After more than a year of anticipation, on Feb. 12 the Trump released the details of of its plans to fix the nation's broken and crumbling infrastructure. President Donald Trump's "Legislative Outline for Rebuilding Infrastructure in America" framework is aimed at shaking up the federal government's role in infrastructure investment.
The plan unveiled three new programs and other changes intended to provide $200 billion in federal funding which, combined with state and local funds and private capital, could lead to $1.5 trillion of new infrastructure investment. The plan also pledges to dramatically shorten the time it takes to obtain permits, and outlines a host of other features that could revamp state and local governments' infrastructure investment decisions while opening the door to the private sector.
What is the Plan?
The plan's broad objective is to push state and local governments to innovate and explore new funding approaches to not only to maximize the multiplier effect of limited federal funding but also to attract private investment. The plan also focuses squarely on reducing and streamlining permitting so that projects that have a strong value proposition and a funding plan can be built quickly. The plan considers a range of models that move beyond the conventional role of municipalities and state government-financed infrastructure including public-private partnerships (P3s) and other alternative-delivery approaches for projects. We see this as favorable because to bridge the well-documented infrastructure gap in an environment of scarce government funding, policy-makers need a range of alternatives and options. The plan also subtly pushes investment decisions to take the full account of lifecycle costs, considers asset bundling, and encourages a concept known as "value capture financing" for transit projects that could result in private capital playing a bigger role in public infrastructure. Studies, including the BPC Executive Council on Infrastructure (see "Bridging the Gap Together: A New Model to Modernize U.S. Infrastructure," May 2016), have emphasized the importance of considering a full range of options for project delivery and financing. Finally, the plan explicitly opens up avenues for revenue-generating projects to be self-sustaining--for example, encouraging states to explore tolling and commercializing rest areas on interstate highways.
Total funding for the plan is $200 billion over 10 years, as follows:
- Incentives program: A total of $100 billion is pledged toward a new program that will award incentive grants to state and local governments for up to 20% of the project cost. The program favors projects that create significant new, additional infrastructure investments that don't require ongoing federal funds for operation, maintenance, and rehabilitation.
- Rural infrastructure: A total of $50 billion is established as a grant program. The lion's share will be allocated as grants directly to governors using a rural formula and gives broad discretion to states to identify needed projects.
- Transformative projects: Another $20 billion is dedicated to provide federal aid to infrastructure projects that are in demonstration phases or seen as too risky to attract conventional financing.
- Other federal loans and programs: About $20 billion would increase funding for less well known but successful federal loan programs, including the Transportation Infrastructure Finance and Innovation Act (TIFIA) and the Water Infrastructure Finance and Innovation Act (WIFIA). It would also expand private activity bonds. In addition, $10 billion would be set aside to create a new revolving fund that would allow purchases rather than leasing of federally owned property.
Our Main Observations – And Questions
Can U.S. infrastructure investment increase while federal infrastructure funding shrinks?
Federal coffers are stretched and the administration faces political headwinds from deficits induced by tax reform, which means this infrastructure plan was never going to be a massive federal stimulus package. We note, however, that half of the total federal funding pledged in the plan is set aside for the incentive program that turns upside down the traditional expected federal government funding contribution. Historically, the funding formula for infrastructure has seen the federal government often foot 80% of the investment, with the state and local governments picking up the balance. This program poses a unique challenge for state and local governments to come up with at least 80% of funding. Not all states or local governments will have the financial flexibility to meaningfully tap into this program (we have nine states on negative outlook), at least not without some creative solutions.
This flipped funding equation could propel innovation.
We expect the early adopter states and local governments will fall into two buckets--those that have capacity and willingness to issue additional debt to capture the federal grants and those that are looking for creative solutions to specific projects. This could include collaborating with the private sector, for example, by tapping user charges such as tolling as a way to support investment and insure funding for ongoing upkeep. (In fact, one element of the plan intends to remove federal restrictions on tolling interstate roads.) Because governments and other infrastructure providers might need to consider user pay models to reach the funding levels required to access the incentives program, they could be more open to participating in P3s. The scope of infrastructure assets eligible is vast. While increasing surface transport investment seems to be a clear winner in the plan, the incentive program includes a wide range of asset classes, such as airports, passenger rail, ports and waterways, flood control, water supply and drinking water, hydropower, waste and storm water, and brownfield and Superfund sites.
