Investors and developers have long grumbled that deals like the 99-year lease of the Chicago Skyway for $1.8 billion and the 75-year lease of the Indiana Toll Road for $3.8 billion are not a sustainable model.
Two US senators recently introduced legislation that may prove them right. New Mexico Democratic Senator Jeff Bingaman and Iowa Republican Charles Grassley jointly sponsored two bills to curb federal benefits for leased roads, such as the Skyway and the Toll Road.
Bill 885 – “Transportation Access for All Americans” – would eliminate an indirect subsidy in the form of depreciation allowance for highway leases. The 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.
Meanwhile, Bill 884 – “Transportation Equity for All Americans Act” – would eliminate a direct subsidy to states in the form of federal funding for highways. It would do so by subtracting leased highway miles from aggregate highway miles eligible for federal funds for operation and maintenance.
Both would make deals like the Skyway and the Toll Road less attractive to investors. But some lawyers interviewed by Infrastructure Investor seem to think the states would be punished more than 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 David Narefsky, a partner at law firm Meyer Brown, referring to bill 885.
“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.
If the law is passed, investors will 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.
States, meanwhile, would stand to lose a meaningful source of road funding thanks to bill 884.
“The legislation fails to recognise 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 penalised if they provide highway services by contract?” asked Edward Kussy, former deputy chief counsel to the Federal Highway Administration and a partner at law firm Nossaman in Washington DC.
Others took a more bearish view on both pieces of legislation. Allen & Overy, an international law firm with a large infrastructure practice, said the bills “would compound the capital starvation of the US transportation network” and could “end” the US market for toll road public-private partnerships if enacted.
Only time will tell how much of a blow the bills will deliver to the US’s nascent PPP market. One thing’s for certain, though; they represent the strongest argument yet for industry participants to police themselves more, so that legislators don’t feel the need to do it for them.