Top 5 Issues for 2018: Transportation & Infrastructure: The Changing Federal Role in Transportation and the Potential Role for the Private Sector

Sunday, January 21, 2018 at 03:01 PM

Issue: Infrastructure investment was expected to be a key policy goal of the Trump administration. While the administration did not produce a comprehensive plan to accomplish that in 2017—it’s now expected after the State of the Union in late January—details of the administration’s priorities that have emerged suggested an emphasis on more targeted federal investments, the use of federal dollars to encourage states that help themselves by seeking additional transportation revenues, and an effort to leverage private sector investment. In late September, the president appeared to sour on how big a role public-private partnerships, or P3s, could play in a federal investment package, but many continue to believe P3s could play a significant, if limited, role in facilitating some infrastructure projects.

President Donald Trump’s Infrastructure Priorities

Included with Trump’s 2018 budget proposal released in spring 2017 was a fact sheet that offered a glimpse at his infrastructure initiative. The document listed four key principles:

Make targeted federal investments;
Encourage self-help;
Align infrastructure investment with entities best suited to provide sustained and efficient investment; and
Leverage the private sector.

The private sector had long been expected to play a big part in the president’s plan to invest $1 trillion in the nation’s infrastructure. In September, it was reported that the president wanted to use $200 billion in proposed direct federal spending over 10 years to leverage $800 billion in new state, local and private sector investment and reach the magic $1 trillion figure.

But later in the month, the president seemed to contradict what was known about his infrastructure plans when he suggested to members of Congress that a public-private approach to improving the nation’s infrastructure won’t work and can’t be a silver bullet for the nation’s infrastructure problems.

The change in philosophy seemed to put the president’s infrastructure plan up in the air. News accounts suggested the administration would seek to force states and localities to foot most of the bill for a major infrastructure investment.

The administration has pointed to the growing number of state and local infrastructure funding measures in recent years as evidence of the wisdom of such an approach. But while many states have increased available transportation revenues in recent years, they continue to rely heavily on the contribution of the federal government for a substantial portion of overall transportation funding. Moreover, many of the states that have authorized the collection of additional state revenues have done so in order to meet federal matching requirements or to pay for needed transportation improvements that federal funds won’t cover.

As 2017 wound down, the passage of a major tax overhaul seemed to present new challenges for moving forward with efforts to finance infrastructure investment. While the tax-exempt status of municipal bonds was preserved in the tax legislation, some predicted the relative yield on municipal bonds will have to rise in order for them to remain competitive as an investment choice, making infrastructure financing more expensive. The legislation also raised uncertainty regarding the future tax-exempt status of Private Activity Bonds. The new cap on federal tax deductions for state and local taxes could also hurt the taxing capacity of cities and states, some believe. Moreover, some state and local officials around the country have said the tax changes will complicate their efforts to balance their existing budgets and make it more difficult to create additional revenue sources for transportation projects, something the administration sees as a prerequisite for tapping federal dollars in the future.

Many also believe Congress could have significant difficulty coming up with the $200 billion federal contribution to the $1 trillion infrastructure plan, whether through revenue generation or budget offsets. A federal gas tax increase would appear unlikely in an election year and an idea once thought promising to pay for infrastructure with revenue from repatriation—where corporations agree to pay a lower tax rate when they return earnings stored overseas—was nixed when it was included as part of the tax package instead.

Public-Private Partnerships

As explanation for his initial souring on the potential for public-private partnerships (P3s) in transportation, Trump pointed to Vice President Mike Pence’s home state of Indiana. As governor in 2014, Pence arranged a deal with an inexperienced Spanish construction firm and a Canadian pension fund to extend I-69 in the southern part of the state. When the project fell behind schedule, the state was forced to dissolve the partnership in 2017 and make plans to issue public debt to finish the 40 percent of the project that remained incomplete.

Another Indiana project—the Indiana Toll Road in the northern part of the state—has also been at the center of the debate over P3s for years. Under a 2006 deal, the road was leased to an Australian investment bank and another Spanish firm for $3.8 billion. The state used the money to fund 10 years-worth of road projects all over the state. But the investment group took on too much debt and during the recession, with fewer drivers on the roads, the road did not live up to traffic and toll revenue projections. The group filed for bankruptcy in 2015. A new operator has taken over the toll road and is now collecting fees from drivers that are more than double what they once were in some instances.

The Indiana Toll Road most recently was touted as an example of a concept called asset recycling that Australian officials were promoting in conversations with the vice president and others in the administration in 2017. But there is disagreement as to whether that P3, one of the earliest transportation P3s in the United States, was a good deal for all parties involved and in any case, it did not become the P3 model followed by other deals in the decade plus since it was executed.

