President Donald Trump is set to highlight an infrastructure plan among the topics he’s expected to bring up during his first State of the Union address on Tuesday, January 30th.
In the meantime, sources are floating trial balloons in the political press detailing the early phases to gage support for alternative funding ideas.
Politico, a reliable publication for how Democrats in Congress are thinking, is calling the $1 trillion, 10-year blueprint to rebuild America a “Game of Thrones” plan because of the funding realities facing both parties:
“Instead of the grand, New Deal-style public works program that Trump’s eye-popping price tag implies, Democratic lawmakers and mayors fear the plan would set up a vicious, zero-sum scramble for a relatively meager amount of federal cash — while forcing cities and states to scrounge up more of their own money, bringing a surge of privately financed toll roads, and shredding regulations in the name of building projects faster.”
According to TheHill.com, whose reporting on the subject brings in more Republican sources, the “idea is to use $200 billion in federal seed money to create $1 trillion worth of overall infrastructure investment by raising revenues from the private sector and local governments.”
Politico’s report adds this:
“The federal share of the decade-long program would be $200 billion, a sum Trump himself concedes is “not a large amount.” The White House contends it would lure a far larger pool of state, local and private money off the sidelines, steering as much as $1.8 trillion to needs as diverse as highways, rural broadband service, drinking water systems and veterans hospitals. (Maybe even commercial spaceflight, one recently leaked draft suggests.)
The reality is there’s not enough support for a big, transformational package to be passed out of Congress so less may be more to get it done. The United States is $20 trillion in debt and Republicans are in no mood to hike the federal gas tax after passing a $1.5 trillion tax cut.
Further complicating matters, adds TheHill.com, “is that Republicans are insisting that the infrastructure proposal be fully paid for — a demand that Democrats are sure to highlight as hypocritical, given that the GOP tax-cut bill was projected to add over $1 trillion to the deficit.”
Alternative funding has been a buzzword in the private sector for years and it’s likely to at least get a fair-minded look among lawmakers.
The plan’s outline signaled as much when it showed up in media reports this past week (here’s the pdf: Trump-Infrastructure-Plan-Outline-1). It touts an Infrastructure Incentives Initiative that “encourages state, local and private investment in core infrastructure by providing incentives in the form of grants. Federal incentive funds will be conditioned on achieving milestones within an identified timeframe.”
The grant formulas are up for debate, as locals raise their own funds for projects that qualify.
Which brings us back to the federal highway tax. Congress may not be so keen to raise it because states are already doing so to pay for highway and road repairs.
As of July of 2017, 26 states have raised taxes on motor fuels in the past four years, according to Pew Research. “The eight states that raised taxes this year include Tennessee and South Carolina, deep-red states dominated by fiscal conservatives.”
States are also grappling with the fact that today’s cars and trucks can drive for longer distances on less fuel, and a small but growing number of vehicles don’t run on gasoline at all. Six of the eight states that raised the gas tax [in 2017] also raised some other vehicle fees and imposed others, including new $100-$150 registration fees for electric vehicles.
The administration’s plan recommends removing “constraints” currently in place on public-private partnerships for transit systems, including a federal ban that prohibits tolling on existing interstate highways, adds TheHill.com.
Public private partnerships, or P3s, as they’re known in the construction world, have gained favor in the U.S. in the past few years since the Great Recession of 2008 put the stops on a lot of traditional publicly funded projects in construction.
Canada practically wrote the book on P3s with good reason. It’s a more centralized economy and its 10 provinces lend itself to a templated approach to P3s. It’s not as easy with America’s 50 states and entrenched public union interests that don’t want to cede control to private outfits.
But the precarious financial positions of many states are changing attitudes. Plenty of Canadian firms with operations in the U.S. such as PCL and Flatiron Corp. have been active in the U.S.-market, guiding firms and the public through the concessionaire process when private entities get involved with managing public infrastructure.
Some 33 states currently have enabling legislation for P3s on their books and other legislatures are considering. Highway projects, however, can get tricky. People generally don’t like to pay the tolls and will look for ways to avoid them if they can.
Bloomberg notes that, “for projects that don’t have built-in revenue streams, governments can make what are known as availability payments, akin to rent-to-own arrangements. These can include “shadow tolls”—per-car fees paid by the state rather than drivers.
“In such deals, the details can make all the difference. The South Bay Expressway in San Diego is one of several U.S. P3s operating tolls that filed for bankruptcy after revenue came in lower than projected. In 2008, Chicago leased 36,000 parking meters for 75 years to an investor group led by Morgan Stanley in return for $1.1 billion. The city’s inspector general later concluded that, in its rush to plug a short-term budget gap, the city undersold the rights by almost $1 billion, infuriating residents.
Municipal water projects, on the other hand, have seen some success with P3s, given the stability of the long-term payments that follow the completion of a modernization project.
The Bayonne, N.J., municipal water system, hard hit after Superstorm Sandy in 2012, has become one such study, according to a report by the Wharton School of Business at the University of Pennsylvania.
Among the city’s many challenges: “pumping an average of 8.3 million gallons of wastewater daily, and outdated infrastructure and outfalls that needed updating to meet federal regulations.” Like so many states and municipalities across this great land, excessive debt obligations made a hash of its credit rating, raising the cost of borrowing for the city.
“The Bayonne Municipal Utilities Authority (BMUA) needed a solution. Its options included selling its water utilities outright to a private company, or entering into either an operation-and-maintenance contract or a longer-term concession agreement,” the report says. “Only a few months after Sandy, the city chose the latter avenue — a joint venture partnership for both water and wastewater operations with Kohlberg Kravis Roberts (KKR) funding 90% of the effort with United Water, a unit of French giant Suez Environnement S.A.” (The full Wharton report, including other successful P3s, is here.)
Not every project is P3 material. But for projects with the right stuff, private capital is flowing toward infrastructure funds and looking for deals.
Engineering and construction giant AECOM raised its own $3.5 billion infrastructure fund in 2017. Meanwhile, ConstructionDive.com adds, the company sent the Treasury Department a $200-billion list of water and infrastructure projects that it says will have an economic impact of up to $1.3 trillion.
As of Q1 2017, total assets under management by private infrastructure funds were US$426 billion, AECOM says. “On the supply side, several US$10 billion-plus funds have been raised or are presently being marketed.”
AECOM’s pitch is this: “Cash flows from infrastructure assets are reasonably predictable, of long duration, somewhat indexed to inflation, and relatively uncorrelated with public equity markets, all of which makes them a good match for the liabilities of life insurers and pension plans, and for the permanent capital of sovereign funds. For an indication of the possible magnitude of capital that could be directed to infrastructure investing, it is worth noting that U.S. public pension plans, corporate pension plans and life insurers hold assets of US$4.2 trillion,13 US$1.5 trillion, and US$6.8 trillion.”
That’s a lot of funds looking for stable, reliable revenue. Still, P3s bring up all kinds of issues about who gets stuck with the risk long-term, which is the name of the game in construction, and the public can be leery.
As the Wharton study from a group critical of the Bayonne P3 project notes, “private equity players typically focus on short-term profits and may seek to flip assets after driving down service quality and driving up prices. That means households and businesses could end up paying more for inferior service.”
Contract documents, as always, are the key here.
At least Republicans and Democrats agree that some kind of infrastructure package would help the nation re-build and refurbish some of its critical infrastructure.
Meanwhile, the trial balloons the administration floated on the plans have at least kicked off some bickering and back and forth among lawmakers to signal what’s possible as the President readies his State of the Union address. Up, up and away.