PPP Update: US Infrastructure Legislation
The US Congress is considering multiple infrastructure funding bills. Will these bills facilitate broader use of public-private partnerships in the United States?
Some of the bills under consideration include new or expanded infrastructure financing programs and would encourage greater private-sector involvement in public projects. Congress is still debating the specifics. It appears somewhat more willing to set aside partisan wrangling in this area, but infrastructure spending bills remain challenging even in the best of times and will be particularly so in advance of the mid-term elections this November.
President Obama asked Congress to pass two infrastructure bills in his State of the Union message to Congress in late January. He asked Congress to reauthorize the federal government’s surface transportation programs, which most recently passed Congress in 2012 as the Moving Ahead for Progress in the 21st Century Act or “MAP-21.” He also asked Congress to reauthorize the federal government’s water resources programs under the Water Resources Development Act. The President followed up the State of the Union with a budget proposal in early March to authorize up to $302 billion in spending on MAP-21 over the next four years, although specific legislative language was not provided.
Congress is still talking about whether to create a new “national infrastructure fund.” A Partnership to Build America Act has been introduced in the House and Senate. There are several more proposals that various members of Congress have introduced that focus on specific issues related to infrastructure investment.
The House Transportation and Infrastructure Committee recently created a special panel to focus on public-private partnerships across various types of infrastructure, including all modes of transportation, water and public buildings. The panel’s recommendations may lead Congress to encourage project financing, private-sector investment and PPPs as part of the reauthorization of the surface transportation and water resources programs.
Congress has until September 30, 2014 to reauthorize the federal surface transportation programs under MAP-21 before the programs expire. A key concern for this bill is the level of funding that the federal government can provide from the increasingly strapped Highway Trust Fund. The US Department of Transportation is maintaining a Highway Trust Fund ticker at http://www.dot.gov/highway-trust-fund-ticker to show that the surface transportation programs continue to spend money faster than receipts are coming into the trust fund that funds these programs. Congress has not raised excise taxes on motor fuels, the primary source of revenue for transportation funding, since 1993 and few alternatives have been seriously considered. The funding issue was the topic of the first MAP-21 reauthorization hearing by the Senate Environment and Public Works Committee in February this year.
The President’s budget proposal includes $302 billion over four years for reauthorization of MAP-21, which is more spending than the Highway Trust Fund can support and an increase from the annual spending levels under the current MAP-21. The Obama administration is proposing to make up the funding gap through corporate tax reform. A Republican discussion draft of a corporate tax reform bill that Congressman Dave Camp (R-Michigan), the House tax-writing committee chairman, released in March would also dedicate some revenue raised through corporate tax reform to support the Highway Trust Fund. However, no action on corporate tax reform is expected this year.
The reality of federal shortfalls over the last several years has helped push state and local governments to consider new approaches for funding infrastructure. Several bills in Congress propose programs to encourage broader project financing and private investment through PPPs as an alternative to traditional funding mechanisms. Two of these financing programs that are relevant for PPPs in the context of the MAP-21 reauthorization are private activity bonds and the Transportation Infrastructure Finance and Innovation Act or “TIFIA” for short.
Private activity bonds allow tax-exempt borrowing to finance projects that serve a public purpose but that are owned, leased or in some cases operated by private companies. Expanding the capacity of the private activity bond program for surface transportation projects would facilitate the use of PPPs by ensuring that tax-exempt debt remains available for PPPs. Congress authorized the use of private activity bonds for surface transportation projects in 2005. The US Department of Transportation can allocate up to $15 billion in total in such tax-exempt financing authority for eligible projects. Private activity bonds are seeing more use for transportation PPPs. In 2013, such bonds were issued for the $763 million East End Crossing PPP between Indiana and Kentucky, the $1.35 billion North Tarrant Express PPP in Texas and the $1.5 billion Goethals Bridge PPP connecting New York and New Jersey.
Recognizing that the $15 billion cap could soon be exhausted, President Obama called for the cap to be increased to $19 billion in March last year. The use of private activity bonds and the pace of PPP activity has accelerated since then. Approximately $9.3 billion of the $15 billion cap had been allocated by the end of February 2014. Industry estimates are that the cap will be fully allocated as early as 2015. Accordingly, PPP proponents are hoping Congress will authorize a substantially higher cap or remove the cap altogether. Senator Mark Kirk (R-Illinois) introduced a bill in late February to increase the cap to $19 billion.
However, these efforts may be swimming upstream as the tax-writing committees that have jurisdiction over tax-exempt bonds are no fans of such bonds. The Camp tax reform bill would eliminate all uses of private activity bonds.
TIFIA provides low-cost, flexible loans for part of the cost of major transportation projects. A multi-year commitment in a reauthorization bill to maintain TIFIA’s current lending capacity would be important for PPPs, as a number of PPPs are working through competitive procurement processes and may not be ready for financing until 2015 or beyond. The President’s budget proposal includes an extension of TIFIA at current funding levels through fiscal year 2018.
Under MAP-21, TIFIA was expanded significantly from a program that could make approximately $1 billion of loans each year to a program with approximately $17 billion to lend over two years. While TIFIA has not used these funds as quickly as some may have hoped or expected, the pace of TIFIA lending has accelerated significantly. In fiscal 2013, TIFIA made two loans using MAP-21 funds for a total of $388 million. So far in fiscal 2014 TIFIA has made six loans using MAP-21 funds for more than $4 billion (and two loans for $534 million using pre-MAP-21 funds). More TIFIA loans using MAP-21 funds are expected before the end of fiscal 2014, and the expanded program is managing a growing pipeline of future projects.
