"Trump Infrastructure Plan May Open Opportunities for Projects"

by Skadden, Arps, Slate, Meagher & Flom LLP
Contact

Skadden, Arps, Slate, Meagher & Flom LLP

After nearly two decades of widening concern over the declining state of U.S. infrastructure, it was not surprising that infrastructure became a central theme in the 2016 election cycle. Improving our nation’s transportation, water and energy infrastructure was one of the few issues to garner strong bipartisan support in the campaign, and President Donald Trump’s infrastructure platform was notable in two key ways. First, it focused heavily on private investment, which President Trump sees as a key funding source for domestic infrastructure projects, and second, it set an ambitious target — $1 trillion of new infrastructure investment. If the Trump administration realizes its infrastructure-related objectives in any significant way, there should be a wave of new opportunities for capital providers, contractors and private developers in the infrastructure sector.

Navarro-Ross Tax Credit Proposal

During the campaign, the centerpiece of the administration’s infrastructure plan was an aggressive use of tax credits to attract private investment. The most detailed proposal in this area was set forth prior to the election in a white paper authored by Peter Navarro, a business professor at the University of California, Irvine, whom President Trump selected to chair the White House National Trade Council, and Wilbur Ross Jr., a noted private equity investor and President Trump’s nominee for secretary of Commerce. The Navarro-Ross plan calls for enacting federal legislation to establish an investment tax credit (ITC) for U.S. infrastructure projects sized at 82 percent of the invested equity. According to the Navarro-Ross analysis, President Trump’s proposed $1 trillion infrastructure plan would require $167 billion in equity, which would give rise to approximately $137 billion in tax credits. The plan calls for the tax credits to be offset by increased tax revenues from project construction activities — specifically, through taxes on additional wage income and contractor profits — resulting in revenue neutrality for the federal government.

The Navarro-Ross tax credit proposal has been met with some skepticism as to its viability. Deficit hawks in Congress, many of them Republican, are not convinced that the plan is revenue-neutral. Industry analysts have expressed concern that many of the currently active investors in the infrastructure sector (e.g., pension funds) are tax-exempt entities and would be unable to utilize the credits. Moreover, if Congress lowers corporate tax rates, it is unclear whether there will be sufficient tax capacity to absorb the full amount of the available investment tax credits. Perhaps in response to these critiques, infrastructure advisers to President Trump suggested in the days following his inauguration that the administration’s infrastructure proposal may be cut nearly in half, to $550 billion.

There also is a more fundamental question: Are there a sufficient number of infrastructure projects that can benefit from the Navarro-Ross proposal? The ITC-based model, like other nonrecourse project financing structures, relies on an underlying project that generates a stream of revenue sufficient to service the project debt and provide the private investor with a return of and on its capital (supplemented by the benefits it receives from the tax credit). Widespread realization of the Navarro-Ross plan likely would require a significant increase in the use of public-private partnerships (P3s) — or analogous development and procurement models — in the infrastructure sector. While variations on the model exist, P3 transactions typically involve a private investor being granted the right, and undertaking the obligation, to design, build, finance, operate and maintain a public infrastructure project pursuant to a long-term concession arrangement. In return, the private investor receives demand-based revenues (e.g., tolls) or, in some cases, an availability payment from the public authority for performance (regardless of demand). Approximately three dozen significant P3s have been financed in the U.S. over the last 30 years, including surface transportation, public utility and social infrastructure projects. Major recent P3 projects include the $4 billion rebuild of the central terminal at LaGuardia Airport in New York City, the $3.4 billion Vista Ridge water pipeline project in Texas and the recently announced commercial closing for the $2.3 billion managed toll lanes project on Interstate 66 in northern Virginia.

