Here’s a presentation that summarizes the main conclusions and implications of the Value for Funding project.

All the concepts seem to lead in one direction:  the next generation of infrastructure delivery and financing alternatives will look more like a ‘Public Project Financing’ than a ‘Public-Private Partnership’

The Trump administration is talking about an Australian infrastructure concept as a way to jump start more private investment in US infrastructure.  It’s called “asset recycling” – the idea is that the public sector can “monetize” (by privatization or sale/leaseback) the value of existing revenue-producing assets and “recycle” the proceeds to further infrastructure investment.  Sometimes this happens on its own – the Indiana Toll Road sale/leaseback in the US is an example – but the federal policy angle is that adding some incentives to the mix might spark more deals.  In Australia, this took the form of a 15% incentive payment to the states for recycling deals under a program started in 2014.

Would it work in the US?  I’m not so sure.  Recapitalizing existing infrastructure is (of course) something that I think can add value to the public sector in many cases, but specific policy to encourage that result might need a different approach in the US.

The actual Australian recycling incentive program was in fact ended prior to its expiration in May last year.  Lack of demand due to local resistance to privatization was apparently the problem, even though Australian has a good track record of successful “social privatizations”.

The US doesn’t have that track record.  Of the (very few) deals that have actually been completed, some water system leases might be considered to have created net value, but all were more in the nature of recapitalizations and the proceeds mostly went to reduce expensive liabilities.  The ITR sale looks successful in retrospect because the private-sector took the bullet when demand crashed during the 2008 financial crisis, but obviously neither side anticipated that Black Swan event.  If “Great Moderation” growth had in fact continued on trend, Indiana would have lost the value of higher revenues and the deal might well have been a net loser for the public.  The chance of winning a bet against sophisticated private-equity investors is not a very compelling argument for privatization, even if occasionally happens.  And the Chicago Parking sale is a well-publicized example of the public losing that bet (big time) on the day the deal was signed.

Resistance to privatization is, if anything, increasing in the US, despite all the money available for it and the efforts of the P3 industry to “educate” (i.e. advertise) the public about its benefits. The polarizing nature of the Trump Administration just adds fuel to the rhetorical fires.  So my guess is that an Australian-style asset recycling program (which didn’t even really work there) is pretty much DOA in the US.

A Different Approach — Good Debt, Bad Debt and Expanded Federal Loan Programs

Still, since Australia is on the Administration’s radar screen, it is worth looking at the Turnbull government’s  latest fiscal concept:  acknowledge that infrastructure spending is necessary and will be federally supported with deficit financing, but highlighting a clear distinction between this as “good debt” (i.e. for capital investment) vs. “bad debt” (i.e. deficit financing for recurrent expenses).

The good/bad debt distinction is basically a political tactic (not a proposal for budget reform), but the interesting part is how it gets translated into the Australian 2017-18 budget – while infrastructure grants to the states are still a recurrent expense, when the national government makes an equity investment in a project (with the intention for future sale), it is characterized as a capital investment.  (see also page 4-8 in the Budget)

This Australian government equity investment/future sale approach might make a lot of sense in the US too – mainly because I think the obstacles to infrastructure investment at the state and local level are (per my Stanford Value for Funding work) not a matter of real value and long-term resources, but fundamentally short-term constraints.  In effect, it is a kind of asset recycling in the sense that the federal equity will be sold at some point (either to private sector or back to the states).  I think the idea works even better for existing infrastructure that needs major upgrades and has future monetization potential – the fed equity program would be bridging the gap between the immediate need for investment and the long time frame involved in the political dynamics of monetization.

Of course, US federal government doesn’t often make equity investments.  But there is a sort of practical precedent – Overseas Private Investment Corp.’s private-equity finance program.  OPIC’s program actually makes loans to qualified private-equity funds, but in the project capital stack the investment is effectively equity.  Since the equity program was started in 1987 uptake is over $4bn, mostly infrastructure related.  The loans are FCRA scored, but somehow OPIC consistently “makes money” overall on a cash accounting basis – doesn’t seem to have been any Solyndra-type stories.  I saw that Trump’s budget cut OPIC, but I assume that was related to foreign aid aspect, not philosophy re supporting private-sector investment.  On a purely programmatic basis, OPIC’s private equity initiative looks like a low-key but solid success story.

