Action Not Words

10 July 2017 The Trump administration has long courted private investment to spearhead its infrastructure plans. Dan Colombini reports on how the soundbites are starting to wear thin

Since President Donald Trump's inauguration at the start of this year, to say he has courted controversy with his policies would be an enormous understatement.

However, one area where Trump has managed to gain some degree of consensus among the population and politicians has been the subject of infrastructure development.

In theory, there at least lies an infrastructure policy that the market can get behind, as the administration continues to court the private sector to spearhead a supposed $1trn overhaul. Ever since he won the election last year, industry sources have been excited about the potential Trump's policies have for the P3 market. But as time drags on, and each new Trump announcement on infrastructure gets us no nearer to putting any meat on the emaciated bones of the plan, patience is wearing thin.

So far, the administration has provided a broad outline of proposals that aim to spur investment by reforming how projects are developed, paid for, and delivered.

"It is encouraging to see proposals to increase funding for the TIFIA and WIFIA programs, raise the ceiling on the amount of Private Activity Bonds (PABs) that can be issued and broaden the types of projects for which PABs could apply; give states broader authority to toll interstate highways and reduce unnecessary delays caused by federal regulatory and permitting processes," says Plenary Concessions executive chairman Dale Bonner.

"Overall, we’re pleased to see the administration taking a multi-faceted approach to address some of the structural barriers that impede investment.

"This includes proposals to give state and local governments more tools and incentives to leverage limited resources through P3s."

And Trump once again reiterated his desire to court private investment in a speech in Cincinatti at the end of June. "Our infrastructure program will be based on forging new partnerships and demanding new accountability for every federal taxpayer dollar," he said. "Under this vision, we will drastically reduce burdensome regulation. We will massively streamline the approval and permitting process.

"Already my administration has expedited environmental reviews and critical energy projects all across the country."

But if you scratch beneath the surface, genuine detail and a tangible path to achieving this remains somewhat elusive at this stage. Investors want pipeline, with enough deals being put on the table to enable them to bid at a competitive and healthy price. And while much of those deals will come from state-level, rumors of lists of projects being submitted to the White House in preparation for a grand program of investment have muddied the waters as to how this trillion-dollar program will come forward.

More immediately, though, Trump has some political hurdles to overcome. Due to the dilapidated state of much of the country's infrastructure, bipartisan support for Trump's proposed $1trn plan was supposedly a sure thing, as both Democrats and Republicans seek to play their part.

Sadly though, as is so often the case with this administration, things are not quite going as smoothly as the president's rhetoric would have us believe.

The Democrats' response to the president's reiteration of his plans in Cincinatti does not support the theory of political unity at all.

"When he called for a trillion-dollar infrastructure bill, we thought that was great," said Senate Minority Leader Charles Schumer shortly after the speech. "What they've proposed is privatizing most of our infrastructure to give wealthy financiers tax breaks on projects they were probably going to build anyway...it'll lead to 'Trump tolls' from one end of the country to the other."

The problem Trump now faces – and something that is concerning many investors – is that for all this talk to become reality, he is going to need the support of Congress in order to see an actual bill passed.

The administration has set no timeline for the release of such a bill and with the Democrats already objecting to elements of the proposals, it is extremely hard for the market to get genuinely excited right now. And beyond that, without details it is impossible to gauge the real potential of what is being proposed, no matter how encouraging it sounds.

Frustration is, therefore, beginning to set in among some in the industry, after another speech that was again encouraging, but actually revealed very little by means of genuine information. "Although an infrastructure bill would present an excellent opportunity for both political parties to come together and spur much-needed investment in our infrastructure, the current environment in Washington makes it impossible to know whether or when we might see a substantive dialogue in Congress," warns Bonner. "It’s simply too soon to know what will happen."

"As a whole, the market has been speculating since November and is growing weary doing so," adds Thomas Mulvihill, group head of infrastructure finance and P3s at KeyBanc Capital Markets.

"The need to invest in infrastructure and the desire to see some level of private investment are supported by both parties. The way to go about funding it, however, is where there may be some disagreement."

The desire for the market, and to some extent the politicians, is clearly there. But without the administration putting weight behind the soundbites, progress will continue to be frustratingly slow. And without solid details, investors are beginning to show concern that the administration is overly reliant on the private sector as a "one-size-fits-all" solution to the problem.

"I think there is concern in the industry that the administration’s proposal to cut back on certain federal aid programs is based on an overly optimistic expectation that the private sector or states can make up the gap," says one lawyer.

So what more does the industry want to see going forward? On initial review, the administration’s proposals have potential to address some of the historical barriers to private investment, but the lack of detail means there is plenty of speculation about what the ideas put out there so far might mean in practice.

Since the federal government is unlikely to increase grant funding, some sources say that the administration could provide new subsidies that further empower state and local governments to leverage scarce resources in partnership with the private sector.

Going beyond the announced initiatives relating to TIFIA, WIFIA and PABs, the most effective way to do that could be to level the playing field between the cost of public and private capital, according to Bonner.

"The financing cost advantage currently inherent to tax-exempt public debt is implicitly coming from the US Treasury in the form of forgone tax revenue," he explains.

He suggests two ways that the federal government could level the playing field for privately delivered P3s at no additional cost: by creating a new infrastructure tax credit program attaching to P3s (investors would receive a set tax credit, generally mirroring the value to the project of tax savings that would flow from public tax exempt bonds), and/or direct-pay infrastructure bonds “whereby the incrementally higher interest between public tax-exempt and private taxable bonds is paid directly by the US Treasury on qualifying P3 projects”.

Bonner continues: "Should the federal government choose, the amount of the support could be set such that it is cost neutral to the US Treasury relative to public issuance of tax-exempt bonds or they could elect to provide higher amounts on a project-by-project basis, for rural, key redevelopment, or nationally significant projects, for example."

He is quick to add that this is not “free money” however. "It is, rather, a game changing way to close the gap between the cost of public and private capital such that states and municipalities, where it makes sense, can capitalize on the benefits of P3 delivery, resulting in more projects, delivered faster, with lower risks and overall costs to taxpayers.

"Where it doesn’t make sense, they can continue to approach projects under traditional public delivery methods. The key is to give them better choices, unhindered by outdated cost of capital arguments and constraints."

Making P3s a level playing field is something that many in the market are keen to see happen. Samara Barend, founder of the Performance- Based Building Coalition (PBBC) and senior vice president and development director of Aecom Capital, is also urging the administration to move in this direction. She argues that an Executive Order from Trump could remove restrictions on public-private ventures, lease purchase, and lease-backs – something she claims would, at a stroke, unlock $16bn in federal real estate investment.

There is now a sense that the Trump administration must start to listen to private industry and start to make things happen, or the very people that he and his administration are targeting to spearhead these plans will lose confidence in the ability to turn rhetoric into reality.

Everyone is tantalisingly close to being on the same page on the issue, but the real details must now be ironed out once and for all if this is to deliver genuine change.

This page was last updated on:
18 December 2017.

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