Private equity tail wagging the public infrastructure dog?
By Leonard Hyman and Bill Tilles:
About two years, we came across an article discussing infrastructure in a relatively obscure engineering journal. The authors of the piece were Wilbur Ross, now Commerce Secretary in the Trump cabinet, and Peter Navarro, a Trump economic advisor.
What struck us about the piece, supposedly elaborating their infrastructure plan, was that there was really nothing in particular that they wanted to build – nothing that would excite the imagination: no space race, or federal highway initiative, and heaven forbid certainly no new deal.
Thinking about it in accounting terms, the asset side of their infrastructure balance sheet was a compete blank. But the liability side of the ledger was the real focus of the Ross/Navarro exercise. They provided an answer to a question that almost no one was asking: How much leverage can one get away with and still control a federal infrastructure project? Their answer was 6-to-1.
On Monday, the White House released its long awaited “Legislative Outline for Rebuilding Infrastructure in America.” It boils down to this: The federal government claims it can facilitate a $1.5-trillion program with only $200 billion of federal money. That’s a leverage ratio of 7.5-to-1. That’s it.
And they still can’t be bothered in the text to name even one actual project they care about.
But the leverage – the debt, that is – is supposed to come from state and local sources, which are not exactly flush with cash. The states could have financed many of these projects if they had wanted to by charging tolls. The document released by the White House is anything but clear on how private investors would horn in on the goodies so to speak.
But it looks as if private investors could collect incentives for their own projects and do all sorts of lease deals with the governments that financed the projects. We would expect investment firms of every stripe to be interested. Terms this generous are seldom on offer.
So what do we think will actually get built? The “Outline” lists various evaluative criteria for potential infrastructure funding. However, answering “Yes” to the question “Can you fund capital and operating expenses without federal support” is 70% of the project’s score. New technologies and provision of economic and social benefits to the community are each accorded a 5% weighting. To put it simply, the criterion is: Will you charge tolls and high tariffs to generate hefty revenues for the project?
Is the private equity tail wagging the public infrastructure dog? Not clear at all from the text. But seems likely given the people in charge. It would be bad enough if vital public services are privatized with reduced restraints or oversight on the new owners.
But this is profoundly different. With so much depending on collecting revenues to pay off the debt, the builders will build what is economically attractive. Toll roads have much better economics than municipal water systems. We doubt the people of Flint will see much benefit.
Sigh. Almost as an aside to its infrastructure plan, the White House also floated an initiative to sell federally-owned assets so as to “optimize taxpayer value.” Included in this list for “optimization” were both Washington airports, Reagan and Dulles, and interestingly all federally owned power transmission assets. This list included the TVA, BPA, and the other federal transmission organizations (WAPA, SWAPA and SEPA).
Selling existing assets, of course, does not create new infrastructure or create jobs. But it does make work for bankers and create opportunities for private equity firms. Making the Federal agencies pay private sector returns, incidentally, means raising prices to consumers.
Let’s see how lawmakers react to having their constituents pay more. We wouldn’t bet on the sale of any electricity assets.
So will the Trump plan produce the touted $1.5 trillion of investment? Hard to say. But it will subsidize private investments that fit into various privileged categories. Private investors we expect will find this plan relatively generous.
It is hard to believe that a spread of small subsidies here and there, none even big enough to finance even a major highway, will do much more than fund what local governments might have spent anyway. But now public and private priorities are being reversed. What would matter the most under the plan are projects that might produce cash flow for investors rather than benefits for the public.
As for selling the federal government’s electric power and transmission companies, which could easily net tens of billions of dollars, as they say in President Trump’s New York, “fuggedaboutit.” When we hear Mitch McConnell say he’s on board with the idea then we will consider revising our view. By Leonard Hyman and Bill Tilles.
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