BY MANUEL H. LAZEROV
There was a recent article about the reluctance of private equity firms’ willingness to invest in public infrastructure. That wasn’t supposed to happen. Supporters of the recent tax bill indicated that the bill would actually act as an inducement for infrastructure investment. So, why hasn’t it happened?
The reasons are: (1) Lengthy review process, (2) Risk, and (3) Returns. The greatest effort by the federal government has been devoted to reducing the friction in getting projects approved. Rolling back regulations, proposals for a super-coordinating agency and limiting the time for law suits to block projects under review, while commendable, still face court challenges and state buy in. The administration has put considerable effort into this, since it does not involve any funding. Shortening the timeline for reviews is crucial, since a drawn out process can destroy a project’s economic potential.
Risk includes: (1) The uncertainty of government approvals, and (2) Not having private investments backstopped by subordinated government debt, loan guarantees, and other assurances. The failure of congress to pass a national public-private partnership law, and to create a national infrastructure bank to implement that law, with loans and loan guarantees, is a factor.
To get the recent tax bill passed, an agreement was reached between the administration and congress over the size of future deficits, which has effectively tied the hands of the administration, limiting their financial support for future projects. Any federal funding for infrastructure will be principally dependent upon re-appropriating money from existing sources. AMTRAK is mentioned as a source.
The administration has made it clear that future financial burdens for upgrading and expanding our infrastructure will be borne by state and local government though the sale of their existing assets to private investors who will upgrade them, (“recycling”),and by their raising taxes and increasing user fees. All future financial support from the Feds to state and local government will depend upon a scoring system, in which projects will be ranked by a number of variables, including the investment of private capital. Federal projections for participation in local projects may drop, in many instances, from 80% of funding to as little as 20 percent.
There is a compression in investment returns is due in part to competition for projects, especially those over $100 Million. Many jurisdictions remain unwilling to have private investment in public infrastructure, which means more debt. Taxpayer resistance to more debt, unfunded pension and benefit liabilities, unfunded environmental liabilities, the sheer magnitude of projects which need to be built, and public resistance to increasing taxes will impact those decisions.
Yet, there is a role for the private sector. Jurisdictions have increasingly accepted the new political and economic realities and have been considering projects that will meet investor expectations. A collaborative effort is growing that will enable local government to do many more projects, utilizing private investment, with or without federal assistance, than they can do alone. Infrastructure is a long game.
Manuel H. Lazerov is president of Infrastructure Financial, Inc. He may be reached at infrastructurefinancial.org.