Here’s a short summary of an analysis I did recently on the potential impact of a federal infrastructure loan program on federal revenues due to the displacement of other forms of financing. Very preliminary — more like a “thought experiment with some numbers” at this point — but the results show that the impact might be worth further research if loan programs become (as I think they will) a larger part of the infrastructure solution.

Here’s a ‘cut to the chase’ version of the evolving functional approach to P3s discussed in the previous post.

One of the most important things that the New Alternative Framework clarifies is highlighted in Concept 4: Ownership and equity Alternatives are not really necessary for most basic infrastructure deferred maintenance and delayed investment projects. The focus should be on construction, O&M and debt financing Alternatives.

A project I’m doing for the Water Infrastructure Resiliency and Finance Center (WIRFC) at the US EPA involves developing a learning module for ‘P3s’. Not incredibly exciting in itself, but I’m thinking of it as an opportunity to start demystifying the topic using Value for Funding principles — by definition, an effective learning tool cannot be mysterious.
Here’s where I’ve got to so far:

Half the mystery in P3 land is the lack of clear definitions in the terms used – not the least of which is the (over-exposed) handle ‘P3’ itself.

More fundamentally, all P3 concepts can be unpacked and anchored in some clear function associated with the infrastructure project. The functional parts of an infrastructure project aren’t mysterious, especially to the public sector folks who deal with this stuff all the time. I think there’s four big categories:

1. You have to build it.
2. Then you have to operate and maintain it.
3. Almost all larger projects will need debt financing to spread out the capital cost.
4. And someone has to own it. For public infrastructure, this functional category is rarely considered since the owner is almost always the ‘public sector’. But that changes when a P3 is being considered – and it’s where most of the cognitive dissonance arises.

Each of the four functional categories have a ‘Traditional’ and an ‘Alternative’ approach. The Alternative approaches might be new to the US public sector, but mainly they’re pretty well established in the private sector or elsewhere – so again, no mystery.

Finally, this framework supports a clear and easy way to define the elusive ‘P3’ – regardless of whether a ‘partnership’ is actually involved, a ‘P3’ really mean some combination of two or more Alternative approaches.

All this – and more – summarized in the presentation above.

Unsurprisingly, the Senate’s tax bill does not include the repeal of PABs. Since the Senate version of tax reform is the tougher one to pass, and they’ve chosen some big fights as revenue raisers already (SALT etc.), my guess is that when the smoke clears PABs will simply remain in their current form, in terms of both eligibility and volume. Hard to see any other outcome on such a minor issue in the context of the overall battle.

But I don’t think the opposite approach to PABs in the House and Senate bills is necessarily meaningless political noise. The stark difference might indicate something about how infrastructure legislation might develop during 2018.

The House’s blunt repeal could be seen as primarily an ideological statement. This view would explain the distinctly un-nuanced language in the Tax Cuts and Jobs Act (“The Federal government should not subsidize the borrowing costs of private businesses”) despite the number of Republican members of the Committee sponsoring bills that actually expand PABs for new infrastructure sectors.

As such, the real TCJA message is: “Small-scale and more or less established usage of PABs for hospitals and low-income housing is OK. But don’t think that PABs will the path whereby private-equity high-rollers can establish large-scale ownership of public infrastructure. P3s or privatization deals might be beneficial is specific cases, but we’re not going to subsidize (or, more importantly, provide a federal endorsement for) highly-sophisticated, profit-oriented investors.”

With this warning shot clearly established in the TCJA, and with the usual suspects rising to defend PABs so the message is not missed, the Senate could turn to “rescuing” PABs by simply ignoring it. And with that, the Republicans move on to the real serious and immediate fights on tax reform. I wouldn’t be surprised if something like this was the plan the pre-arranged plan between the House and Senate from the start.

In effect, PAB repeal in the TCJA was probably meant to be a placeholder (and perhaps a tactic to smoke out private-equity supporter?) for a specific fight about infrastructure legislation in 2018.