In the wake of the November 6th election results, there is renewed talk of a national infrastructure bill.
The day after the election, likely House Speaker Nancy Pelosi, a Democrat from California, announced that infrastructure legislation would be high on the Democrats’ 2019 agenda. She was seconded by the expected chairman of the House Transportation & Infrastructure Committee, Rep. Peter DeFazio, a Democrat from Oregon, who said he is working on a $500 billion infrastructure proposal.
Any such measure must contend with two big obstacles. First, there is the increased Republican majority in the Senate. Second, there’s the strong support at U.S. Department of Transportation for the ideas presented in a White House infrastructure proposal released back in February. That proposal, although calling for some new federal spending ($200 billion over 10 years) was mainly about providing incentives to encourage state and local governments to come up with additional revenue to support rebuilding infrastructure and adding new capacity where needed. Such measures include incentive grants, reforms to make it easier for infrastructure owners to use long-term public-private partnerships, and a relatively new idea called “asset recycling.”
With Congress now divided between the two political parties, any infrastructure bill must be developed as a bipartisan compromise that would couple some increased federal spending with policy changes to enable state and local infrastructure owners to invest more, and to invest more wisely. To that end, I think the asset-recycling idea holds considerable promise. A new Reason Foundation policy study, released today, provides an introduction to infrastructure-asset recycling.
The basic idea here is to have a state or local government lease existing revenue-producing infrastructure to a well-qualified company, financed by investors. Any company chosen for this purpose would commit to (1) paying most or all of the lease payments up-front, and (2) rebuilding and maintaining the infrastructure during the term of the lease. After paying off any outstanding bonds on the infrastructure, government officials could then use the net proceeds from the lease payments to invest in other, currently unfunded, infrastructure.
In surface transportation, the best example in the U.S. of asset recycling is the long-term lease of the Indiana Toll Road. The net proceeds from that transaction enabled the Indiana DOT to fully fund a 10-year highway improvement program called Major Moves, in addition to setting up a dedicated fund to maintain new or rebuilt highways and bridges. Chicago and Puerto Rico have also done long-term P3 leases of existing toll roads—the Chicago Skyway and PR 22, respectively.
In 2014, Australia adopted a national government policy to encourage its state governments to make use of infrastructure-asset recycling. It offered grants to the states, adding 15 percent to the net proceeds of an infrastructure lease or sale as long as those proceeds were invested in new infrastructure. From $6 billion (Australian dollars) worth federal incentive grants, Australia was able to generate $20 billion worth of spending on new infrastructure, the majority of it in New South Wales.
The U.S. DOT’s 58-page report on how it hopes to use the White House proposal for transportation infrastructure includes several pages on asset recycling, citing Australia’s policies and noting various major U.S. surface transportation P3 projects carried out thus far. It also calls attention to policy proposals that the White House’s plan would use to reduce barriers to P3 concessions, including an expansion of tax-exempt Private Activity Bonds to enable them to finance P3s for “brownfield” infrastructure, in addition to their existing use to finance “greenfield” infrastructure.
The new Reason policy study draws on long-term P3 leases worldwide to make some ballpark estimates of the value that might be liberated from existing infrastructure such as airports, toll roads, water and wastewater systems and other such things. For example, toll roads and bridges have been valued in recent transactions at between 18.5 times and 35.5 times their annual earnings before interest, taxation, depreciation & amortization, and as having an average value of 26.2 times EBITDA. For the 42 largest U.S. toll roads, the net proceeds could total between $175 billion and $230 billion. Three specific roads are presented as further examples: the Bay Area Toll Authority, the George Washington Bridge, and the Illinois Tollway system.
Infrastructure-asset recycling thus offers a double benefit to infrastructure. It would shift responsibility for much existing infrastructure to world-class companies that would be contractually required to refurbish and modernize it under long-term P3 lease agreements. And it would yield many billions of dollars in asset value that state and local governments could use to develop needed, but unfunded, new infrastructure. Therefore, removing federal barriers to asset recycling and providing federal incentives for state and local governments to make use of asset recycling should be part of any 2019 infrastructure bill in Congress.
And for those who are skeptical that such a policy could be included in a bipartisan bill, remember that in 2014 a bipartisan task force of the House Transportation & Infrastructure Committee issued a landmark report endorsing long-term P3s for infrastructure. In addition, the Bipartisan Policy Center announced its support earlier this year for infrastructure asset recycling.
Robert Poole is director of transportation policy at Reason Foundation, a public-policy think tank.