Michael Leahey
Managing director, PACE Equity, Denver
If there is one issue that Americans agree on across the political spectrum, it’s that we should resume investing in our failing infrastructure. The American Society of Civil Engineers performs a well-known “report card” study each year, and the results are staggering. Our national infrastructure spending needs top $4.5 trillion – that is trillion with a “t” – yet are backed by only $2.5 trillion in revenues, for a net deficit of $2 trillion. In the approximately $20 trillion annual U.S. economy, that is 10 percent of the gross domestic product – not small potatoes by any measure.
This $2 trillion deficit is broken out in the pie chart. Transportation deficits drive half of the national total, followed by schools, electricity, water and parks, all of which comprise 90 percent of the total deficit. The “other” 10 percent includes levees, airports, dams, rail, ports and waste.
The individual data points tell a bleak story: 67,000 deficient bridges, 240,000 broken water mains, 900 billion discharged gallons of sewage. Not only do we lack a national plan, but at the county level, where much infrastructure development occurs, over 3,000 counties lack an infrastructure plan at all, and capital is limited by years of budget cuts. Some estimate that this investment gap yields an annual deferred maintenance expense of $5,000 on every man, woman and child in the U.S.
Incentivizing private investment. The challenge is attracting private capital, especially for projects whose returns don’t support such investment. There are 33 states that allow private investment in infrastructure – but why not all 50? And what can we do to make it more attractive? While fees such as tolls can be leveraged to secure funding, many projects that deal with public goods don’t naturally lend themselves to such charges.
Public-private partnerships typically are creative investment and capital planning ventures where the risks and value of the private sector are matched with the risks and value creation of the public sector. PPPs generally are supported by both sides of the political spectrum (though, of course, the devil is in the details).
What innovative ways exist to incentivize private investment in public works? One set of options is described in a PriceWaterhouseCopper study. It suggests other innovative potential incentives, including:
- Expand the asset classes allowed to invest in infrastructure to include master limited partnerships and real estate investment trusts;
- Offer repatriation incentives for projects with limited return on investment (such as bridges and maintenance), while eliminating tax liability on those repatriated profits reinvested;
- Tax credits for smart infrastructure to better optimize resource usage; and
- Creative new financing instruments such as private activity bonds and Transportation Infrastructure Finance and Innovation Act loans that require a mix of public and private investment. Financing tools such as the Property Assessed Clean Energy program, which help fill gaps in the capital stack on private commercial development projects, could be applied to public-private infrastructure development, further leveraging private investment.
National infrastructure plan. As an issue with bipartisan support, the current administration has long touted a “$1.5 trillion infrastructure plan.” The plan includes $200 billion in direct government investment (financed through debt via Treasury bills), designed to leverage an additional $1.3 trillion in private investment, all spread over 10 years. Annually, that’s $20 billion in public and $130 billion in private spending.
To stimulate that $1.3 trillion in direct investment, tax credits are used to incentivize private developers to sponsor projects that benefit public as well as private stakeholders.
The plan is a start toward closing the infrastructure gap. However, it could be improved in several ways. First, it only addresses three quarters of the national infrastructure deficit, and over a long period of time. Why not invest $1 trillion in public funds over 10 years, or $100 billion per year, with a goal of incentivizing matching funds of $1 trillion – for a total of $2 trillion. While planning for investing the funds and actually raising them are two different things, shouldn’t we as Americans shoot a little higher than not quite enough? What is the cost of under-investment?
That $100 billion is only half a percent of GDP. In other words, the U.S. could go from spending 2.5 percent of GDP to 3 percent. Certainly, as a federal expenditure, it would need to be financed through either tax revenue or bond sales, and each carries risk to the economy. However, in this case, the rewards appear to be higher than the risks – and it cannot be stressed enough, this is a bipartisan agreement.
Second, it will require states and municipalities to provide 80 percent of the funding for the project to be eligible. For most, this is simply impossible. Traditionally, the federal government provides 80 percent financing, and the local agency 20 percent. Reversed, it will severely limit the number of projects that will even qualify.
Third, if the incentives provide benefits to projects that already were going to be done anyway, there is no net benefit to society. A bipartisan body would need to be created that would attempt to filter out projects that were already intended or those with purely private benefits, which creates more bureaucracy and need for administration.
Fourth, it does little to stimulate private investment without tax incentives. And in a falling tax environment, the value of individual tax credits is substantially reduced, which will increase the difficulty of raising private funds that way.
Finally, the plan is paired with offsetting spending cuts, including deep ones to incumbent infrastructure programs. The net effect in fiscal year 2019 is, in fact, a net reduction in infrastructure spending!
There is broad bipartisan agreement, supported by economists and infrastructure experts, that massive investments are necessary to secure our national health and wealth and build the economy of the future. While we can debate the correct ratio of public and private investment necessary, there is no longer a debate that it is needed. It’s up to a broad coalition of real estate developers, community activists, political leaders and concerned citizens to hold our elected officials accountable for investing in our collective future. Perhaps infrastructure itself could be that integrative issue that we need to bring America back together again.
