more in America’s infrastructure. Governments at every level have struggled for years to keep up with the needs of a growing economy and changing demographics, let alone stay on top of maintenance and rehabilitation on existing infrastructure. Despite trillions in investment, there remains a significant need for both expansion and rehabilitation.
Prior infrastructure investments have created tremendous economic value for the country, as well as creating a long list of assets attractive to private investors. Asset recycling can unlock billions in new capital that can be redirected into new investments in infrastructure.
Additionally, recycling can benefit the long-term health of the nation’s infrastructure, since long-term P3 lease agreements include stringent performance regimes. Requirements include keeping assets properly maintained and fully operational, as well as returning the asset in excellent condition at the end of the lease. Private operators are fully incentivized to make the investments when they need to be made in order to keep customers happy, avoid any performance penalties, or risk termination of the concession and the asset returning to the state.
With constrained public resources at every level of government, it will take novel ideas to address our continued infrastructure investment deficit. Shifting non-taxpaying assets into tax-paying entities will broaden the tax base and generate new revenue streams that support continued infrastructure investment.
Arguably, no other tool holds as much promise in addressing America’s infrastructure deficit, while simultaneously boosting employment and GDP growth. Asset recycling should be part of any solution to rebuild and modernize this country’s aging public-purpose infrastructure.
Full Study: Asset Recycling to Rebuild America’s Infrastructure