So, if the Administration is intrigued by Australian solutions and could see OPIC as a successful US federal precedent, why not a “Domestic Infrastructure Private Investment Corp” (DIPIC) that could back-leverage equity in P3-type infrastructure projects?

I think it would fit into existing loan program frameworks pretty well – re TIFIA, WIFIA, the investment-grade rating requirement would obviously need to be modified, but US projects are generally so low-risk that doesn’t seem crazy, especially if the senior debt is investment-grade.  Interestingly, this is consistent with what Chicago’s mayor, Rahm Emanuel, was calling for in his Politico article.  Maybe some sort of pilot?

Re federal budget scoring, I assume DIPIC loans would be FCRA measured so much less expensive than tax-credits or grants for equity – and a future Administration in better economic times could always add tax-credits or grants to the sale.

Even if bulk of project equity is provided by loan from federal program, there’s still a big role in DIPIC for private-sector equity investment/management – that’s also in the OPIC precedent, where at least 50% of equity was from qualified fund managers.  Could be lower percentage in US (10%?) to be politically attractive and make the numbers work, but still a lot of volume even before eventual full sale or DIPIC loan repayment.

It might be relevant to this approach that the Trump team’s budget fact sheet about infrastructure mentioned that the “Administration supports the expansion of TIFIA eligibility” – but didn’t talk about asset recycling per se despite their reported interest.

The Government Financial Officers Association (GFOA) recently posted a succinct advisory about the dangers of issuing a taxable bond to reduce unfunded public pension liabilities (a “Pension Obligation Bond” or POB).

Infrastructure recapitalizations have been successfully used to pay down pension obligations in the past — and will be increasingly used for this purpose as the public sector’s need increases and more efficient options for the recap structure expand.  I thought a quick “compare and contrast” with the GFOA advisory point would be interesting (click to enlarge):

Magical thinking about P3s may be inevitable in the current political climate.  The real harm is that it obscures the real value of non-traditional approaches to public infrastructure investment — here’s my current op-ed in Apolitical Magazine on the problem.

Let’s face it: the standard Value for Money (VfM) evaluation for non-traditional infrastructure procurement and financing doesn’t work very well in the US.

VfM’s ongoing failure manifests itself in various ways but I think there’s fundamentally one ultimate cause.  An infrastructure project intrinsically involves a complex bundle of benefits and costs, and P3-type alternatives are often sold as a bundle of contractual and financing components.  All of the factors are very different, yet the VfM framework seeks to combine them into a projection of a single stream of cash and cash-equivalent values that is discounted by a single rate to produce a single “universal” number, the project’s PV of cost.

This explains what we see – and what everyone complains about: a VfM analysis is complex, expensive and not very useful.  But is such a unitary approach to evaluation necessary?

Something like a unitary analysis may in fact be necessary when the infrastructure alternative being considered is a full privatization or demand-charge P3 that involves a significant transfer of ownership and control.  In those cases, the deal is intrinsically bundled and the decision is basically whether “to sell or not sell”.

But non-traditional alternatives are often sought to improve only specific aspects of an infrastructure project, something that’s currently reflected in the alphabet-soup of P3 taxonomy: DB, DBF, DBFOM, etc.  In these cases, a separate evaluation of each component of the proposed alternative with respect to its impact on a specific aspect of the project would appear to be a simpler and more practical approach.  Non-traditional alternative evaluation would then involve multiple separate analyses, each using the appropriate “apples-to-apples” methodology with its own “natural” discount rate.  I think this would not only lead to clearer and more useful results (both for decision-making and communication with stakeholders) but also to cheaper and quicker modelling (a series of small standalone Excel models is much easier to create than a single large integrated model).

For example, a DBFOM proposal could be evaluated with four separate models (click on to enlarge):

Something like this is clearly already being done when decision-makers choose to include or exclude components of a P3 (e.g. choose a DB deal only and exclude financing and O&M in the P3).  Why not focus development efforts on improving and standardizing evaluation “modules” instead of further refinement of an already-too-complex VfM methodology?

The case for separate component evaluation becomes even clearer when the overall approach to non-traditional alternatives is explicitly based on providing a menu of options to the public sector, not on prepackaged P3 proposals.  Each specific option would be proposed with its own custom-tailored evaluation methodology.  Here’s what that might look like for the debt capitalization options described in the CMT approach (click on to enlarge):