During the last six years approximately, P3s in the US were mostly limited to toll road concessions. However, the government and investors are coming together on a much broader range of projects, including social infrastructure, water infrastructure assets, Federal assets and electricity transmission assets. In this article we will attempt to cover the legal proposals reflected by Trump’s infrastructure plan affecting the new asset classes.
The Trump infrastructure plan (source : International Project Finance )
미국 트럼프 행정부의 infrastructure plan은 다음 두가지 서류에서 명확히 나타나고 있음
(i) an infrastructure initiative and fact sheet (the Fact Sheet) that accompanied the White House’s proposed budget for the 2018 fiscal year; and (ii) a white paper published in October 2016 , prior to the election, by Wilbur Ross and Peter Navarro, who at the time were senior policy advisers to the Trump campaign. Both documents refer to a target of US$1trn in infrastructure investment over ten years. This target figure would be funded through a combination of federal funding and incentivised non-federal funding.
* Increased role of States, localities and the private sector, reduced Federal funding – The Fact Sheet argues that the investment of the US Federal government in infrastructure is inefficient, and further asserts that the funding of certain infrastructure projects has been over-reliant on the receipt of Federal funding. The Fact Sheet also notes that, while one-fifth of infrastructure spending is federal, and the other four-fifths are derived from state and local governments and the private sector, Federal rules, regulations and mandates are applied to “virtually all” infrastructure investments.
The Fact Sheet states that the Trump administration’s goal is to “seek long-term reforms on how infrastructure projects are regulated, funded, delivered, and maintained”. The Fact Sheet proposes certain specific measures to accomplish these goals, see below. Beyond these specific proposals, the proposed budget indicates that the Trump administration intends to “fix underlying incentives, procedures, and policies to spur better infrastructure decisions and outcomes, across a range of sectors , including surface transportation, airports, waterways, ports, drinking and waste-water, broadband and key Federal facilities. Such improvements will include tracking the progress of major infrastructure projects on a public dashboard to ensure transparency and accountability of the permitting process.”
Among the key principles set forth by the Fact Sheet is one that would “encourage self-help” by states, tribes and localities: “Localities are better equipped to understand the right level – and type – of infrastructure investments, and the Federal Government should support more communities moving toward a model of independence.”
Another key principle set out in the Fact Sheet is to leverage the private sector. “The private sector can provide valuable benefits for the delivery of infrastructure, through better procurement methods, market discipline, and a long-term focus on maintaining assets. 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.”
Trump’s proposed budget indicates that the Federal spending that is envisaged will be “focused on incentivizing additional non-Federal investments”, The Fact Sheet indicates that the Trump administration aims to make the investing of Federal money in infrastructure projects on a more targeted basis: “When Federal funds are provided, they should be awarded to projects that address problems that are a high priority from the perspective of a region of the Nation, or projects that lead to long-term changes in how infrastructure is designed, built and maintained.”
Significantly, the proposed Trump budget contemplates not renewing long-term financing of the Federal highway trust fund by means of the FAST Act after the FAST Act expires in 2020, which would mean a US$95bn cut from current levels of funding through to 2027. The Trump budget also would eliminate, or cut, other infrastructure funding programs, such as the TIGER grant program and the New Starts program of the Federal Transit Administration4.
* Tax credit proposal – The Navarro-Ross white paper proposed an upfront 82% investment tax credit on equity invested in infrastructure.
* Divestiture/monetisation of Federal functions and assets – The Fact Sheet states that the Trump administration “will look for opportunities to appropriately divest from certain functions, which will provide better services for citizens, and potentially generate budgetary savings”. The Fact Sheet also states that the Trump administration will look to divest certain “underused capital assets”.
Specifically, the budget proposes to shift management of the US air traffic control system from the Federal Aviation Administration to a newly-created non-governmental entity. The new entity would be funded by fees collected directly from users of US airspace, and not by taxes.
The budget also includes a specific proposal to divest the Power Marketing Administration’s electricity transmission assets5, as well as proposals that would give the Veterans’ Administration increased flexibility to lease out vacant assets and to make the VA better able to act quickly to pursue facility renovations and improvements. The Fact Sheet indicates that “future reforms” would encourage the participation of P3s with respect to VA assets and “reduce barriers to acquisition, contracting, and disposals” of such assets.
The budget also proposes to reform the laws governing the Inland Waterways Trust Fund, including by establishing a fee to increase the amount paid by commercial navigation users. The Fact Sheet states that this additional revenue would be used to finance future capital investment in inland waterways.
Funding proposals
The proposed budget included US$200bn in outlays related to the infrastructure initiative.
