US infra outlook stable despite threat to PABs, Fitch says

Uncertainty over tax reform suggests storm clouds in 2018, but overall trends point to moderate growth across the sector.

A tax reform bill before Congress muddies the 2018 prospects for the US transportation sector, as the elimination of tax-exempt private activity bonds would damage the PPP market, according to Fitch Ratings.

Still, Fitch gave the overall sector a stable outlook in its annual report, expecting growth to track GDP expansion and benefit from low fuel prices. Even tax reform was described as a “mixed bag”.

“While the tax reform will increase costs for capital improvements for US transportation assets in the near term, it may limit issuer options but also deepen the pool by opening up investments to a larger investor base,” said Fitch managing director Cherian George.

The fate of PABs, tax-exempt bonds issued by state and local governments for projects perceived to hold a societal benefit, remains unclear. A tax reform bill passed by the House of Representatives eliminates PABs, while the Senate’s version of the bill keeps them in place. Gaps in the bills will be closed in a conference committee.

The impact of tax reform was one issue discussed at the Infrastructure Investor New York Summit held this week, as panelists said that eliminating PABs would slow the market for PPPs.

“PABs have been very instrumental and useful to the market,” one panellist stated. “It would be bad for the market overall if they were to disappear.”

Fitch rated both the ports and toll roads sectors as having a stable outlook for 2018. For airports, the outlook was revised to stable-to-positive.

“Rising traffic levels are expected across most airports, coupled with a continuation of generally positive industry fundamentals for airlines,” the Fitch report stated.

The agency also gave the PPP sector a stable rating, noting continued interest in the procurement method among state and local governments. The report pointed to delays on Indiana’s I-69 and Pennsylvania’s Rapid Bridge Replacement projects as examples of completion risk. But toll-road PPPs have continued to grow, Fitch said, and will likely experience expanding interest. Airport PPPs are also gaining traction following the close of the $4 billion LaGuardia project in 2016 and the progress of proposals in Denver and Los Angeles this year.

“A number of other airports of varying size have issued proposals for P3 projects and there could be additional selections announced in 2018,” Fitch concluded.