MuniLand – Field of Dreams

In the 1989 movie Field of Dreams, Shoeless Joe Jackson famously says, “If you build it, he will come.”  Not unlike Kevin Costner, we might find President-elect Trump’s Administration out in a cornfield building its infrastructure plan. The 10-year $1 trillion infrastructure proposal would rely on tax credits derived from the repatriation of overseas corporate retained earnings. In effect, the administration would convert the tax liability into an equity investment in infrastructure projects (click here for the conversion process).

For the administration to move forward, it would rely on public-private partnerships, or P3s. P3s are risk-sharing agreements between the private sector and public agencies where the private partner assumes significant responsibility and risk over the project’s design, construction and operation. How states and local authorities leverage P3s will be critical to the success of the Trump administration’s plan. The Pew Charitable Trusts found P3s have had limited success in funding infrastructure projects over the past 25 years. Pew’s research indicates that less than 1% of spending on highways nationwide came from P3s. So the structure has been a marginal infrastructure financing vehicle. Pew also found that only 35 states currently allow P3s. Going forward, the other states would need to promulgate laws to utilize the P3 structure. From a municipal credit perspective, state and local authorities utilizing P3 “availability payments,” or payments to the private partner irrespective of demand for the infrastructure, present a credit risk.

Availability payments could be a tool to skirt debt limits and hide significant off balance sheet liabilities. Accordingly, the public entity would not issue any debt, but would promise to pay the private partner to take on the debt and administer the project. While there is much to like about the potential for substantial reinvestment in America’s infrastructure, the history of P3s is limited and public agencies have much to learn about the financing structure. So the question remains: “If you build it, will he come?”