September 29, 2017

President Trump unexpectedly distanced himself from one of the core principles of his own Administration’s infrastructure plan this week – an increased reliance on public-private partnerships to finance infrastructure. In a meeting with bipartisan members of the House Ways and Means Committee to discuss tax reform on September 26, Trump apparently said that most “PPPs” are “more trouble than they’re worth.” (Reps. Brian Higgins (D-NY) and Richard Neal (D-MA) gave the quotes and the story to the Wall Street Journal and the Washington Post in separate articles the night of September 26.

Vice President Mike Pence was also in the meeting, and according to the WSJ article, Trump singled out the big P3 in Pence’s home state of Indiana – the lease of the 156-mile Indiana Toll Road to a private venture for 75 years (2006 to 2081) in exchange for $3.8 billion in cash up front, which was used by the Indiana DOT to pay for a 10-year program of building new transportation infrastructure throughout the state. Rep. Higgins told the WSJ that Trump said “They tried it in Mike’s state and it didn’t work.”

(Ed. Note: In any two-party transaction, you need to be careful saying “it” didn’t work. Financially, the agreement has worked as intended (so far) for the State of Indiana – they got their $3.8 billion check, cashed it, and built roads with it. Whether it works for Indiana in the future depends on how much Indiana might need to build a road competing with the toll road between now and the year 2081 but will be forbidden to do so by the P3 lease agreement, and how well the private operator maintains the toll road. The venture did not work out for the original P3 partner, a joint venture of Cintra and Maquarie, which had some bad revenue and debt service assumptions in its business plan (see this Forbes article for details) and which may have overpaid for the toll road  in the first place. The Cintra-Maquarie joint venture declared bankruptcy in 2014 and was bought for $5.7 billion in 2015 by IFM Investors. The original P3 was done under Governor Mitch Daniels (R) and the re-sale of the bankrupt private side was handled by Gov. Pence.)

(Further Ed. Note: By dumping on the Indiana project in particular, Trump is especially distancing himself from the “asset recycling” concept, because of all the P3 infrastructure projects in America to date, it is the Indiana one that most resembles the asset recycling concept as practiced in Australia and elsewhere.)

It’s hard to overstate how at odds this is from everything we thought we knew about the Trump Administration’s forthcoming infrastructure plan. A brief timeline:

• October 2016 – Future Commerce Secretary Wilbur Ross and future White House trade advisor Peter Navarro release, through the Trump campaign, a white paper on infrastructure relying almost completely on private equity, backed with an 82 percent tax credit on private equity investments in infrastructure, the cost of which tax credit would be fully offset by overseas corporate income repatriation. The private equity would total $1 trillion, necessitating a federal tax credit of $121 billion.
• May 2017 – The White House releases its full budget request for 2018, which includes $200 billion in federal infrastructure funding in 2018 to leverage $800 million in “incentivized non-federal funding” for a $1 trillion total. A fact sheet issued by OMB at the time said that “While public-private partnerships will not be the solution to all infrastructure needs, they can help advance the Nation’s most important, regionally significant projects.”
• July 2017 – DOT rewrites the guidelines for its annual FASTLANE grants into a new INFRA program with selection criteria that emphasize leverage: “In addition, the Department seeks to increase the sources of infrastructure funding by encouraging private infrastructure investment. Therefore projects that incorporate private sector contributions, including through a public-private partnership structure, are likely to be more competitive than those that rely solely on public non-Federal funding. Likewise, applicants who have pursued private funds for appropriate projects are likely to be more competitive under this program than applicants who have not.
• August 2017 – OMB Director Mick Mulvaney, Transportation Secretary Elaine Chao, and other Administration officials brief state and local government officials on the infrastructure plan, and continue to emphasize private equity investment.

This reaction from the godfather of the privatization movement, Bob Poole of the Reason Foundation, was pretty typical: “I was both astonished and dismayed. Everything the administration had said up until yesterday was that public private partnerships and private investment in infrastructure improvements was going to be the core of the program.”

As noted above, the budget itself calls for $200 billion in real mandatory budget authority in 2018 (pay-for TBD) to leverage an additional $800 billion in non-federal funding. It had been assumed by nearly everyone that a substantial chunk of that $800 billion, especially in major urban areas where there is a lot of passenger and freight through-put, would be private equity. If private equity is not going to fund a substantial chunk of that $800 billion, then there are only two options that can allow the “$1 trillion” top line number to stay in place:

1. The White House needs to increase the actual amount of real federal dollars provided to well over $200 billion (some Democrats this week suggested going to $500 billion), or
2. State and local governments are going to have to pick up many billion (possibly several hundred billion) dollars more of the tab for the President’s $1 trillion infrastructure plan than they had though as of last week.

(Trump’s about-face came the week after Maryland Governor Larry Hogan (R) unveiled his plan for the largest P3 project in U.S. history – see here for details.)