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.

Here’s a quick sketch of a ‘Convertible PAB’ in context of TCJA bill, the Move America bills and political reality:

• Keep or even reduce current PAB volume allocations – not expansion like Move America. So price tag is $39bn or less – even $10bn starts a market. Maybe expand scope of qualifying projects – but I don’t care about outcome here.
• Include the Move America 4:1 conversion option for QIFs and the other MAIFC mechanics, more or less.
• Cut out the Move America project-specific conversion credits altogether – using straight PAB is the only P3 option.
• Add a feature that monetizes tax credits through withholding taxes – but for ‘qualified retirement funds’ only, and only those that are public or large-scale (e.g. labor) US pensions. So the whole credit conversion option is strictly public QIF-to-public-ish pensions. No Wall Street involvement needed.

Chances? This depends on how hard the PAB fight turns out to be. If GOP is determined to repeal altogether, then there’s no chance. Or if GOP just caves on PAB repeal without modifications, then again no chance.

But a fight in the middle is possible – GOP willing to keep (some) PAB volume as long as a level-playing field option for public infrastructure is included – then there’s a shot. Worth thinking about anyway – if only for setting-up infrastructure bill concepts re QIF loan program support.

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.

Tax reform legislation, if and how passed, probably won’t have much in it about US infrastructure renewal per se. But I think the process will still be extremely enlightening about how Congress and the Administration look at economic and financial issues (with all their political and social ramifications) in the context of actually trying to pass an infrastructure bill in 2018. So well worth paying attention to it, and I’ll focus a number of coming blog posts on it.

To start, I read the House’s TCJA 80-page summary and went through the JCT numbers. There’s definitely a ‘drain the swamp’ theme against using federal tax code to support private investment even when that doesn’t count much as pay-for. PAB repeal rationale: “The Federal government should not subsidize the borrowing costs of private businesses” – sounds like an ideological ex cathedra statement. At least PAB cut gets about $39bn in revenue, but whacking tax credit bonds just gets chump change $0.5bn Cutting rehab and new market tax credits together don’t add up to much either – about $11bn. Also, it seems the PAB repeal in effect cuts about half of LIHTC credits.

Presumably Senate version will be much more moderate, but won’t they have to fight for the big stuff first (SALT, home mortgage, deficit itself etc.)? If GOP really is serious about passing partisan bill quickly (and it seems they have a lot of existential-type motivation for that), I could see an outcome where a lot of small-scale stuff stays on the chopping block.

Especially this outcome re infrastructure – wouldn’t one response to negative impact of TCJA PAB and tax credit repeals on infrastructure be: “we can always put infrastructure-specific PABs and tax credits back in the infrastructure bill if they’re all that important?” If so, then Delaney’s flashing billboard might end up as the real problem, apart from any further energizing of the drain the swamp animus if TCJA passes i.e. bait & switch.

Re chances of passing partisan bill, many folks know far better than I do about this stuff, but after reading the summary it struck me that this is very different than Obamacare attempt. In that mess, there was visceral consensus on ‘repeal’ but no unity or even coherence on the ‘replace’ part. In TCJA, there seems to be a clear unifying theme on the ‘repeal’ cuts (even apart from the need to raise revenue) –actually somewhat populist (look at cuts to executive compensation) – but more importantly, the ‘replace’ proposal is crystal clear: broad rate reductions and simplification. There’s a much better story to build & enforce consensus, even in the face of extreme Democrat and media (and lobbyist?) opposition. And 2018 mid-terms will definitely concentrate minds.