However, P3 transactions require complex and lengthy planning and structuring efforts and, in many cases, a major shift both in strategic thinking by public sector agencies (which have developed projects without private involvement, for example, via tax-exempt bond financings) and in public sentiment regarding the delivery of essential services (where, as an example, members of the public face new or increased charges that accrue to a private investor). Consequently, P3 projects undergo several years of planning and permitting before the investment community is invited to submit qualifications and proposals. Without significant changes in the way P3 projects are structured and financed, only a handful of well-structured and “shovel ready” P3 projects may reach financial close in any given year. While new federal incentives may spur greater private sector interest in infrastructure, the use and success of P3s ultimately depends on projects that produce predictable revenue streams over the long term. Given the scale and complexity of these projects, implementing P3 procurement models on a large scale nationwide will take time.

Federal Credit Programs in the Trump Era

Infrastructure investors in the U.S. will need to monitor how the specific policies and legislative agenda advances in the coming months support or sideline federal credit programs that provide low-interest-rate financing to infrastructure projects, including P3s. Oversight of the primary credit programs has been consolidated under the Build America Bureau, which was established within the Department of Transportation in 2016 to provide a one-stop shop for federal financing for P3s and other significant transportation projects. The bureau’s mandate is to streamline approvals of loans under two credit programs that provide long-term, low-interest-rate loans to surface transportation and rail projects, respectively, and to administer the private activity bond program, through which tax-exempt financing is made available to support P3s. The bureau also will manage the $800 million Fostering Advancements in Shipping and Transportation for the Long-Term Achievement of National Efficiencies (FASTLANE) grant program, established in December 2015 pursuant to the Fixing America’s Surface Transportation (FAST) Act.

Investors also should be aware of new opportunities in the U.S. water infrastructure sector. The Water Infrastructure Finance and Innovation Act of 2014 (WIFIA) established a federal credit program administered by the Environmental Protection Agency for eligible water and wastewater infrastructure projects. WIFIA was further amended by the Water Infrastructure Improvements for the Nation Act of 2016, which included $20 million in budget authority ($17 million of which is available for loans and other credit support) to allow the WIFIA program to commence lending operations. This amount, which has been appropriated to the program, represents a credit subsidy cost, similar to a loan loss reserve. The actual credit assistance capacity of the program is expected to exceed $1 billion in credit facilities, with loans for private and public sector borrowers, supporting up to 49 percent of eligible project costs for water infrastructure projects.

Democrats’ ‘Blueprint to Rebuild America’s Infrastructure’

Democrats in Congress, who are advocating for increased public sector spending, have responded to President Trump’s plan with their own competing infrastructure proposal. On January 24, 2017, Senate Minority Leader Chuck Schumer, D-N.Y., and several Senate Democratic colleagues released “A Blueprint to Rebuild America’s Infrastructure,” which matches President Trump’s vision of a $1 trillion investment in U.S. infrastructure over a 10-year period. Unlike President Trump’s plan, funding under the Democrats’ proposal would come entirely from taxpayer dollars at the federal level. The proposal would expand the use of popular federal grant and loan programs, such as Transportation Investment Generating Economic Recovery (TIGER) grants, the Transportation Infrastructure Finance and Innovation Act (TIFIA), Railroad Rehabilitation and Improvement Financing (RRIF) and WIFIA, and would lead to the creation of a national infrastructure bank to promote innovative infrastructure financing solutions. In this regard, the Democrats’ plan carries on several Obama administration initiatives that failed to garner approval from the Republican-controlled Congress. The plan also proposes to reform the current system of energy tax incentives by consolidating a number of targeted incentives for renewable and clean energy into broader categories and by making those tax incentives permanent (i.e., not subject to phase-outs).

Conclusion

It is still too early to gauge how the new administration’s infrastructure agenda will incorporate specific facets of any prior policy proposal, including the Navarro-Ross plan. Any infrastructure legislation actually passed by Congress will bear the imprint of significant bipartisan negotiations. However, we expect that President Trump and his advisers’ emphasis on private investment and more frequent use of P3s will significantly increase opportunities for private sector participants and spur financial innovation in the area of infrastructure project delivery.

The authors wish to acknowledge the contribution of energy and infrastructure projects analyst Karen R. Abbott in the preparation of this article.

[View source.]

Written by:

Skadden, Arps, Slate, Meagher & Flom LLP
Contact
more
less

Skadden, Arps, Slate, Meagher & Flom LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.