Pennsylvania needs significant infrastructure updates. President-elect Donald Trump has proposed $1 trillion worth of work to improve the country’s airports, bridges, and roads, all funded by private investors.
In exchange for a tax credit (roughly 82 percent of a project’s equity), and the ability to recoup costs through user fees such as tolls, the idea is private companies would cover the nation’s hefty up-front costs.
Trump’s plan has raised a lot of questions. But Christopher Brewer, a bond attorney with the Pittsburgh firm Dinsmore & Shohl said trying to entice private money to service the municipal good is not a new idea.
“This would not be the first administration to tinker with the tax code to try to get the presumed right mix of interested and motivated investors and other market participants,” he said. “Yet by and large over the years there's been little better than the traditional tax-exempt municipal bond.”
Ah, the bond: that familiar friend of local government. It’s almost always a win-win: municipalities get a line of credit while buyers get an interest payment year after year, a stable return on investment. Theoretically, anyone could buy a bond. But they’re usually snapped up by corporations or banks or fund managers for retirement accounts. Which means anytime a bond is sold, private money fronts the cash for municipal work.
That sounds an awful lot like Trump’s plan. But Paul Leger, Finance Director for the City of Pittsburgh, said there’s a crucial difference.
“When you issue a bond, the government is loaned the money to use as it needs it.”
Under Trump’s proposed plan of public-private partnerships, or P3s, governments would forfeit that autonomy, said Leger. For example, if a private company rehabs a bridge, the company essentially controls it until the cost of investment is repaid.
“I've rented my asset out for maybe 30 years while a private company recoups its cost,” he said.
Allowing a private company to operate a public asset was an idea Pennsylvania entertained back in 2008. Then-Governor Ed Rendell proposed leasing the turnpike for 75 years. The deal would have paid $12.8 billion to the state up front. The agreement fell through, due in part to confusion about how exactly the public-private partnership would operate.
The Pew Center on the States analyzed the "deal that wasn't" in a 2009 post-mortem. For starters, it found that Pennsylvania was overly optimistic about how lucrative the deal would be. Rendell planned to invest most of that bulk $12.8 billion payment, and draw on the interest to pay for infrastructure improvements. But the state projected an annual 12% rate of return, much higher than their advisor deemed feasible. Furthermore, it wasn’t clear who would oversee the money and what would be done with it. The report said, “A public-private partnership is a complex deal, full of moving parts. No one element of it — not even a massive upfront payment — automatically renders it a 'good deal' or a 'bad deal.'"
Four years later, the Pennsylvania Department of Transportation tried something a little different. They contracted with a team of private companies to rehab and rebuild 558 bridges across the commonwealth. While the state agency isn't building the bridges, PennDOT retained the means to hold contractors accountable. PennDOT determined the scope and schedule of the work, and only pays contractors once they've met agreed-upon milestones.
The details of how Trump proposes to rebuild the nation's infrastructure without federal subsidies or a tax hike likely won’t emerge until spring. But Leger said the price tag could include loss of local control.
