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A Level Financial Playing Field For P3 Projects

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One of the perennial arguments raised against long-term public-private partnerships (P3s) for transportation infrastructure is that the financing cost will be higher, because revenue bonds issued by the private sector carry higher interest rates, since the interest on those bonds is taxable. If the same project were carried out by a government toll agency, the bonds would be tax-exempt and therefore have lower interest rates.

For many years, along with industry colleagues, I argued that this was a foolish distinction for federal policy to make, and that tax-exempt bond status should depend not on who the project developer/operator is but rather on whether or not it is available for use by the public. Congress finally accepted this logic, and in the 2005 SAFETEA-LU legislation, authorized federal tax-exempt status for up to $15 billion in bonds for P3 surface transportation infrastructure projects.

These Private Activity Bonds (PABs) have been very popular. As of June 2014, according to DOT figures in the House Transportation & Infrastructure Committee’s report by its bipartisan panel on P3s, some $4.59 billion of PABs have been issued for projects that are either under construction or now in operation: nine highway/bridge projects, two intermodal center projects, and one transit project. Another $6.46 billion of PABs have been allocated to eight more projects, bringing the total to $11.05 billion. That leaves only $4 billion remaining out of the $15 billion authorized, with dozens more eligible P3 projects in the pipeline.

The need to increase—or ideally, to remove—that cap has been a subject of considerable discussion during the past year. Last September the U.S. Treasury’s Office of Economic Policy issued a 17-page report, “Expanding our Nation’s Infrastructure through Innovative Financing.” Among its recommendations was to increase the cap to $19 billion, as part of the President’s FY 2015 budget. That’s significant, because historically Treasury has resisted just about any increases in the use of tax-exempt debt, on the assumption that any projects that would use something like PABs would otherwise be financed via taxable debt. Hence, such expansions would reduce federal revenue. That has also been the long-standing position of Congress’s Joint Committee on Taxation. That claim ignores the fact that some projects simply do not pencil out as feasible with the higher debt-service cost of taxable debt, so they either would not be done at all or would be done by a government toll agency . . . using tax-exempt bonds.

But the big news now is that last week the White House announced a multi-pronged effort on “Increasing Investment in Roads, Ports, and Drinking Water Systems through Innovative Financing.” One key provision is “leveling the playing field for public-private partnerships.” Specifically, the proposal calls for creating tax-exempt Qualified Public Infrastructure Bonds (QPIBs) intended specifically for P3s in airports, seaports, highways and bridges, transit, solid waste disposal, water, and sewer projects. As the fact sheet notes, “Unlike PABs, the QPIB program will have no expiration date, no issuance caps, and interest on these bonds will not be subject to the Alternative Minimum Tax.”

As I told a reporter from Bloomberg, “Eliminating the [PAB] cap—mainstreaming level playing-field financing for P3 projects—is huge.” It’s not immediately clear whether this change can be done by Treasury alone, or whether it will require legislation (as was the case for the current PABs program). If the latter is the case, at the very least the Administration’s support for the concept should make it easy for Congress to eliminate the current PAB cap, even if it’s not ready to expand the idea to all other

types of infrastructure. The White House has promised details on QPIBs in its upcoming budget proposal.

(This article first ran in Surface Transportation Innovation in its January issue.)

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