The Trump infra plan’s PPP silver lining

President Trump’s Infrastructure Plan, released on 11 February 2018, has been heavily criticised for only providing $200 billion ($20 billion a year) in federal funding, while expecting state and local governments and private parties to provide the remaining trillion dollars. Without stating that it expects the private sector to provide a large part of these additional funds, the plan contains many proposals that would permit state and local governments to use public-private partnerships to deliver and finance necessary improvements to roads, bridges, ports and airports.

A year ago, when I became the first executive director of the Build America Bureau at the Department of Transportation, I led a team that prepared a variety of proposals promoting PPPs. These proposals were requested by and forwarded to the White House. The Build America Bureau was created by Congress to serve as the source of expertise within the DOT for innovative finance and PPPs, and its mission included promoting PPPs. The Bureau also managed the TIFIA and RRIF [Railroad Rehabilitation & Improvement Financing] loan programmes and allocated transportation Private Activity Bonds. These loan and bond programmes financed PPP projects that met statutory eligibility requirements. So, we were in the thick of the effort to help design the administration’s infrastructure plan.

I was pleased that some of the proposals we suggested were included in the infrastructure plan and disappointed that others were not. Although the plan fails to provide monetary incentives specifically targeted to promote PPPs, such as an incentivised asset recycling programme similar to the one successfully implemented in Australia a few years ago, it does contain provisions to make asset recycling more attractive to local governments than it is today. The plan also recommends that certain federal infrastructure assets be privatised. And it would give local governments the flexibility to utilise PPPs in more situations than currently exist. Infrastructure funds, their investors and PPP developers will need to carefully evaluate these new opportunities.

Let’s focus on five proposals in the administration’s plan that create PPP opportunities in the transportation industry. First, the plan proposes to alter rules governing PABs to: eliminate volume caps; permit PABs to be used for airports, ports and reconstruction, as well as new construction; eliminate the alternative minimum tax that now applies to PABs, making them more cost-competitive with standard municipal bonds; and eliminate the change-of-use restrictions, so that the interest on tax-exempt bonds that had been issued for an asset would continue to be tax-exempt, even if a private party later took over operation and maintenance of the asset. These are all important changes that would enable private parties to provide debt financing for projects on a basis competitive with a state or local government. In other words, the current view that PPPs cannot compete on a cost-of-money basis with a project that a state finances would no longer be true. They would both have access to the same tax-exempt bond market, assuming both are otherwise creditworthy borrowers.

These changes would make it easier and more attractive for a state to ‘privatise’ an existing asset, such as the New Jersey Turnpike. For example, a group of investors could enter into an agreement to operate and maintain the turnpike without having to refinance its existing debt. Moreover, the investors could issue new tax-exempt financing to raise the debt portion of their payment to the local government for the right to operate the turnpike. The investors would therefore be able to pay the state a higher price for the right to operate the turnpike than under current law.

Second, the plan proposes to eliminate restrictions on the tolling of interstate highways as long as the revenue realised by the government is reinvested in other eligible transportation infrastructure. Tolling creates a revenue stream that could be the basis for several different PPP transactions. The state could set and collect the tolls and pay a portion of the revenue to a PPP that operated and maintained the road – an availability payment – or the PPP entity could collect the tolls and pay the state an agreed-upon fee, either upfront, over time, or both. In either case, the tolls could be regulated by the state. States will likely struggle politically with adding tolls to roads that are now free, but the concept of users paying fees rather than the state relying on tax revenue is becoming more acceptable in many states and is used throughout Europe and Asia.

The view that PPPs cannot compete on a cost-of-money basis with a project that a state finances would no longer be true. They would both have access to the same tax-exempt bond market”
Martin Klepper

Airports throughout Europe, Asia and Latin America are now operated by private parties under PPP arrangements. Large infrastructure funds that team up with experienced airport operators have been urging the Trump administration to permit airport privatisation on a more attractive basis than the current ‘pilot’ programme. The plan contains numerous provisions that could make it easier for PPPs to upgrade, expand, operate and maintain airport facilities, including terminals, rental car facilities and related assets. They include: removing the limitation in existing law on the number and size of airports that can be privatised; decreasing the percent of carriers at an airport that must approve privatisation from 65 percent to 50 percent; changing the rules governing incentive payments for airport improvements; allowing TIFIA to finance airport improvements and limiting FAA oversight of non-aviation development activities at airports. If implemented, these changes would increase airport privatisations and provide funds to upgrade and expand airport facilities.

Federal law currently prohibits most commercial activity within interstate highway rights of way, including at interstate rest areas. The plan proposes to eliminate these restrictions as long as proceeds are reinvested in the corridor in which they were generated. This would permit states to enter into PPP transactions to commercialise rest areas. States could lease land along the interstate to private parties to build, expand, finance, own, operate and maintain these rest areas, which could become mini-shopping malls. Developers of airport and train terminals would now be able to apply their experience to interstate highways. While tolling is often met with significant political resistance, commercialising rest areas and related land is likely to be viewed as adding and upgrading public facilities while also generating revenue to further benefit the community’s transportation infrastructure. The challenge will be siting these facilities in a way that is environmentally acceptable.

The fifth proposal would permit the federal government to sell real property faster and easier than under current law, without the current preference given to state and local governments and certain non-profit institutions to acquire the property at a significant discount. The proposals also allow federal agencies to retain the sale proceeds if they are reinvested by the agency in other (i.e new) property. Agencies could, for example, sell a large facility and use the proceeds to move into a new, more efficient, and perhaps smaller space. There are dozens of federal properties throughout the nation that have been identified by GSA as “excess” or underused. Many would be very attractive privatisation candidates under these new rules.

The administration’s plan also suggests that the following federal assets would be better managed by private parties (or state entities): federal electric transmission assets, including those owned by the Tennessee Valley Authority and the Bonneville Power Administration, Ronald Reagan National and Dulles Airports, and the George Washington and Baltimore Washington Parkways. Each of these assets have potential to provide a reliable long-term revenue stream that would make it easy to privatise.

Of course, all these proposals require congressional action. There is speculation that Congress may tackle some of these suggestions in separate bills to achieve some quick action on those that are viewed as least controversial. Although it is likely that some of these proposals will not survive the legislative process, I believe a number will become law, either by the end of the summer, or the summer of 2019.

Martin Klepper served from January until November 2017 as the first executive director of the Build America Bureau at the Department of Transportation. Before that, he was a partner at the global law firm of Skadden Arps, Slate, Meagher & Flom where he represented developers, lenders and investors in energy and transportation infrastructure transactions. He is now consulting in these areas.