Legislative changes are extensive and substantive, with the quite clear objective to leverage the private sector.
More broadly, the role of private capital could be significant under the plan. Private investment in public infrastructure is not a new concept globally (where it has particularly thrived in Canada, Europe, the U.K., and Australia), but it has had a slow start in the U.S. Although there is no single section of the plan devoted to programs using private capital, it clearly intends to stimulate P3s and potentially encourage outright privatization through legislative changes. Some specific areas of support include efforts to expand the use of tax-exempt private activity bonds, which are attractive forms of debt financing for P3s; offering the ability to toll on federal interstates; removing some of the constraints around using P3s for public transit projects; and streamline passenger facility charge changes in small and non-hub airports (which could stimulate the number of airport modernization programs that use a P3 structure). Tempering these opportunities is the lack of alignment between Republicans and Democrats over the use of private capital to stimulate infrastructure investment, and this administration's plan will ultimately need bipartisan support to advance an infrastructure bill.
Some relatively obscure but successful federal programs would receive increased funding.
TIFIA of 1998 has been providing credit assistance mostly in the form of direct loans to critical surface transportation projects. WIFIA is a more recent program begun in 2014 to provide similar federal credit to water and wastewater infrastructure. Both programs, along with the Railroad Rehabilitation and Improvement Financing, which helps finance railroad infrastructure, will see a significant funding increase of about $14 billion. Because these programs are matched with other debt and equity contributions, we estimate that as much as $50 billion in additional projects could be supported. (Since January 2017, for example, TIFIA underwrote a little less than $5 billion in 15 project loans for a total of $20 billion in projects.) Because P3s can also tap these lending sources, the expansion of TIFIA and WIFIA in particular is another area in which private capital is handed opportunities under the plan.
Rural areas are given special focus, which ushers in the need to consider asset bundling.
The plan makes special provisions for rural areas, which is interesting because it's not always easy to deliver infrastructure with scale. As well, low levels of population and weaker demographics can challenge a user-pay approach. The biggest opportunity to jumpstart rural infrastructure may then be to consider bundling of assets. For example, a P3--the Penn Bridges project--will develop, design, construct, and maintain 558 geographically dispersed, structurally deficient bridges across the Commonwealth of Pennsylvania. After repair and construction is completed, the project will maintain the bridges under a 25-year availability concession with Pennsylvania Department of Transportation. Construction completion is expected by December 2018. Governments could combine smaller individual projects to attract private capital and harness scale along with building critical mass around the expertise needed to manage them. Bundling can be done outside of a P3 structure. Areas we expect to see as the most likely candidates for new rural infrastructure are water and bridge rehabilitation. The plan's aim for rural broadband could be difficult. Rural America generally receives its electricity from electric cooperatives given the very low customers per line mile, making geographically large service territories unattractive to investor-owned utilities or more direct private investment. The same likely holds true for broadband.
Innovation and new ideas for bridging the gap are included but not highlighted.
The structure of the program incentives appears very much to be focused on reforming governments' behavior and mindset of relying on federal funding to jumpstart critical state and local projects. Instead, the program incentivizes applicants that can demonstrate the ability to operate and maintain the infrastructure on their own, well after any federal and other capital money is gone. This implies more than just robust asset management, but also takes into account that there have generally been few incentives to create infrastructure programs that take into account concepts such as needing to insure that assets are not only built but properly maintained through the lifecycle. As well, it challenges applicants to consider tariff and fee structures that end the well-ingrained notion that essential services such as roads, water, and transit should be free or subsidized.
Is America ready to pay to use its public assets?
The problem for U.S. infrastructure has never been a shortage of private capital, but rather how it is paid for. Even if policymakers reject the overall plan and its role for private capital, S&P Global Ratings sees an inevitable need for Americans to accept paying more to use the nation's infrastructure. At its very essence, the plan forces into the political debate a conversation about who will support new infrastructure because massive federal funding is no longer on the table. And if the gap cannot be bridged by local and state governments alone or through additional direct federal spending or programs, the private sector will inevitably have to be involved in the solution.