Port investment brightens, but outlook remains cloudy for toll roads, airports and other public assets.
Businesses, economists, and policy experts say there is a crying need for government to invest in infrastructure because it is a foundation for economic growth and makes U.S. exporters more competitive in global markets. Meanwhile, federal, state and local governments are severely constrained from closing the infrastructure investment gap by limited funds and anti-tax public sentiment.
While governments at all levels face flat or shrinking budgets, massive amounts of private capital sit on the sidelines waiting for deals that will generate a steady rate of return in the low to mid-teens.
Financial deals for U.S. port infrastructure are heating up. But the market for highways and other public assets is still slow because inexperienced state and local governments are skittish about voter backlash after several well-publicized transactions involving large upfront payments for long-term operating rights didn’t include sufficient protections for taxpayers or facility users.
State Of Infrastructure. The American Society of Civil Engineers gives the United States an overall grade of “D+” for infrastructure, including dams, transit and electricity. Based on current investment trends, it forecasts by 2020 the nation, across all levels of government, will have a $1.6 trillion shortfall between the amount needed to bring all types of infrastructure to an acceptable level for safety and efficient function, and projected funding levels.
IBIS World estimates that local governments, which are responsible for almost three-quarters of infrastructure investment, have scaled back infrastructure spending by 3.4 percent in the past five years, on an annualized basis.
ASCE’s projected funding gap for surface transportation is $846 billion.
President Obama recently signed legislation extending the government’s authority to spend money on surface transportation programs for another eight months, but it’s a stopgap measure that required an $11 billion infusion of money to the Highway Trust Fund paid for by increasing customs duties, transferring funds from another account and deferring tax-free contributions for corporate pension reserves so the government ends up with more tax money.
About $40 billion a year is sent from the Highway Trust Fund to states to help pay for highway maintenance and new construction.
Bailing out the Highway Trust Fund is necessary because demand for construction projects exceeds revenues primarily coming from motor fuel taxes, which are in decline as Americans drive less and use more fuel-efficient cars. The gas and diesel tax is a fixed amount per gallon and hasn’t been raised in 20 years. Inflation has eroded nearly 40 percent of its value, which means money to fund projects doesn’t go as far as it once did. A gallon of regular gas in 1993 cost $1.12 and today costs $3.50, but the gas tax remains the same—18.4 cents. Transportation advocates had hoped Congress would pass a multi-year transportation authorization bill that identified a permanent source of alternative funding for the Highway Trust Fund, but raising taxes, especially in an election year, has become the fourth rail of American politics. A gas-tax increase has been automatically ruled out by most lawmakers and the Obama administration, and there is no consensus on what other types of user fees or other taxes would be appropriate.
Some states have made the difficult choice to raise more money for transportation infrastructure. Last year, Virginia passed landmark legislation to raise an additional $3.5 billion for new road and bridge construction, mass transit, rail and other needs over six years. It eliminated the 17.5 cent-per-gallon tax on motor fuels and replaced it with a percentage-based sales tax of 3.5 percent for gasoline and 6 percent for diesel fuel. It also increased the state sales tax by 0.3 percent, with the increase dedicated for highway maintenance and operations.
Missouri voters on Aug. 5, however, defeated a ballot measure that would have established a dedicated infrastructure fund paid for by a 0.75 cent sales tax increase. The Missouri Department of Transportation estimates that requests for infrastructure spending across the state in the next 20 years will total $70 billion, but only $17.3 billion of funds will be available. Even if some of those projects could be pared down as unnecessary or a local responsibility, the gap remains sizable. The measure was expected to raise $5.4 billion over 10 years for priority transportation projects.
Some argue that allowing the private sector to finance, build and manage roadways, or buy the operating rights for existing roads, would provide the necessary capital. In most cases, however, private contractors make money on roads by implementing tolls, which many politicians strongly oppose.
The situation is complicated by the lack of an overarching, national policy toward public-private partnerships. States and municipalities control much of the nation’s infrastructure and legislation is needed to define qualifying projects, create the framework for concession terms and impose rules of accountability, according to transport finance experts.