The Fact Sheet also set out several “illustrative examples” of funding proposals that would be pursued by the Trump administration, many of which would be accomplished by expanding existing programmes. These include:
* TIFIA – The Fact Sheet proposes to expand eligibility under the credit and credit support programmes under the Transportation Infrastructure Finance and Innovation Act (TIFIA) and to increase the amount of the annual TIFIA subsidy to US$1bn for ten years.
* WIFIA – The Fact Sheet indicates that the Trump administration supports the funding of the Water Infrastructure Finance and Innovation Act (WIFIA), a credit and credit support programme that is modelled after TIFIA.
* PABs – The Fact Sheet states that the Trump administration proposes to lift the volume cap on tax-exempt private activity bonds (PABs) for surface transportation projects, which is currently US$15bn. The Trump administration also supports the expansion of eligibility for issuance of PABs.
* Tolling/rest area investment/congestion mitigation – The Fact Sheet also indicates that the Trump administration will pursue innovative approaches to mitigate urban congestion, similar to the Congestion Reduction Demonstration Program, which could include congestion pricing.
* Encourage non-Federal funding of Army Corps of Engineers projects – The Fact Sheet indicates that the Trump administration will encourage the development of financing programmes designed to allow non-Federal sponsors of projects with the Army Corps of Engineers to fund construction activities on their own.
* Environmental review and permitting process enhancements – Consistent with the budget and the Fact Sheet, on August 15, President Trump signed an executive order purporting to streamline the process for environmental review and permitting of infrastructure projects. Among other things, this executive order calls for “one federal decision”, designating a lead agency for every major infrastructure project with the responsibility “for navigating the project through the federal environmental review and authorization process”.
The August 15 Executive Order revoked President Obama’s Executive Order 13690 dated January 30 201510, which imposed a Federal flood management standard for federally funded projects.
* New Federal budgeting tools – The Fact Sheet takes the position that the cash budgeting system used by the Federal government “may not give appropriate weight to the long-term benefits of investing in infrastructure and cause the Government to make project choices that have lower short-term but higher-long term costs”. The Trump administration suggests discussing “different tools to support better decision-making while maintaining transparency and fiscal restraint”.
Specifically, the administration has suggested:
i) The creation of a Federal capital revolving fund for the financing of capital assets. This fund contemplates that agencies would pay for capital assets as they are utilised. The repayments would be made from future appropriations, which would provide an incentive to select projects with the highest return on investment.
ii) Partnership grants for Federal assets. This would involve a private partner building or improving a Federal facility and donating it to the Government in exchange for the right to retain revenue from the activities associated with the facility.
The Role of P3s
As described in the key principles of the Fact Sheet, the Trump administration clearly views P3s as playing a major role in achieving the administration’s infrastructure goals. More specifically, the administration seeks to expand TIFIA, fund WIFIA, remove the cap on PABs, and involve the private sector in tolling opportunities, highway rest areas, divestiture opportunities with respect to power transmission assets and in connection with VA infrastructure. It may be that P3s could participate in Army Corps of Engineers projects as well.
The administration’s reduced amount of direct Federal investment in surface transportation projects clearly contemplates that private investment will play a role in filling the gap between such reduced amount and the overall amount of investment that the administration views as necessary to restore America’s infrastructure.
Further, another of the key principles set forth in the Fact Sheet is to “align infrastructure investment with entities best suited to provide sustained and efficient investment”. The Fact Sheet indicates that non-federal entities, including those in the private sector, may be able to deliver certain services more efficiently than the Federal government, and that the administration will look to “appropriately divest” from certain functions. As noted above, the administration is also looking to take advantage of the management skills of the private sector with respect to the delivery of infrastructure, including through procurement, market discipline and long-term focus.
Where the process stands
Many of the Trump administration’s infrastructure objectives will require Congressional action to implement. It is likely that the implementation of many of these objectives will be complicated in that they are linked to other Trump administration priorities, such as tax reform, which will also require Congressional action.
Still other administration proposals await further detail from the White House.
Recently, Elaine Chao, the Secretary of Transportation, announced that the Trump administration plans to send out principles for its infrastructure spending plan later this fall11. Chao also stated that the Trump plan will provide for competition for federal funding, saying: “Those projects that have greater innovation will get a greater share of federal dollars.”
While many of the administration’s more ambitious goals will require either further development or the cooperation of Congress, certain more limited proposals may be effected by executive order or by the promulgation of new or revised regulations, such as the streamlining of the permit process, and certain changes to the PAB rules and to TIFIA and WIFIA eligibility.
It is important to note that the proposed Trump budget clearly contemplates a reduction in direct Federal funding of infrastructure, while setting overall infrastructure funding as a priority. The Trump administration sees private investment as partly filling the gap, while also requiring increased contributions from state and local governments.
The Trump administration seems to recognise that any such private investment may require appropriate incentives, such as tax credits, to attract the necessary capital. Investment opportunities may be presented from Federal government divestiture of assets and privatisation of services, as well as from a liberalised policy involving tolling of highway assets.
