A proposal included in President Obama’s State of the Union that is intended to encourage more private involvement in public infrastructure projects appears promising -- but whether it would actually result in more development remains in doubt.
The so-called Qualified Public Infrastructure Bonds, or QPIBs, would expand an existing financing tool that allows state and local governments to issue tax-exempt bonds to pay for public infrastructure projects managed primarily by private companies. That program, Private Activity Bonds (PABs), has already been used to support financing for more than $10 billion of roads, tunnels and bridges. For example, tax exempt PABs were used to help finance 29 miles of managed express lanes on Interstate 95 in northern Virginia. Gov. Terry McAuliffe has said the $950 million project, which opened in December, would not have been possible without the partnership of Fluor Enterprises and Transurban, which invested $280 million in the project and will collect tolls and maintain the lanes until 2087.
If approved by Congress, the QPIB bond program would expand these kinds of tax advantages to include financing for airports, ports, mass transit, solid waste disposal, sewer, and water, as well as for other types of surface transportation projects beyond what's allowed in the PAB program. The main appeal of offering tax exempt bonds is that it’s a cheaper way to finance projects: it allows the government issuer to pay back investors at a lower interest rate (compared with taxable bonds) because the investor is saves money by not paying taxes on the interest earned.
In addition to being available to fund more types of infrastructure projects, the new bonds would also have no expiration date and no limit to how many a government can issue each year. The QPIB program eliminates a loophole in the PAB program that requires some investors to pay a minimum tax on their interest earned.
The response to Obama’s proposal, which was initially outlined last week, has been relatively positive. For a market that has seen fewer new bonds issued in recent years, a new financing tool that encourages more public-private partnerships could encourage more issuance, a Standard & Poor’s analysis said. Certainly the need is there -- infrastructure demands in the U.S. have continued to climb while investment has been restrained at the state municipal level because revenue growth has been slower-than-average following the Great Recession. While failing to meet infrastructure needs could limit a government's economic competitiveness, S&P noted that “QPIBs would definitely provide a spark to start-up projects, advancing projects that might not have gotten off the ground otherwise.”
But how big of a spark is unclear, given governments’ overall reticence to go into more debt even under the favorable conditions of recent years. Even as governments have started to regain revenue and, interest rates have been at all-time lows, that hasn’t been enough to reverse the tide in the municipal market of governments issuing less debt. Total issuance has fallen for two straight years from $376 billion in 2012 to $333 billion in 2014. The market reached a high in 2010, when governments issued a total $433 billion in debt. And, notes Urban Institute Senior Fellow Tracy Gordon, the demand for PABS hasn’t been so great that states are pushing against their volume caps -- many are coming in well under their ceiling for that type of debt.
“At all levels of government, we have a lack of political will to find funding for infrastructure whether it’s via toll increases or gas tax increases or just pledging more revenue for debt,” she said. “That’s not to say there aren’t jurisdictions that aren’t looking at it or that this isn’t appealing to a class of municipal bond buyers. … But I don’t see this as earth shattering.”
Still, the expansion of the tax exemption marks a shift from Obama, who has consistently proposed in his annual budgets a limit to the tax exemption on governments’ General Obligation debt. The QPIB idea has the ability to be popular in a Republican Congress -- similar, specialized tax-exempt bond programs such as New York Liberty Zone Bonds or the Gulf Opportunity Zone Bonds targeted at redevelopment in disaster areas passed with bi-partisan support under President George W. Bush. And the U.S. Chamber of Commerce, which panned Obama’s other proposals to raise taxes on the rich in favor of cuts for the middle class, told the Bond Buyer it likes what it sees so far in the QPIB program.
Public-private partnerships “can bring innovation, cost discipline and time savings, and enable projects to go forward that cannot do so under conventional procurement methods,” said Janet Kavinoky, executive director for transportation and infrastructure. “The Chamber will take a close look as the proposals are revealed.”
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