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 (D, CA) announced that major infrastructure legislation will be high on the Democrats’ 2019 agenda. She was seconded by the expected chairman of the House Transportation & Infrastructure Committee, Rep. Peter DeFazio (D, OR), who said he is working on a $500 billion infrastructure proposal.
Any such measure must contend with two key background factors. First, the increased Republican majority in the Senate. Second, the strong support at U.S. DOT for the ideas presented in the White House infrastructure proposal released back in February. That proposal, while including some new federal spending ($200 billion over 10 years) focused much of its attention on providing incentives for state and local governments to come up with additional revenues to support rebuilding their aging 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 (P3s), and a relatively new concept called “asset recycling.”
With a divided Congress, 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 is for a state or local government to long-term-lease an existing revenue-producing facility to a well-qualified company, financed by infrastructure investors. The company commits to (1) paying most or all of the lease payments up-front, and (2) rebuilding and maintaining the facility during the term of the lease. After paying off any outstanding bonds on the facility, the government can then use the net proceeds of the lease payments to invest in other, currently unfunded, infrastructure.
In surface transportation, the best U.S. example of asset recycling is the long-term lease of the Indiana Toll Road. Net proceeds of 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 the new or rebuilt highways and bridges. Chicago and Puerto Rico have also done long-term P3 leases of existing toll facilities—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, so long as those proceeds were invested in new infrastructure. A$6 billion in federal incentive grants generated A$20 billion in 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 infrastructure asset recycling, citing Australia’s program and noting the major U.S. surface transportation P3 projects carried out thus far. It highlights policy proposals in the White House plan that would 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 facilities, water & wastewater systems, etc. 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 (EBITDA), with an average value of 26.2 times EBITDA. For the 42 largest U.S. toll facilities, the net proceeds could total between $175 billion and $230 billion. Three specific facilities 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 for improving America’s infrastructure. It would shift responsibility for many aging existing facilities to world-class companies that would be contractually obligated to refurbish and modernize them 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, earlier this year the Bipartisan Policy Center announced its support for infrastructure asset recycling.
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