New opportunities by asset class
It is often difficult to read the political tea leaves to see where opportunities may lie. However, we believe that several asset classes may present particular opportunities.
* Toll roads and managed lanes – The road sector, and more specifically express toll lanes and managed lanes, have become quite popular in urban areas. We expect that growth will continue based on the appetite for traffic risk by both sponsors and investors with respect to this kind of asset.
For example, in Illinois, it is possible that two long-discussed toll road and managed lane projects may move forward.
On March 27 of this year, Illinois Governor Bruce Rauner held a press conference to urge the Illinois General Assembly, and in particular the Democratic leaders in the House and Senate, both of which are controlled by Democrats, to pass a resolution that would allow the I-55 Managed Lanes Project (I-55 Project) to proceed to the Request for Qualifications phase of procurement.
Under the Illinois public-private partnership (P3) law, the Illinois Department of Transportation (IDOT) can pursue transportation projects under a P3 model, only if the General Assembly adopts a resolution in support of the project. In January of 2017, state legislators filed again a joint resolution in support of the I-55 Project, which was assigned to the House Executive Committee on February 22 2017.
Despite bipartisan support, House Speaker Michael Madigan has not allowed the I-55 Project resolution to advance. Publicly, the Speaker has stated that he needs additional information about how the project will save taxpayers money or result in better maintained roads. The House has held five hearings on the project. Some believe Speaker Madigan prefers to stall the project rather than give Governor Rauner a potential victory that will favour his re-election campaign. Others believe that the Democrats are seeking to extract some political concessions from Rauner before they will support any of the Governor’s initiatives.
The stalemate is part of a bigger logjam in Illinois that stems from the failure of the Governor and Democratic legislatives leaders to have agreed upon a budget for a two-year period. The state legislature recently passed a budget for the first time since 2015, overriding the governor’s veto12. Given the passage of this budget, it is possible that other legislative matters that had been stalled, such as the I-55 Project, could go to both houses.
The potential candidates for Illinois Governor currently include Chris Kennedy, JB Pritzker, Bob Daiber, Chicago Alderman Ameya Pawar, State Senator Daniel Biss, and Alex Paterakis. Chris Kennedy and JB Pritzker are considered the top contenders, in part because they have significant personal wealth to fund their campaigns.
Presumably, if a Democrat were elected governor in Illinois, the Democratic legislative leaders would work with the new governor on many initiatives, including legislative items such as the I-55 Project.
The I-55 project demonstrates that political issues concerning P3s may arise at levels other than at the federal level.
Further, Chicago Mayor Rahm Emanuel’s plans to move forward with the express train to O’Hare International Airport connecting Chicago’s Loop with the airport, the so-called O’Hare Express, may present an opportunity for those investors seeking traffic risk. Emanuel has retained Robert S Rivkin, former general counsel of the US Department of Transportation, to serve as legal champion for the long-discussed rail line and informal industry meetings have been taking place with the ultimate goal of having Chicago issue a request for proposals on this project.
Elsewhere, Maryland is seeking to enter into a P3 for a US$9bn project to widen I-270, the Capital Beltway (I-495) and the Baltimore-Washington Parkway (MD 295).
* Airports – In a presidential debate last fall, President Trump compared LAX, LaGuardia, JFK and Newark airports to airports in third world countries.
The Trump budget states that the FAA would retain operation of the Airport Improvement Grant Program after the proposed privatisation of the US air traffic control system. The Trump administration has announced the funding of approximately US$3.3bn in infrastructure grants to airports under this programme during 2017.
In April 2017, the Trump administration announced that the FAA had accepted the City of St Louis’s preliminary application for St Louis Lambert International Airport to participate in the FAA’s Airport Privatization Pilot Program15. Currently, the programme has slots for the privatisation of 10 airports, and Lambert is the fourth airport in the programme. Under this programme, the private operator of an air carrier airport may receive Airport Improvement Program grants and collect passenger facility charges. Under the programme, private operators of a medium hub airport such as Lambert are entitled to the same level of grant participation as public sponsors: 75% federal and 25% local. AIP discretionary grants for private operators are 70% federal and 30% local.
On the other hand, the Trump budget also proposes eliminating funding for the Essential Air Service (EAS) programme, which provides subsidised commercial air services to rural airports.
We note that several noteworthy P3 projects involving airport construction are moving forward now, including projects at the Denver airport and at LaGuardia.
* LNG – Export and liquefaction facilities for liquefied natural gas are expected to continue to grow. President Trump has been an active booster of increased LNG exports16. Several new liquefaction facilities that convert natural gas to transportable LNG have been financed and developed in the US. It is expected that by 2020 the US will have the third-largest LNG export capacity in the world after Australia and Qatar.
