PPP’s: Did they just say that???
This week I had the pleasure of attending another infrastructure conference in our nation’s capital. Normally, I would give the conference production company credit and mention the name. It was, after all, a well coordinated conference with lots of great topics, panellists and attendees. However, for this post, I think I will let it remain anonymous and protect the innocent.
Disclaimer – I love my job and I love this industry. However, there are a few things they really drive me batty. One of those is the idea that somehow public-private partnerships (PPP) are magical answer for all that ails the US infrastructure industry. I don’t know where this idea originated, but it needs to go away – now! PPP’s certainly should have a place in the procurement toolbox, but the situations where they are the “best” option are limited. More often than not, there is a less complicated way to get the same results. However, when they are appropriate and work, they are a fantastic option and can do great things.
Now, with that disclaimer out of the way…
WTF # 1:
One of the panels at this conference focused on ways that the US could double its investment in infrastructure. It’s a noble goal that we all think is sorely needed. The moderator asked each of the panellists what they felt was the major impediment to reaching this goal of significantly increased investment.
The response of one of the panellists absolutely floored me. This individual, who shall remain nameless, is a PPP expert who works for one of the largest infrastructure consultants in the US. They make regular appearances on panels such as this one and, by all accounts, should understand the industry as well as anyone.
Their response to what was the single largest impediment to increasing our spending on infrastructure was that the availability of tax exempt debt was a major disincentive. Their reasoning was that when they went to talk to municipalities about doing PPP projects, the municipalities always said they could get cheaper capital in the tax-exempt municipal bond market. The panellist went on to say that they hoped the tax reform discussions occurring in DC would “fix this”, implying an elimination of tax-exempt debt.
The $3 Trillion US tax-exempt debt market is the envy of the modern world. In fact, there are numerous countries who are actively trying to duplicate it, establishing their own municipal debt markets because ours has been such a success story. It has allowed Trillions of dollars of infrastructure projects to be completed in the most cost efficient manner possible. Other than pay-as-you-go, it has enabled more infrastructure development than any other financial instrument.
This is not an option for state and local governments that should be eliminated. If anything, it’s use should be expanded. New issues are regularly oversubscribed and there is a ready, willing and able pool of investors interested in their risk/return profile, even at very low interest rates. With one of the lowest, if not the lowest, default rates it is easy to see why there is such strong demand.
To suggest that the only option should be higher cost, private capital is irresponsible. There is a place for private funds, and it will inevitably carry a higher cost of capital, but we shouldn’t be advocating for the elimination other viable options just so it can be more competitive. That hurts the industry and will ultimately lead to fewer projects being completed. If each project becomes more expensive because the tax-exempt debt is not available, then there will be fewer funds available to fund project, ie fewer projects get completed. This is simple math.
I can only hope that maybe this person misspoke and didn’t mean to suggest that the tax-exempt option should be eliminated. I’d hate to think that this is the official position of one of the largest infrastructure consultants in the US.
The other comment that really blew my mind was on another panel, and came from a respected elected official. They commented that “You can’t tax people enough to pay for infrastructure. And you can’t set user fees high enough to pay for the projects. So, we need to use public-private partnerships.” I don’t even know where to begin to address this one…
Without general funds from taxes (availability payments, leases, etc.) or adequate user fees how, exactly, will the private sector earn any return on their investment? We can debate what a “reasonable return expectation” should look like for the private sector, but there needs to be SOME return for them! It’s not free money!
It’s this mentality/concept that PPP’s are some sort of a “free lunch” program that hurts our industry. If the public and private sector partners go into this expecting miracles to happen, they will be sorely disappointed. We can do some amazingly creative things, but there are limits.