News analysis: US road subsidies cuts would hit states, not investors

Lawyers at Mayer Brown and Nossaman argue that recent legislation introduced by Senators Grassley and Bingaman will not have a ‘major impact’ on investor appetite for road assets, but would penalise states who lease them.

As legislation to cut subsidies for roads that have been leased by private investors and the states that lease them takes shape in the US Senate, legal experts see the legislation as more of a blow to the states than the investors.

“At this point I don’t have the sense that it is going to have a major impact on continued appetite for infrastructure transactions,” said Mayer Brown partner David Narefsky, referring to Senate Bill 885 introduced by Senators Grassley and Bingaman on Friday.

The bill would eliminate an indirect subsidy in the form of a depreciation allowance for highways that have been leased. Current tax code allows lessors to depreciate certain tangible and intangible assets, such as the right to collect tolls, over an accelerated 15-year schedule if the lease exceeds 45 years in length. The senators argue that this is effectively a “generous tax subsidy” which should be eliminated because it is incentivising exceptionally long leases of 75 and 99 years.

Asked why investors don’t simply cap their lease lengths at 46 years, Narefsky – who advised Pennsylvania on structuring a 75 year lease for the ultimately unsuccessful turnpike transaction – pointed to other benefits beyond tax incentives.

“There’s a real benefit to having a longer term so that you have enough time to make sure that the debt is paid back. Plus, there are economic benefits. If I have the right to run a road for 75 years, I am going to pay more for that same right for 45 years,” he added.

Nevertheless, if the law is passed, investors would still have the ability to depreciate certain portions of their lease costs – just not as fast as they used to. Other costs, such as capital improvements funded by private activity bonds, tax-exempt debt issued by private sector organisations to finance infrastructure, would still be subject to a decelerated schedule.

Infrastructure investors’ characteristics also dampen the impact of the bill on the private sector.

“When you look at the universe of likely investors in infrastructure assets, generally a significant portion are investors for whom these tax considerations are not relevant – whether they’re [public] pension funds or sovereign wealth funds,” Narefsky said.

The other bill introduced by Grassley and Bingaman – Senate Bill 884 – was aimed at states. It would subtract leased highway miles from  aggregate highway miles eligible for federal  funds for operation and maintenance, thereby reducing overall federal funds available for highway infrastructure.

For example, if Pennsylvania accepted a $12.8 billion offer for

This is the wrong time to be limiting or discouraging states from adopting particular approaches to meeting their transportation responsibilities

Edward Kussy

leasing its 537-mile turnpike under current law, it would not lose federal subsidies related to those miles. If the law passed, Pennsylvania would have to subtract the present value of the subsidies over the term of the lease from its proceeds, introducing a new wrinkle into transaction negotiations.

“The legislation fails to recognize that the roads at issue are still public roads that must be maintained for public benefit . . . prisons, garbage collection, transit services, and many other public services are accomplished by states and local governments by contract.  Why should states be penalized if they provide highway services by contract?” said Edward Kussy, former deputy chief counsel to the Federal Highway Administration and a partner at Nossaman in Washington DC.

“This is the wrong time to be limiting or discouraging states from adopting particular approaches to meeting their transportation responsibilities,” Kussy added.