With a clear rule of law, a stable regulatory environment, and transparent democratic processes, the United States would appear to be an ideal market for private investment to help address our well-documented infrastructure needs. So why have public-private partnerships (P3s) been so slow to develop here? In part, the answer lies in our liquid and robust tax-exempt debt market, which has financed trillions of dollars of infrastructure at very low cost. Tax-exempt debt has been so widely available, in fact, that for many years it virtually eliminated any incentive for state and local governments to explore other options for delivering infrastructure. However, since the recession of 2008, states and cities have become more cautious about taking on debt in part due to the slow recovery of sales, property, and income tax revenues by which they would pay off the bonds. Further, state and local partners are much more aware of the daunting scope of their infrastructure needs. As a result, more communities are looking to the private sector for answers.
Interestingly, and perhaps not fully recognized, most infrastructure in the United States is already financed by private investors. The most common financing mechanism is tax-exempt debt issued by states, cities, counties, and other public authorities. Because the interest earned on that debt is exempt from federal taxation, it is attractive to investors who have tax liabilities. This form of private investment in infrastructure remains vital to of solving America’s infrastructure challenge.
But private capital is diverse. Investors have different characteristics in terms of risk tolerance, tax status, and expected return. Recognizing this, the federal government supplements tax-exempt bonds with a variety of other financing programs. These options bring additional investors to the table, generating more capital for infrastructure. Yet, with some improvements, they could be doing even more.
Federal Infrastructure Financing Programs
TIFIA/WIFIA. The Transportation Infrastructure Finance and Innovation Act (TIFIA) offers loans, loan guarantees, and letters of credit to surface transportation projects. Its counterpart, WIFIA, finances clean water and drinking water projects. Both programs offer favorable interest rates with deferred repayment, flexibility that can be essential for infrastructure projects but is not typically available in the private market. They can finance only up to 49 percent of a project’s cost, so their loans are used in combination with other public or private financing. According to USDOT, each dollar Congress provides for TIFIA yields up to $14 in credit assistance and supports up to $40 in infrastructure investment.
Private Activity Bonds. Private activity bonds (PABs) complement the tax-exempt bond market by extending favorable tax treatment to bonds issued for private entities, including public-private partnerships. Unlike traditional tax-exempt debt, interest on PABs is subject to the alternative minimum tax (AMT), which lessens the benefit of the tax exemption. PABs can currently be used for transportation, water, affordable housing, and other types of infrastructure with a public purpose, but the number of PABs that can be issued is limited by state volume caps. PABs for transportation projects are limited by a national volume cap.
Direct Payment Bonds (currently expired). Direct payment bonds offer a taxable bond for which the issuer receives a direct payment from the federal government or the buyer receives a federal tax credit. Unlike traditional tax-exempt debt, direct payment bonds are attractive to investors who do not have federal tax liability, such as pension funds.
What Can the Government Do?
Private investors want to invest in American infrastructure. Meanwhile, our cities, towns, and even the federal government need help addressing their growing needs. Several steps would enable private investors to more easily partner with their public-sector counterparts, including:
Enable TIFIA and WIFIA to support more projects. Congress can increase authorizations for both programs, and take steps to improve access for rural and economically-distressed communities by allowing TIFIA/WIFIA financing to cover a larger portion of project costs, extending the repayment period, and waiving fees and other requirements that might be burdensome for smaller projects.
Align budget scoring with actual experience. TIFIA is currently scored as costlier than it is given its strong record of high-performing loans. Aligning scoring with the true cost of the program would expand lending capacity without increasing the cost to the federal balance sheet.
Authorize direct payment bonds for conventional projects as well as public-private partnerships. This step would attract the widest variety of private investors and support the greatest number of projects. Such a program would complement the existing tax-exempt debt market and should be exempt from any future sequester.
Raise the cap on PABs and exempt them from the AMT. This was proposed in S. 146, the Move America Act, introduced by Sens. John Hoeven (R-ND) and Ron Wyden (D-OR).