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Could Asset Recycling Be the Answer for Trump Infrastructure Plan?

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In my April column in Public Works Financing, I pointed out that the Trump Administration faces a dilemma in its quest for a $1 trillion infrastructure program based largely on private capital investment via public-private partnerships (P3s). Any such program must be enacted by Congress, and therein lies the problem.

Most Democrats and many Republicans from rural states insist that a significant portion of the $1 trillion must be net new government spending. This is partly because the kinds of P3 projects investors are interested in have user-fee revenue streams—and few such projects are likely in rural states or for infrastructure like school buildings and new city halls that many legislators would like included. On the other hand, fiscal conservative members will insist that any net new federal spending must be paid for (generally by spending cuts), rather than being added to the national debt. So where is net new money for non-revenue-producing infrastructure going to come from?

One idea getting increasing attention is “asset recycling,” as pioneered several years ago in Australia and now under serious consideration in Canada. The basic idea is for governments to sell or long-term lease existing revenue-producing infrastructure (airports, bridges, highways, seaports, etc.) and use the up-front proceeds to invest in other infrastructure that does not have its own revenue stream. An example I used in the PWFcolumn is the Gateway Project in the New York metro area: new Amtrak and commuter rail tunnels under the Hudson River whose price tag (including various connections on both sides of the river) is $24 billion. Since neither Amtrak nor commuter rail does more than cover its operating costs out of the farebox, this project could not be financed as a revenue-based P3.

However, the lead agency—the Port Authority—owns revenue-positive transportation assets that it could sell or lease, as governments worldwide have been doing in recent decades. My January 2017 study for the Manhattan Institute estimated the market value of the PA’s three major airports as $16.4 billion, the bridges and tunnels as $28.2 billion, and the seaports as $3.3 billion, for a total of $47.9 billion.

What the federal government could do is to encourage state and local governments to engage in this kind of asset recycling, while making sure federal laws and regulations don’t stand in the way. One form of encouragement would be to provide incentive grants to such governments on condition that the net proceeds from sale/lease transactions be spent solely on needed infrastructure. A possible source of funding for such grants would be a portion of one-time federal revenues repatriated by corporations in response to proposed lower corporate tax rates.

Australian states (such as New South Wales and Victoria) have been doing this for years, most recently selling or long-term leasing (under P3 concessions) major seaports and electric utility enterprises. For several years, Australia’s federal government offered states a 15% bonus payment on net asset proceeds if those proceeds were all invested in needed infrastructure. Canada’s federal government is seriously considering a similar asset recycling program, with Toronto’s Pearson International Airport as a potential first candidate. In Brazil, the Sao Paulo state government just closed a deal under which Abertis agreed to pay $453 million up-front for a 30-year P3 concession to expand and modernize 250 miles of existing toll road, with the state government using the proceeds for other infrastructure.

Could such a plan actually gain traction in this country? Consulting firm McKinsey has urged both the Canadian and U.S. governments to pursue such a course. And last month Steven Ross, co-chairman of the President’s infrastructure task force, at a Bloomberg panel discussion, expressed interest in Australia’s asset recycling program, as described by fellow panelist John Schmidt of law firm Mayer Brown. At the forum, Schmidt also pointed to the long-term lease of the Indiana Toll Road as a U.S. precedent for asset recycling, in which the net proceeds were used for a 10-year program of highway capital investment in the state. Around the same time, the CEO of Blackstone Group, Steve Schwartzman, suggested in a TV interview that the United States emulate the Australian model.
Over the last five years, the 50 largest global infrastructure investment firms raised $250 billion, according to data compiled by Infrastructure Investor. Many would eagerly invest in U.S. airports, bridges, highways, and seaports if only there was a pipeline of projects open to revenue-based P3 investment. So would a great many domestic and overseas pension funds. They don’t want or need a tax credit (as proposed by the Trump campaign last fall). All they need are projects open to P3 concessions. Congress could open the door to such a pipeline of projects.

(This article first ran in the May issue of Surface Transportation Innovation)

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