Meanwhile, a number of other states, despite some past successes with P3s, appear to be reassessing their value in some cases.

Increasingly toll-averse Texas lawmakers in 2017 declined to approve 18 highway projects proposed by the Texas Department of Transportation because they were proposed as public-private partnerships.

Virginia, an early P3 pioneer, is taking a harder look at the model after assuming too much risk on a deal to build a proposed 55-mile toll road connecting the Norfolk area to I-95 that failed to pass environmental muster and left the commonwealth nearly $290 million in the hole.

Virginia also drew some criticism in 2017 when tolls on the recently opened I-66 express lanes reached $40 for traveling a 10-mile stretch—one of the highest prices for any toll road in the country.

Such cautionary tales haven’t stopped other states from ploughing ahead with P3s. The governor of Maryland, Virginia’s neighbor, said recently he wants to use a P3 to pursue a $9 billion traffic relief plan that would add toll lanes and traffic capacity on three heavily-used highways in the Washington, D.C., area. Michigan in 2017 announced plans to partner with the private sector to finish a $1 billion state highway modernization project.

But policymakers have long pointed out that while P3s can be a great “tool in the toolbox” for a state to have and can be successful on certain projects, they generally work best for megaprojects on which the private sector can seek a return on their investment through tolls. There are far fewer of these kinds of megaprojects around the country than there are road resurfacing and bridge repair projects that don’t necessarily lend themselves to establishing revenue streams. Projects in rural communities without large populations and lots of traffic would likely be of less interest to investors. Administration officials have countered that the $200 billion federal share could include block grants for rural areas in addition to funding for “self-help” states and localities, funding for existing federal loan programs and money for projects deemed “transformational.”

But analysts also note that for states with good credit ratings that are willing to borrow project funding, the municipal bond market presents a much better deal right now due to low interest rates than seeking a loan at a higher interest rate from the private sector just so their investors can make more money.

One P3 project that some hope can become a model for the country in dealing with major infrastructure needs and that could have some utility in more rural areas is the Pennsylvania Rapid Bridge Project. The commonwealth partnered with a private contractor in 2014 for the replacement of 558 structurally deficient bridges all over the state in just three years as part of a $900 million arrangement. In October, Pennsylvania officials said the contractor is expected to deliver the bridge bundle on time in 2018. The bridges won’t be tolled. Following substantial completion of the project, the Pennsylvania Department of Transportation will make periodic, performance-based payments in return for the development and ongoing maintenance of the bridges over the 25-year term of the contract.

What’s Ahead for 2018?

With a Trump infrastructure package not yet fully fleshed out as of this writing, it remains to be seen how much the administration is considering any of these state examples, how much of a role public-private partnerships could play in the package and the degree to which rethinking their importance may have altered the package. What’s also unclear is the degree to which states will be left holding the bag or be counted on to pick up the slack. It was reported in December that the package would pivot back to the original promise of a $1 trillion infrastructure package including $800 billion in private investment. And a report just last week said the administration’s plan now taking shape involves $200 billion in federal funding that would be spread out over 10 years and divided into four pools of funds--$100 billion for cost-sharing projects with local governments, $50 billion earmarked for rural projects, $25 billion for existing federal infrastructure loan programs that seek to spur private investment and $25 billion for so-called transformative projects.

Politico reported in October that frustration was mounting among those in the transportation industry who were initially excited that infrastructure was one of Trump’s policy priorities. Some infrastructure advocates fear that what’s likely to be a contentious midterm election season could significantly reduce its chances for success and what was once expected to be an issue that could win bipartisan support could fall victim to an increasingly poisonous political environment in the nation’s Capital this year.

As 2018 began and Congress returned to work, reports emerged that Trump has suggested increasing the federal gas tax to 50 cents a gallon to help fund an infrastructure overhaul but that Republicans lawmakers rejected the suggestion. Trump has also urged Congress to bring back earmarks to help build support for infrastructure legislation, a strategy they abandoned in 2011. It also appeared that the release of Trump’s detailed infrastructure plan, once expected prior to the State of the Union in late January, could be pushed back to February. Contradictory comments by the president and his chief economic adviser Gary Cohn at a meeting with Republican leaders in early January at Camp David only seemed to add to the confusion about whether the president actually supports the plan his administration is working on.

Also in early 2018, the chairman of the U.S. House Transportation and Infrastructure Committee, Bill Shuster of Pennsylvania, announced that he would step down at the end of his current term. Shuster said he would spend his last year in Congress focusing on passing “a much-needed infrastructure bill to rebuild America.”

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