Renewing existing financing options is one thing, but Congress could also consider programmatic reforms and other initiatives as part of a surface transportation reauthorization bill to make it easier for public officials to consider other ways to deliver basic infrastructure. Reforms could build on efforts initiated in MAP-21 to loosen restrictions, cut red tape, focus on performance and develop best practices. For example, Congress could consider further loosening restrictions on tolling and pricing that would facilitate broader use of project financing mechanisms.
Senator Kirk and Senator Mark Warner (D-Virginia) introduced a bill in late February to expand the number of states that can participate in federal programs that allow broader use of tolling and pricing on highways. The bill, called the “Highway Innovative Financing Act of 2014,” would eliminate an existing cap on the number of states that could participate in a “value pricing pilot program” that encourages testing of congestion pricing strategies. The bill would also increase from three to 10 the number of states that could participate in an “interstate system reconstruction and rehabilitation pilot program” that allows tolling on certain existing interstate highways that require repair. All three of the current slots are reserved.
The Obama administration could also continue to streamline federal review and approval processes. The latest budget request to Congress builds on previous efforts in this area by establishing a new Interagency Infrastructure Permitting Improvement Center that will be administratively housed within the US Department of Transportation along with a new “permitting dashboard” on the department’s website. Congress and the administration could also try to coordinate PPP efforts across federal agencies and provide higher-level support and visibility for PPPs.
Congress is in position to pass a water resources bill this spring for the first time since 2007, but progress has slowed in recent months. The existing Water Resources Development Act provides federal support for ports and waterways and targeted flood protection and environmental restoration. The Act does not currently facilitate project financing or PPPs, but new programs under consideration could encourage private investment. The Senate and House passed different versions of the bill — the House added an extra “R” to the title of its bill for “Reform” — and a conference committee was appointed in late 2013 to reconcile differences.
The Senate version includes a new Water Infrastructure Finance and Innovation Act program called “WIFIA” that would be modeled after TIFIA. This program would provide $50 million annually to each of the US Army Corps of Engineers and the US Environmental Protection Agency to make low-interest loans for water infrastructure projects, including PPPs. Water and wastewater projects would be eligible, as would projects for flood control, hurricane and storm damage reduction, enhanced energy efficiency, improvements to treatment works, community water systems, aging water distribution and waste collection facilities, desalination, managed aquifer recharge and water recycling.
Like TIFIA, WIFIA would be able to provide loans for no more than 49% of project costs to encourage co-investment. The financing would be flexible, with a repayment schedule based on projected project cash flows, final maturity up to 35 years after substantial completion, and repayment of principal or interest commencing up to five years after substantial completion. Project costs from development through construction, including certain refinancing costs, would be eligible for assistance. The threshold for minimum project costs would be $20 million (or $5 million for rural projects).
The House version of the water bill does not include WIFIA, but it includes a pilot program authorizing PPPs for water projects. Under this program, the US Army Corps of Engineers would be authorized to allocate $25 million each year from 2014 through 2018 for projects to be managed by private entities. Fifteen total projects would be chosen, covering the areas of flood risk management, hurricane and storm damage reduction, coastal harbor and channel improvements, inland navigation and aquatic ecosystem restoration.
A National Infrastructure Fund
The idea of a national infrastructure bank or fund has been proposed multiple times over the last several years in Congress and by the Obama administration. It has not had much traction and suffered from, among other things, House Republican efforts to shine a spotlight on the US Department of Energy loan guarantees given to companies like Solyndra that went bankrupt after receiving federal support.
Nevertheless, the Obama administration reiterated its support for “establishing an independent National Infrastructure Bank to leverage private and public capital to support infrastructure projects” in its latest budget proposal to Congress. The budget message did not provide any details for how the National Infrastructure Bank would be structured or operate.
A “Partnership to Build America Act” introduced by Congressman John Delaney (D-Maryland) in May last year would capitalize a new American Infrastructure Fund through the sale of $50 billion of infrastructure bonds. The corporations that purchase the bonds would be allowed to repatriate overseas earnings tax free in an amount to be determined. While the bill is supported by a bipartisan group in Congress, it has not been referred to a committee, which is the first step in the legislative process. Meanwhile, the tax-writing committees are not keen to write earmarks like this into the tax code.
Delaney would require the infrastructure fund to put a minimum of 25% of its funding into infrastructure projects that use PPPs with at least 20% of the financing for such projects consisting of private capital. The fund would be designed to be self-sustaining and would not be backed by the full faith and credit of the federal government. No federal appropriations would be required.
To ensure accountability, the bill proposes an 11-member board to manage investment decisions. Seven spots on the board would be appointed by the seven entities purchasing the most bonds, and the other four spots would be appointed by the President and would require Senate confirmation. The mission of the board would be to operate the fund as “a low-cost provider of bond guarantees, loans, and equity investments to State and local governments and non-profit infrastructure providers for both urban and rural non-profit infrastructure projects that provide a positive economic impact and to meet such other standards as the [b]oard may develop.” The fund would only assist with state and local projects.
The independence of the fund may alleviate some concerns about federal accountability for investment decisions, but giving control of the board to the bondholders could raise questions about the criteria that will be used for making investment decisions and the alignment of investment decisions with public policy considerations.