Road Show
Jim Courtovich
1/19/17
Reuters

Every politician wants to invest in infrastructure. President-elect Donald Trump, who also wants to rebuild America’s crumbling roads and bridges, is different, though. As a leading businessman who made his fortune by building and managing assets, Trump should have the know-how to leverage private investment to address a yawning infrastructure deficit, one the American Society of Civil Engineers estimates will require $3.6 trillion by 2020.

Being prepared for the special interests ready to battle against fresh ways to fund these projects could give the new administration a real chance. Trump’s proposal to spur $1 trillion of investment would expand on work Congress did in late 2015 when it passed a five-year highway and transit bill. Keen interest from global investment and pension funds gives partnerships with the public sector a better chance.

According to research outfit Infrastructure Investor, the top 50 dedicated private-sector infrastructure funds have raised over $280 billion since 2011. That hardly scratches the surface of the many insurers, sovereign wealth funds and other smaller investors that could be tapped for myriad projects.

Even so, the United States is a consistent underachiever. A swamp of entrenched groups have hijacked the municipal bond industry, making bidding on new investment-grade initiatives prohibitively expensive and leaving them mired in politics.

An analysis published by Wilbur Ross, a private equity investor, and economist Peter Navarro from the University of California, Irvine, both of whom have been nominated to positions in the Trump administration, makes the case that $167 billion in equity along with large tax credits would be enough to finance $1 trillion of infrastructure investment. They argue that the tax credits would be repaid by additional tax revenue created by the projects, including from income taxes generated by job growth and corporate taxes on contractor profits.

Federal programs exist that can support this plan. The Department of Transportation’s Build America Bureau and the EPA’s Water Infrastructure and Resiliency Finance Center were created to increase access to federal debt and provide technical assistance. In addition, each dollar of funding from the Transportation Infrastructure Finance and Innovation Act can support about $10 in loans, loan guarantees or lines of credit. That means it can essentially act as an infrastructure bank without having to create a whole new government program.

Regardless of government support, however, there is a mindset about how American infrastructure is funded that needs to be disrupted to get private capital to flow. Borrowing is not the same as new outside money, especially considering that funds raised in the bond market can be directed to unrelated and sometimes wasteful expenses. The Port Authority of New York and New Jersey, for example, just agreed to pay a $400,000 fine to settle Securities and Exchange Commission allegations of misleading investors about the use of proceeds. Municipal debt plays an important role, but it should not come at the expense of private capital for investment-grade projects, nor should it benefit only a select few.

The Pennsylvania Turnpike is a case study in old, bad habits. Back in 2006, a private consortium offered more than $20 billion to lease the 360-mile highway for 75 years. In return, it would have been maintained and expanded. The suitors offered to collect tolls and cap increases at 2.5 percent annually.

Instead, the turnpike – overseen at the time by commissioners with their own personal conflicts of interest – spent $1 million lobbying against the lease. They leaned on the state’s General Assembly, which had a cozy relationship with the municipal bond industry and controlled hiring practices, to quash the deal.

Eventually, the investors pulled out of the process and the Pennsylvania Turnpike Commission now spends $600 million of its $980 million annual budget on debt payments, forcing it to increase tolls at 6 percent a year, which cripples its capital-expenditure program. Despite a powerful state senator’s conviction on a 137-count federal indictment, the Turnpike chairman’s guilty plea to corruption and bribery and the chief executive being found guilty of conflicts of interest, little was learned. A state Senate staffer involved in the fiasco was subsequently rewarded with a spot as the Turnpike’s top lobbyist and now serves as chief operating officer.

Reforming such behavior, in addition to fully leveraging federal programs, will be instrumental to capturing the hundreds of billions of dollars looking for investment opportunities. One way would be to ensure that municipal agencies remain accountable for the money they raise through bond issuances. The Transportation Department, for example, could work in coordination with the Securities and Exchange Commission’s Office of Municipal Affairs and allow the Internal Revenue Service to assess penalties for non-disclosure of maintenance conditions that might affect bond values.

The infrastructure industry is primed to work with Trump to accelerate starting new projects. To do so, however, the administration and Congress must alter the way projects are funded and force greater accountability.