Op-Ed: Private Activity Bonds Fuel Innovative Infrastructure Projects
The United States has significant infrastructure investment needs. The American Society of Civil Engineers (ASCE) gives U.S. infrastructure an overall grade of D+ and estimates that the U.S. needs to invest $4.5 trillion in infrastructure by 2025, including $2.042 trillion for surface transportation infrastructure such as highways, transit, and intermodal projects. However, public funding for infrastructure falls well below these needs; ASCE notes that the gap between what the U.S. is currently spending and our infrastructure investment needs through 2025 for surface transportation infrastructure alone is $1.101 trillion. Federal, State, and local governments do not have sufficient funding dedicated to infrastructure investment, and in the past they have shown a willingness to defer infrastructure spending when budgets are tight.
To decrease the infrastructure investment gap we should encourage private investment in infrastructure. The Administration is seeking to achieve $1.5 trillion in infrastructure investment, including significant investment from the private sector. This approach to leverage private sector funding is the most effective way to ensure the infrastructure objectives are met, and is consistent with today’s spending profile where only around 25% of infrastructure investment comes directly from the Federal Government.
Released in February, the Administration’s legislative outline on infrastructure calls for $200 billion in direct Federal funding over 10 years for new infrastructure grant programs, increased funding for DOT and USDA loan programs, and a Federal capital financing fund. The plan provides $20 billion to expand infrastructure finance tools that provide lower-cost loans to both public and private project sponsors and makes critical improvements to several categories of Private Activity Bonds (PABs).
PABs are a critical finance tool for infrastructure investment. Since the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) surface transportation reauthorization was passed in 2005, the Department of Transportation (DOT) has issued over $8.2 billion in PABs used to advance highway, transit, and intermodal surface transportation projects across the country and the PABs invested are estimated to have stimulated in excess of $30 billion of economic activity.
The PABs framework has facilitated significant private investment in these transformative infrastructure projects, including by supporting public private partnership (P3) projects that would otherwise likely not have been possible, leading to total infrastructure investment on these projects of approximately $33.3 billion as reported by Public Works Financing. These projects, supported by PABs, have generated substantial public benefits through increasing infrastructure investment, delivering projects that reduce congestion, supporting jobs and enhancing economic growth.
PABs are an essential tool not only for attracting private sector financing at competitive pricing but also to ensuring transformative infrastructure projects actually get built. PABs funding lowers project costs and enables governments to successfully deliver projects that would not otherwise be possible, but the PABs framework has also created a lending market of senior lenders willing to finance greenfield demand risk projects – where states pass key risks to the private sector during development and operations. It is unlikely that these projects would have secured sufficient private debt without PABs as there hasn’t been a proven alternative identified in almost a decade. States could arguably retain all of the project risks, and finance the projects with municipal financing, but this option is rarely used for such projects as doing so would degrade municipal risk profiles, damage state credit ratings, and reduce the opportunity to use those funds for other public benefit projects which don’t generate revenue. As a result, states have been reticent to take this approach.
Federal credit programs like PABs are instrumental in fueling pioneering infrastructure projects that may not otherwise be feasible – projects that support transformational improvements that are unlocking our most congested cities. In the coming months, as it considers a comprehensive infrastructure bill, I urge Congress to follow the Administration’s proposal to expand the PABs program, allowing this financing tool to continue to be used to support investment in much-needed infrastructure projects across the country.