Many of us associate infrastructure with crumbling roads and bridges, but U.S. infrastructure issues are far more pronounced than what we see on our daily commute. Recent incidents involving aging municipal water pipes, overloaded sewer systems and even burst dams should remind us that these problems can amount to more than just travel delays and may, in some instances, be life-threatening.
Infrastructure Issue 1: Age & Use
In 2017, a report issued by the American Road & Transportation Builders Association found that 54,259 bridges throughout the U.S. were rated as “structurally deficient;” and the average age of those bridges was 67 years. Meanwhile, the Interstate Highway System, initially funded in 1956, is comprised of nearly 46,876 miles of roadway that were largely constructed in the succeeding two decades.
More alarming than just the age of these systems, however, is that most of these bridges and roadways were constructed with the intent of carrying less than half of the daily traffic they handle today. E-commerce is compounding the issue. Free two-day shipping comes with a significant infrastructure cost: increased truck traffic and usage of the ailing interstates and bridges.
Infrastructure Issue 2: Cost
The Highway Trust Fund was designed to help the nation sustain its interstate system, but its reserves cannot keep up with roadway needs. The federal excise tax on gasoline and diesel purchases that funds the Highway Trust Fund has not been increased since 1993. More people are also driving electric cars, which creates an excise tax free-rider problem on American roadways.
With every passing year, the cost to repair and replace existing structures grows. The American Society of Civil Engineers (ASCE) projected in a 2017 report that the cumulative infrastructure funding gap would eclipse $2 trillion by 2025. Even more staggering are aging infrastructure’s indirect costs. The ASCE projects that aging infrastructure could result in $3.9 trillion in losses to the U.S. GDP; $7 trillion in lost business sales; and 2.5 million lost American jobs, all by 2025.
P3s as a Solution
Public-private partnerships (P3s) may alleviate or mitigate many of these issues. They are not simple undertakings, however, which makes planning and project scoping essential. Within the last decade, there is already at least one disastrous example of a P3 involving the Indiana Toll Road not going according to plan.
P3s as an Investment Opportunity
International and domestic investors may see good investment potential in P3s. On a state and local level, municipal bonds are often used for infrastructure financing, and the interest on those bonds is exempt from state and federal income tax. Provisions in the tax reform law, commonly referred to as the Tax Cuts and Jobs Act (TCJA), may stoke additional interest in P3 investments. It is important to note though, due to another change brought about by the TCJA, that in certain circumstances the receipt of funds may result in a taxable event.
There can be benefits for investments in U.S. infrastructure projects for international investment funds as well. If the debt is being provided by a foreign lender (other than a bank) and the lender does not own a 10 percent or greater equity interest in the project, then the interest paid on that loan can be exempt from U.S. income tax. This provision applies regardless of whether the foreign lender is in a country that has a tax treaty with the U.S. Investors in the fund may owe foreign income tax on their investments, but generally international investment funds are often configured in a way that minimizes taxes for investors by being domiciled in a low- or no-tax jurisdiction.
Working Together to Keep Us Moving
Creative financing may be the new norm to complete major infrastructure projects in the absence of funding changes at the federal level. There is at least one positive example—the Port of Miami Tunnel—that could lead to more such projects.
Ultimately, collaboration among private capital, tax incentives, and government grants may be one of the best solutions for the many issues facing the U.S. infrastructure system – so P3s could help keep America moving.
John Forry is the Practice Lead for the CBIZ Infrastructure & Project Advisory Group and is based in the Los Angeles office. He can be reached at [email protected] or (310) 268-2000.