Chicago Mayor Rahm Emanuel based his decision last year not to do a deal to run Midway Airport on lessons learned from predecessor Richard Daley’s much-maligned decision to transfer control of the city’s parking meters to a consortium led by Morgan Stanley. He listed his criteria for privatization in a Chicago Tribune op-ed last September:
“[F]irst, a group of outside experts should be impaneled at the start of the process to monitor each step; second, there must be a minimum 30-day review by the City Council before the project is voted upon; third, there should be a clear set of standards so the public can judge a potential partnership when it is presented; fourth, the funds should be invested in infrastructure rather than used as a plug for short-term budget holes; fifth, a true public-private partnership requires that taxpayers maintain control of the asset and share in management decisions and financial profit.”
Frustrated with what he characterized as the unwillingness of Republicans in Congress to advance a long-term funding plan for surface transportation programs, President Obama in mid-July said his administration is moving to empower states and localities to find private-sector partners for needed infrastructure projects.
The Build America Investment Initiative is a government-wide effort to increase infrastructure investment by encouraging greater collaboration between the public and private sectors, expand the market for private infrastructure financing, and better utilize federal credit programs.
The president said a key part of the initiative is the creation of the Build America Transportation Center at the Department of Transportation to serve as “a one-stop shop” that matches cities and states with private developers and investors; provides guidance on how to structure deals involving private financing; and improves access to federal credit programs, such as TIFIA, private-activity bonds, and Railroad Rehabilitation and Improvement Financing loans. RRIF’s complex bureaucratic requirements, for example, have dissuaded many railroads and shippers from taking advantage of the loan program.
Institutional investors are sitting on hundreds of billions of dollars and have expressed great interest in building, maintaining and operating infrastructure in exchange for collecting revenue from users or payments from public entities. But the political and legal framework for long-term leases of public infrastructure is not as mature in the United States as it is in other countries. Obama’s initiative is designed to make it easier and more appealing for the private sector to get involved in public-private projects.
DOT said its investment center will offer hands-on support for states and local governments trying to access federal programs and assemble public-private funding packages, as well as tools and resources for interested private partners. It also serves as a clearinghouse for best practices from states that have experience with private investment in public assets.
The action builds on previous steps the administration has taken on infrastructure such as speeding up the permitting process for large projects. The new investment center will coordinate with the permitting center to ensure projects are designed and financed to move quickly through the permitting process.
The administration also announced the formation of the Build America Interagency Working Group, co-chaired by Treasury Secretary Jack Lew and Transportation Secretary Anthony Foxx, which will address barriers to private investments and partnerships across all infrastructure classes, including ports, by bringing better coordination among all parties to accelerate projects of national significance, particularly those that cross state boundaries.
The Treasury Department will host an Infrastructure Investment Summit on Sept. 9 to highlight innovative public-private partnership approaches and the federal government’s resources.
A White House fact sheet pointed to the $1 billion Port of Miami tunnel project as a successful example of leveraging private financing and expertise to build an asset that would have taken much longer for local governments to complete themselves or been unaffordable.
Miami Access Tunnel Concessionaire, a consortium of financial and construction firms, was hired by the state to design, build, finance and operate the tunnel for 35 years.
City and state officials say it will take 16,000 cars, taxis, buses, and trucks out of the downtown area by creating a direct bypass under Biscayne Bay between Interstate 95 and PortMiami, which rests on a man-made island.
The tunnel is expected to shave 25 minutes from a port shuttle truck’s round trip to the port, potentially making it possible for drivers to add another trip per day and make more money, according to Port Director Juan Kuryla.
The tunnel will also be an alternative route for 7 million passenger vehicles, taxis, buses, and provisioning trucks trying to reach the world’s largest cruise terminal, helping to reduce downtown congestion and idling that produces harmful emissions.
There will be no tolls on the tunnel. The concessionaire will make money through “availability payments” from the state of Florida. In addition to $156 million in construction milestone payments, the company will receive a $350 million payment at final acceptance of the project and then monthly payments for each month the facility is available for public use. If the tunnel is unavailable or the operator does not meet performance benchmarks it will not get paid.
Miami-Dade County is contributing about $358 million, and the city is pitching in with about $50 million, in addition to donations of right of way by both parties.
This article was published in the September 2014 issue of American Shipper.