States should team up with the private sector on infrastructure

States should team up with the private sector on infrastructure
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President TrumpDonald John TrumpDC board rejects Trump Hotel effort to dismiss complaint seeking removal of liquor license on basis of Trump's 'character' DC board rejects Trump Hotel effort to dismiss complaint seeking removal of liquor license on basis of Trump's 'character' Mexico's immigration chief resigns amid US pressure over migrants MORE won the White House in 2016 by breaking through a formidable blue wall in the U.S. Electoral College. He is going to have to repeat that same feat if his administration hopes to make any progress addressing the country’s pressing infrastructure needs.

After a false start last summer, President Trump’s long-awaited infrastructure plan is the next focus item on his economic agenda. As highlighted in his State of the Union address last week, the headline number has now jumped to $1.5 trillion, although the funding details remain sketchy.

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While partisan relations are still frosty, there is some optimism that common political ground can be found in this important policy area.  However, infrastructure has a Rashomon effect on U.S. politicians, with one side of the aisle seeing government spending and the other looking for private sector investment whenever the topic is raised.

As a result, infrastructure will set up as another ideological battle between Republicans and Democrats, this time at the state and local level, over the proper role of government in the American economy. Roughly 40 percent of the estimated $24 trillion stock of U.S. infrastructure assets is currently held by state and local governments, mainly in highways, roads, bridges, tunnels, and water systems, even though the public sector is a poor steward of such critical capital.

Over the past three decades, state and local governments, in the aggregate, have barely invested in public infrastructure at the maintenance level of depreciation expense. This is the “third world” component of U.S. economic infrastructure that President Trump has publicly deplored since the campaign trail.

Maintaining the status quo by providing additional federal grants and subsidized credit to allow these infrastructure assets to remain on state and city balance sheets would only perpetuate the core problem of local politicians focused on short-term election cycles making long-term investment decisions for economic assets that last 50 years to 75 years.

To “permanently fix” the problem, the administration’s program will need to reengineer how public infrastructure is owned, managed, and financed in this country. Toward this end, Trump’s infrastructure plan should spotlight and promote public-private partnerships (P3s) as the central piece of its reform package, rather than just taking an agnostic approach.

Over the past 25 years, the combination of government budgetary constraints and the growing complexity of large-scale public service projects has led to a greater private sector role in public infrastructure development around the world, with the notable exception of the United States.

While 37 states currently have enabling legislation for P3 projects, U.S. participation in the market has been minimal to date. Such a trend is not that surprising given that many Democratic officials tend to view private sector involvement with suspicion and regularly use the term “privatization” as an epithet.

Despite a significant loss of Democratic seats at the state level over the past nine years, Republicans currently control the state legislature and the governorship of just 25 states, while 33 of the 50 largest U.S. cities are still run by Democratic mayors.

To break down blue state and city resistance to P3 projects, the Trump administration should take a page out of Australia’s infrastructure play book by providing a financial incentive for U.S. state and local governments willing to engage with the private sector.

Since 2014, the Australian government has spurred its states and territories to privatize, or lease under long-term concession, existing infrastructure assets with discrete revenue streams and redeploy the proceeds into other infrastructure priorities by grossing up the assessed value of such asset sales by 15 percent using federal money. The country’s “asset recycling” program has thus far catalyzed almost A$100 billion in brownfield and greenfield projects for the country despite partisan opposition.

Away from providing political cover for local elected officials, such an approach would have additional benefits for U.S. states and cities. These include expanding the taxable property base and freeing up municipal debt borrowing capacity to cover operating budget shortfalls and contingent obligations such as outsized government employee pensions.

Such fiscal positives would also help to relieve some of the incremental state and local government budgetary pressures resulting from the state and local tax deduction provisions contained in the recently passed Tax Cut and Jobs Act.

Any federal money to be included in a $1.5 trillion U.S. infrastructure program should be characterized as incentive payments based on P3 performance, rather than just straight grants. States and cities should then be forced to compete on a first come, first serve basis for this finite pool of capital, which would ensure fast-tracking of the most important projects.

To help fund these performance fees and build bipartisan support for the initiative, the federal government should also move to monetize its much-smaller portfolio of infrastructure assets, starting with the Tennessee Valley Authority, an anachronistic government-owned electric utility dating back to the New Deal that notably serves seven predominantly red states.

There is no shortage of private sector capital, both equity and debt, to finance American public infrastructure projects, only a dearth of investable domestic deals. The private sector is standing shovel-ready to fix America’s aging and obsolete public infrastructure. The only roadblock is a lack of steely blue political will.

Paul H. Tice works at Schroder Investment Management and is an adjunct professor at the Stern School of Business at New York University. He focuses on the energy, infrastructure, and project finance markets.