Plan would expand use of PABs to finance development; allow states to put tolls on interstates; and require value capture financing for transit projects receiving fed money
Infrastructure investment in the United States perennially lags behind even the basic cost of maintaining the highways, bridges, airports, canals, and railroads that already exist—never mind breaking ground on innovative projects like high speed rail or the Hyperloop. It’s a pain point for the entire economy and our nation’s competitiveness: in a recent report on American manufacturing, McKinsey found that compared to other advanced economies, America’s road infrastructure was deteriorating and our rail infrastructure lagged far behind our competitors.
The Republican Congress’ biggest legislative victory this year, the massive tax reform bill that is already pushing the stock market to new heights and raising wages, might paradoxically hurt the chances of significantly moving the needle on the state of the nation’s infrastructure. The GOP’s original plan was to repeal Obamacare and use the billions of dollars of savings to help pay for the tax cut, but when the repeal effort failed, the tax cut wasn’t paid for and instead relied on deficit spending. Now a huge infrastructure bill would dig the hole further—in essence, by not repealing Obamacare and passing the tax bill anyway, the federal government will face more budgetary constraints in how it approaches infrastructure spending. We’ve always known that the only way to get to the $1T number touted by Trump in debates and campaign speeches was through public-private partnerships, but we have just now begun to learn exactly how they would work.
Yesterday, in a story first reported by Axios, and then picked up by Politico, the Hill, and other media outlets, we got the first look at the Trump administration’s long-awaited infrastructure plan. A six page document containing an outline of ‘Funding Principles’ and ‘Principles for Infrastructure Improvements’ was leaked to the press and provoked widespread commentary.
The undated document does not contain numbers for the overall cost, but is rather a structural outline of how the infrastructure program would work—we learn what the administration seeks to accomplish and the mechanisms by which it would do so.
In previous discussions of the infrastructure plan, the Trump administration has floated a price tag of $200B in federal appropriations over 10 years which would be leveraged into $1T total spending when joined by state, local, and private funding sources. Those earlier numbers are consistent with the structure proposed in the outline, which is basically a system of federal grants to other entities. The catch is that the federal grants would be limited to funding only 20% of project costs—thus the $200B / $1T spending ratio. That’s a significant difference from how the federal government currently helps pay for large transit projects, where it can shoulder upwards of 50% of the cost.
Project applications submitted to the grant program are scored on several criteria, including sustainable revenue and overall public benefit, but the lion’s share of the score—70%—would be based on the project’s association with new, non-federal revenue. But where would all of that money come from? FreightWaves previously reported on President Trump’s skepticism toward public-private partnerships’ feasibility for infrastructure investment, because the ROI is typically very low, and in the expanding economy we’re currently experiencing, there are plenty of more attractive investment options.
The plan calls for an expansion of the kinds of projects that would qualify for public activity bonds (PABs), and eliminates the cap on the volume of PABs a state can issue. A PAB is a form of public-private partnership whereby a city, county, or state issues a tax-free municipal bond to help pay for a project that is owned privately but has a public benefit. Airports, waste water treatment plants, and docks at ports are examples of the kinds of facilities that are typically funded with PABs—the Trump infrastructure plan wants to make more kinds of projects eligible for PABs and also to remove limits on how much debt can be financed with PABs. This provision is meant to give a tax break to developers and encourage them to invest; it may also result in an increase in the number of privately-owned infrastructure projects.
While the infrastructure plan leaves state, local, and private entities on the hook for 80% of each project’s cost, the Trump administration has an idea that could help states pay for the developments: turn interstates into toll roads. The first ‘principle for infrastructure investment’ under Transportation – Financing reads, “Allow states flexibility to toll on interstates and reinvest toll revenues in infrastructure”; the sixth principle also promises to “provide states flexibility to commercialize interstate rest areas.” There are now some tolled sections of interstate highways, but the majority are major bridges in cities.
There are also a number of regulatory changes to the construction permit process that are designed to encourage development. For example, the plan has a provision to let highway projects move forward without waiting on environmental reviews—specifically, the plan allows for the relocation of utilities to take place prior to NEPA (National Environmental Policy Act) completion. The plan also calls for federal funds provided for highway projects to be gradually refunded to the government so that federal requirements would not apply in perpetuity.
Another piece of regulatory relief in the outlined plan separates smaller highway projects from the federal requirements for ‘major projects’, defined by the Federal Highway Administration as projects with a total cost of $500M or more that receive federal funding. Major projects require detailed management and finance plans to be submitted to federal agencies; the infrastructure plan outline would raise the cost threshold for those requirements to $1B and also exempt smaller projects from those sorts of regulation and oversight.
For the financing of transit projects, the Trump administration’s outline requires the use of value capture financing as a condition for receipt of federal funds and eliminates constraints on the use of public-private and public-public partnerships. Value capture financing is a method of infrastructure finance favored by urban planners because it acknowledges how private landowners get unearned profits from public investment. For instance, imagine a city that wants to build a commuter rail system to its suburbs. The privately owned land around each rail station built by the city will increase in value as more and higher buildings go up around the station. Proximity to the rail stations will encourage everything from retail to residential construction, and private owners of the land surrounding the stations will see enormous benefit.
Value capture financing would try to ‘capture’ that unearned private profit through the use of targeted taxes, essentially financing the new infrastructure through its direct beneficiaries. In some states, it’s difficult for municipalities to receive authorization for value capture financed projects, but if this provision becomes law, states will have a powerful incentive to authorize that kind of finance structure. The Trump administration wants transit projects to use value capture financing because it will lower developers’ interest rates. Construction loans that are secured by supplemental value taxes are less risky for lenders to issue and will have lower interest rates—and the promise of lower interest rates will encourage developers to make investments in transit projects.
Imagining the infrastructure plan from the perspective of a real estate developer allows you to read between the lines of the brief document and focus on how these provisions make development opportunities more attractive to investors. President Trump, a billionaire real estate developer himself, understands what motivates builders, and the document that leaked yesterday is evidence that he’s leveraging his business experience to create a favorable climate for the infrastructure investments the United States badly needs.
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