Public Works Financing
Federal agencies are awash with regulations and provisions based on the presumption that government is and should be the provider of infrastructure that serves the public. But now that we understand the merits of various forms of public-private partnerships (P3s) to provide more accountable public-purpose infrastructure, these numerous provisions function as obstacles.
Back in 1995, Reason Foundation published a policy study itemizing a number of these barriers, most of which still exist. Because of the evident interest of the new Trump administration in public-private partnerships and infrastructure, we have just released an updated report, “Federal Barriers to Private Capital Investment in U.S. Infrastructure.”
One significant obstacle is restrictions tied to federal grants. If a state or municipal facility has received direct federal grant funds, a change of use or ownership (such as a long-term lease/concession) triggers a grant repayment requirement. We assisted the George H.W. Bush administration with Executive Order 12803 (1994) that reduced the extent of this grant-payback. But with the exception of the 1996 Airport Privatization Pilot program, which waived that regulation for participants, grant repayment is required for all other sectors. Since this is an Office of Management and Budget rule, it could be changed by the stroke of the president’s pen.
Except for surface transportation, infrastructure operated under long-term P3 agreements cannot issue tax-exempt bonds, and a municipality can lose the tax-exempt status existing bonds if it enters into a long-term P3 agreement for the facility. When Puerto Rico entered into a 40-year P3 lease agreement for the San Juan International Airport, the winning consortium had to pay off the existing tax-exempt bonds in addition to financing the deal’s extensive airport terminal modernization.
Another constraint on water and wastewater treatment P3s is the way EPA has interpreted language in the Resource Conservation & Recovery Act of 1976. The statute refers to “publicly owned treatment works,” but the agency has limited the provisions of RCRA to only those facilities owned and operated by a government agency. New facilities developed under long-term P3 lease/concession agreements are treated under RCRA as if they are “privately owned.”
In short, business-as usual presumptions embedded in federal agencies that deal with infrastructure are decidedly not P3-friendly. They need to be changed, where possible by new Executive Orders but where necessary, by legislation.
Last month I described legislative changes that would remove barriers to P3s that remain in the Airport Privatization Pilot Program, turning this program into an obstacle course rather than an invitation. Comparable changes are needed in the tiny Federal Highway Administration (FHWA) pilot program for toll-financed Interstate highway reconstruction. Those 47,000 miles of highway are the nation’s most valuable surface transportation infrastructure, handling 25 percent of all vehicle miles of travel on just 2.5 percent of total highway lane-miles. Yet the system is aging beyond its 50-year design life; it’s strangled by over 100 major bottlenecks created by obsolete interchanges; and many major truck route corridors need dedicated truck lanes to handle projected freight movements over the next 30 years.
Since there is no dedicated source of funding for this trillion-dollar refurbishment (even among the proliferation of project wish-lists we’ve seen this month), a major focus of a Trump infrastructure plan must be the reconstruction and modernization of this vital infrastructure. Nearly all the Interstate corridors in all but a handful of states would lend themselves to long-term P3 concessions, financed by equity and toll revenue bonds.
Compared with this need, the pilot program is not really serious. It is open to a maximum of three states, and each is allowed to toll-finance only a single corridor. We saw how politically dumb that is when North Carolina Department of Transportation proposed toll-financed reconstruction and widening of I-95. There was an immediate political backlash from those living near or doing business using NC I-95, along the lines of “Why are we being singled out to pay tolls on our Interstate?” A responsible DOT should be able to make the case to its legislature and voters that over the next 20 years it will rebuild and modernize all its Interstates using toll finance. And this option should be open to all states, which is the best way to find the first, pathfinder state that will work out a politically acceptable, user-friendly consensus that toll finance is the least-bad option for something that is vitally needed.
Besides those revisions, Congress could do several other things to make the toll financing customer-friendly. One would be to mandate that the new tolling be implemented on a corridor only after it is reconstructed, so users only pay once they get better infrastructure. Another would be to require the state to enact a statute guaranteeing that the toll revenues be used solely for the capital and operating costs of the revamped Interstates in the state in question. Third, consistent with the idea of transitioning from per-gallon taxes to per-mile charges, states should be required to offer fuel-tax rebates to toll-paying customers of the newly rebuilt corridors. That would eliminate the “double taxation” point raised by truckers and other toll skeptics.
One additional change would make second-generation Interstates more user-friendly. That would be to eliminate the current ban on commercial rest areas on Interstates. Toll roads all serve their customers by offering refueling, food and drink, and shopping opportunities at service plazas. But Interstates—by federal law—are bereft of such service plazas, due to the lobbying efforts of the truck-stop trade association NATSO. The new service plazas would be ideal locations for electric car recharging stations, which under current law must be located off the Interstate, and not necessarily where the car owner can sit down to a meal while her Tesla is recharging.
Infrastructure funds, pension funds, and P3 concession companies lament the lack of a pipeline of projects in the United States. One of the main reasons for this lack is 20th century regulations and policies that make P3 projects more difficult, not financially feasible, or impossible. We need to work together to remove these federal obstacles.
Robert Poole is director of transportation policy at Reason Foundation.