White House’s New Bonds Seek to Attract Private Investment
The White House’s effort to promote public-private partnerships for infrastructure is the latest effort to tap the private sector for funds in an era of tight fiscal constraints. The outcome, if successful, could raise billions of dollars for investment in transportation projects with relatively little fiscal effect on the government.
The Qualified Public Infrastructure Bond, the new bonds announced Friday, would give public-private partnerships access to the low interest rates and the federal tax benefits of municipal bonds. The bonds are similar to Private Activity Bonds, which have proven successful, but have been limited by a $15 billion cap.
The new program would not be capped.
The administration’s idea is to combine some of the most attractive features of public-private partnerships with the most attractive features of wholly public projects. Local governments get a private equity partner willing to share the risk of a project while the private sector gets access to low-interest loans.
The risks in transportation infrastructure can be considerable. Construction delays, cost overruns and other problems can be difficult to manage on a complex project. Depending on the structure of the partnership, the private investor may take on the responsibility of managing those risks.
Public-private partnerships, in which a private investor contributes equity and takes a share of risk in an infrastructure project, are widespread in Europe but have had a difficult time gaining acceptance in the United States. That has led American investment funds to invest in projects overseas rather than at home.
Case in point: CalPERS, the California state employee retirement fund and one of the world’s largest investors, owns 12.7 percent of London’s Gatwick Airport.
One reason the partnerships haven’t taken hold in the U.S. is that state and local governments benefit from a well-developed municipal bond market that allows them to borrow money cheaply. Rather than deal with the legal hassles of crafting a contract with a private investor, the governments prefer to go to the bond market and keep control of their projects.
Voters and local officials in this country also often oppose toll roads or other user fees necessary to generate a return for the private investor.
“The primary impediment to equity investment by pensions, across all public infrastructure sectors, is the strong access to the tax-exempt bond market enjoyed by many government agencies,” CalPERS wrote in a 2012 report looking at infrastructure investment opportunities in the United States.
The report noted that bond interest rates are now lower than the targeted rates of return for CalPERS and other major investors, which usually exceed 8 percent. “Therefore, tax-exempt bonds are the lowest cost option and represent the majority of funding,” the report said.
Recession Hit Munis
The recession threw a wrench in public financing. Devastating budget crises in 2009 and 2010 made state and local officials reluctant to borrow heavily to pay for projects. Issues of municipal bonds remain down from the pre-recession peak even as state budgets have largely recovered.
The fiscal crisis has led state and local governments to take a new look at public-private partnerships as a way to pair up crumbling roads and bridges with billions in private investment capital.
Jim Reed, transportation policy director at the National Conference of State Legislature, said partnerships are increasingly attractive to states because they can build maintenance requirements into the contracts. Deals can be structured to give the private entity responsibility for the long-term maintenance of the new asset.
“The incentives have to do on the performance side and the longer-term contract,” he said.
Transportation experts say that public-private partnerships are not enough to fix all that’s ailing the American infrastructure network.
Still, by promoting the new bond program, the administration is trying to get more money flowing into projects without committing more scarce federal dollars up front. Instead of paying for part of the projects, the government is using its full faith and credit to guarantee state and municipal loans.
That could perhaps make the program more palatable to lawmakers who have been reluctant to spend more money.
Details surrounding the new bonds are scarce. The White House announcement said it would unveil more information as part of the next month’s budget release.
Robert Puentes, an infrastructure expert at the Brookings Institution said the new bonds could encourage state and local governments to dip their feet into the bond market once again.
“This is kind of a way to put another package together that’s not capped, that’s maybe more open to the private sector,” he said.
The administration is also working to consolidate best practices from public-private partnerships from around the country to make it easier for local governments to make deals with the private sector. Much of the reluctance to these deals stems from the lack of expertise and experience in local governments, Puentes said.
At the same time, the initiative will try to reduce the bureaucratic burden by encouraging federal agencies to coordinate to speed up the legal and environmental reviews that must be completed before a project can break ground. And the administration wants to make it possible for smaller projects to bundle together to create a more appealing investment for big investment funds.
“There’s an insatiable demand for best practices, just to learn about the innovations that are out there,” said Puentes. “Some of this, on the federal level, is designed to kick that into gear and to get some of that lending going.”