27 Jul 2021 Private Capital Must Be Part of the Infrastructure Solution in Infrastructure
Intense negotiations are underway on a Bipartisan Infrastructure Framework that would provide more than $1 trillion for America’s transportation, water, broadband, and energy systems. Investment at this level is warranted; as our Smarter, Cleaner, Faster Infrastructure Task Force has observed, the faster we build cleaner, smarter infrastructure, the better the outcomes for our climate, for jobs, and for economic growth.
However, public funds on their own will not be enough to meet this need. Fortunately, the Framework includes proposals designed to attract more private capital for infrastructure, including public-private partnerships, private activity bonds, asset recycling, direct pay bonds, and an Infrastructure Financing Authority. These tools would bring additional private investment to the table, complementing the proposed federal investment and enabling faster delivery of urgently needed infrastructure projects, and Congress should include them in the final infrastructure package.
Public-Private Partnerships
Public-private partnerships (P3s) are contractual arrangements in which the private sector takes on more of the risks and responsibilities for delivering a project than in a typical contract. In some P3s, the private partner designs and builds the project, while in others, the private partner may also operate and maintain it. In many P3s (but by no means all), the private partner is also responsible for a portion of project financing, which may include privately issued debt or private equity.
P3s are a valuable tool for delivering infrastructure projects more quickly and cost-effectively than conventional project delivery. Having a single consortium handling all aspects of designing, building, and operating a project can shorten the timeframe for delivery, and private partners often bring significant technical expertise. P3s also allow for risk-sharing; for example, the private partner may assume the responsibility for cost increases during construction. P3s that include private financing can be particularly helpful for public agencies that are near their statutory debt limit or prefer to use available debt capacity for other priorities.
Private investors require a return on their investment, which they may receive either through user fees or direct payments from the public partner. In other words, while private financing may help build projects faster, it is not “free money.” Instead, private capital is an important complement to federal investment, and both will be needed to achieve the infrastructure transformation we need.
To increase the number of P3s in the U.S., three key barriers must be addressed. First, a deeper project pipeline must be developed. State and local governments should begin by preparing asset inventories that identify current conditions, repair and replacement needs, and life-cycle costs for each asset they own. This is the type of information that private partners require when investing in infrastructure, yet too many public agencies lack this data, preventing them from engaging in P3s. Second, the process for infrastructure development must be faster and more predictable. Third, infrastructure agencies need more funding as well as additional financing tools to reduce the cost of capital, such as private activity bonds and direct-pay bonds, discussed below.
Asset Recycling
Asset recycling refers to the process of public agencies selling or leasing assets they own—usually land or facilities—and reinvesting the proceeds into other projects. While asset recycling has been limited in the U.S., it has been successfully used in Australia, in part due to an incentive program offered by the federal government. Under that program, public agencies could receive federal funding equal to 15% of the amount received through their recycling agreement, as long as both the federal funds and the proceeds of the original agreement were invested in other infrastructure projects. The government of New South Wales used this program to lease its electrical transmission facility and reinvested the funds into the Sydney Metro and other transportation projects. Though there are differences in the way that Australia and the United States build and pay for infrastructure, a similar program in the United States could be helpful in encouraging state and local agencies to explore asset recycling as a way to monetize existing assets to generate ongoing revenue streams that can help fund unmet infrastructure needs.
Private Activity Bonds
Tax-exempt or “qualified” private activity bonds (PABs) are a form of debt similar to traditional municipal debt but available for certain types of infrastructure projects that are privately owned or operated for the public’s benefit. PABs have been regularly used to finance airports, water and wastewater facilities, surface transportation projects, and a variety of other infrastructure types. However, the volume of tax-exempt PABs that states can issue per year is limited by federal law, as are the types of projects that PABs can finance. Moreover, while interest on PABs is exempt from ordinary income taxes, it is not exempt from the Alternative Minimum Tax, making PABs less attractive to investors subject to that tax.
Raising the volume cap and exempting PABs from the AMT would make them a more effective tool for attracting private capital and have received bipartisan support, such as Sens. Wyden (D-OR) and Hoeven’s (R-ND) Move America Act. In addition, the list of eligible infrastructure could be expanded to include clean energy and carbon reduction projects; proposals have been made to extend tax-exempt PABs to renewable energy facilities and carbon capture and storage (CCS) and direct air capture (DAC) projects, among others.
Direct-Pay Municipal Bonds
Direct-pay bonds utilize the existing structure of the municipal bond market, but unlike traditional municipal bonds, the interest on direct-pay bonds is taxable. Because that makes the bonds less desirable to many investors, issuers face higher interest costs. To compensate, the issuer receives a direct payment from the federal government to help offset the higher interest costs. This type of bond is more attractive than traditional municipal debt to investors who do not have federal tax liability and who therefore do not benefit from the tax exemption, such as pension funds, insurance companies, and foreign investors.
Direct-pay bonds were authorized for a limited time as part of the American Reinvestment and Recovery Act of 2009 and were highly successful in raising capital for local governments, with $181 billion issued before the program ended in 2010. If direct payment bonds were a permanent tool in the infrastructure financing toolbox, and the subsidy was protected from potential cuts due to sequestration, they could attract significantly more private capital from institutional investors like pension funds. Like private activity bonds, direct-pay bond proposals, such as the American Infrastructure Bonds Act introduced by Sens. Bennet (D-CO) and Wicker (R-MS), have received bipartisan support.
Infrastructure Financing Authority
A number of proposals have been made to create a federal Infrastructure Financing Authority, including a bipartisan proposal by Sens. Warner (D-VA) and Blunt (R-MO) in the REPAIR Act. Under that proposal, the IFA would be a government corporation with a Board of Directors appointed by the President and would be authorized to provide loans and loan guarantees to infrastructure projects that meet certain requirements, including having a clear public benefit and a dedicated revenue stream. The IFA would be initially capitalized by the federal government but would be designed to become self-sufficient over time. An IFA similar to that proposed in the REPAIR Act could help both P3 and conventional projects access low-cost financing to deliver projects faster and more cost-effectively.
Conclusion
More detail on these and other ideas for attracting private investment can be found BPC’s Executive Council on Infrastructure’s comprehensive report on private capital and infrastructure. As noted above, bipartisan bills have been introduced on several of these proposals and should be incorporated into the final legislation. While these tools may differ in their particulars, they are all intended to bring private capital off the sidelines to help meet America’s infrastructure needs, a goal that should receive broad bipartisan support given the urgency of addressing our economic and climate challenges. BPC Action calls for the inclusion of these financing tools, and specifically The MOVE America Act, the REPAIR Act, and the American Infrastructure Bonds Act.
