Defending PABs for High Rollers?

This post was recycled from an email exchange where someone suggested that the case for at least not repealing (and ideally, expanding) PABs should look like this: “PABs promote private investment in traditionally public infrastructure by lowering the debt costs for projects with private equity investment.” Although not explicit, the source and context makes it (somewhat) clear that what’s being contemplated are private-equity based P3s. As readers here will know, I’m not much of a fan. My response:

“Your case relies on the assumption that “private investment in traditionally public infrastructure” is such an obviously good thing that the federal government should subsidize debt costs for private equity. That might be heavier lift than complexity per se in current environment.

I don’t think anyone is arguing that private-equity P3s are always a bad thing – if the numbers actually work, and if the social value is really there, why shut the door on an option? But there’s apparently a lot of skepticism even in GOP about P3s now – Trump’s pivot not the cause but an effect – and if there’s widespread doubt about the effectiveness or social benefit of P3s, then the PAB case seems to boil down to subsidizing private equity to “give them a chance” to show how in fact good P3s really are. Tough sell.

That’s why I thought the Move America bill was especially interesting and subtle [this bill was part of the broader discussion – summary here]. Sure, it starts with usual case of expanding PAB volume (so P3 supporters and muni market are happy) but then pivots to converting the tax cost of the PABs into 2 types of tax credits. One is a project credit for private investment – again the usual P3 pitch. But the other is directed towards distinctly local public-sector Qualified Investment Funds like SRFs and SIBs (which do have a good track record and seem to enjoy widespread support even among the swamp-drainers). That’s the real new idea – and I think it’s there for a reason.

In effect, what the Move America bill is saying “yeah, we don’t know if P3s are always a good thing, but shouldn’t shut the door on them – let the states decide on individual cases. But if P3s don’t work, states then can use the tax cost to expand SRFs and SIBs for basic public infrastructure – and everybody likes that”

So I think the Move America bill conversion options (complex as they appear to be) are actually making a good and politically practical case for PABs – keep PABs around as a P3-oriented option (and avoid a fight w/ muni bond folks) but show how the tax cost of keeping them can be (and likely will be) used for something other than private equity – e.g. for ever-popular SRFs. That approach covers a lot of stakeholders and defuses a lot of objections, I think.

Worth noting that Move America lead sponsor is Republican Rep. Walorski from Indiana – a state which has big & successful SRF and SIB programs, and knows P3s, good and bad. More specifically, she’s on Ways & Means and her website is currently singing the praises of TCJA bill – at the same time her own bill is calling for PAB expansion. She definitely knows the full picture. I think there’s some subtle stuff going on here – so I wouldn’t be too quick to dismiss the Move America conversion approach, especially in the context of defending PABs.”

I’ll add an afterthought – private-equity is not a sector that gets (or needs, frankly) much sympathy. I think the real-world defenders of PABs definitely are not advocating “lowering [private equity’s] debt costs” for a reason. Far from it: what I see in the muni trade press is an endless litany about all the hospitals, low-income housing and campus facilities that have used PABs in the past, followed by a subtle conflation to PAB’s usefulness for ever-popular ‘infrastructure’ in general. This is clearly a tactic. All the more-or-less benign current uses of PABs rely on small-scale, relatively competitive and low-roller private equity specialist markets. But the potential real action is in much less benign large-scale, revenue-generating economic-core public infrastructure assets – that’s what the private-equity P3 high-rollers are looking for.

And why might these high-rollers care about something as pedestrian as PABs? I’m guessing it has less to do with “lowering debt costs” and more about getting their hands on juicy assets.
They’ve found it tough so far to make a compelling case for their product. States & locals under short-term fiscal pressure are naturally tempted – but there’s lots of internal dissension (quite apart from public resistance). In these political battles, I think anti-P3 officials use the public-sector’s more/less exclusive use of tax-exempt financing as a ‘shield’ – a simple soundbite excuse to dismiss private-equity owned P3s.

But if PAB volume and eligibility are expanded (and of course, avoiding repeal is a sine qua non of that process), this shield collapses. Which means a few extra basis points of yield for P3 owners courtesy of federal taxpayers, but I think the real point is that it allows private-equity – with a federal imprimatur – to get closer to ‘persuadable’ state & local officials. So I think it’ll be a serious fight.