Yet Another Glaring Flaw With Trump Infrastructure Plan: Dependence on Vagaries of Tiny, Slow-Moving Tax Equity Market

I must confess to holding back from saying much about Trump’s infrastructure plan since it has only been sketched out at a high level. But even so, despite infrastructure being the new darling of economists as a high octane way to stimulate growth, there’s plenty not to like about the Trump version even at the 50,000 foot level:

“Public/private partnerships” mean using middlemen with very high profit requirements, making the process more costly than if handled by government entities directly. The Federal government has repeatedly executed large scale investment programs successfully of vastly more complexity than anything the private sector has undertaken (see Felix Rohaytn’s Bold Endeavors for examples; consider the space race for starters).

Private-sector deals will go whether the returns, which includes looting, is greatest, rather than where the need or long-term growth opportunities are best.

First, Trump implicitly promised to help revitalize parts of America that lost factory jobs, and many of those are in small to medium-sized towns. But for a project to be attractive to investors, it will need to serve large or at least large-ish numbers of users. That means even if downtrodden states do get some investment dough, it will almost certainly go to their cities, and not the boonies.

Second, the well-documented fact that investors demand excessively high returns make them prefer opportunities where cash flows are front-ended. That is not the profile of societally-desirable infrastructure project. As Andrew Haldane said in a 2011 speech, based on his work with Richard Davies:

Our evidence suggests short-termism is both statistically and economically significant in capital markets. It appears also to be rising. In the UK and US, cash-flows 5 years ahead are discounted at rates more appropriate 8 or more years hence; 10 year ahead cash-flows are valued as if 16 or more years ahead; and cash-flows more than 30 years ahead are scarcely valued at all…

This is a market failure. It would tend to result in investment being too low and in long-duration projects suffering disproportionately. This might include projects with high build or sunk costs, including infrastructure and high-tech investments. These projects are often felt to yield the highest long-term (private and social) returns and hence offer the biggest boost to future growth. That makes short-termism a public policy issue.

By relying on known-to-be-myopic private investors, Trump’s plan would double down on a known investor bias.

Infrastructure investment will provide an economic stimulus only to the degree it is truly incremental spending. If it merely moves government projects that would have been executed regardless into private hands and/or diverts private investor funding from private investments (not secondary investments, but the funding of corporate growth projects, such as financing smaller-tier private companies) it will not additive.

Some types of infrastructure deals are guaranteed bankruptcy futures. Toll roads, tunnels and bridges are sure losers. From a 2014 article in Thinking Highways:

Beginning with the contracting stage, the evidence suggests toll operating public private partnerships are transportation shell companies for international financiers and contractors who blueprint future bankruptcies. Because Uncle Sam generally guarantees the bonds – by far the largest chunk of “private” money – if and when the private toll road or tunnel partner goes bankrupt, taxpayers are forced to pay off the bonds while absorbing all loans the state and federal governments gave the private shell company and any accumulated depreciation. Yet the shell company’s parent firms get to keep years of actual toll income, on top of millions in design-build cost overruns….

Of course, no executive comes forward and says, “We’re planning to go bankrupt,” but an analysis of the data is shocking. There do not appear to be any American private toll firms still in operation under the same management 15 years after construction closed. The original toll firms seem consistently to have gone bankrupt or “zeroed their assets” and walked away, leaving taxpayers a highway now needing repair and having to pay off the bonds and absorb the loans and the depreciation.

The list of bankrupt firms is staggering, from Virginia’s Pocahontas Parkway to Presidio Parkway in San Francisco to Canada’s “Sea to Sky Highway” to Orange County’s Riverside Freeway to Detroit’s Windsor Tunnel to Brisbane, Australia’s Airport Link to South Carolina’s Connector 2000 to San Diego’s South Bay Expressway to Austin’s Cintra SH 130 to a couple dozen other toll facilities.

We cannot find any American private toll companies, furthermore, meeting their pre-construction traffic projections. Even those shell companies not in bankruptcy court usually produce half the income they projected to bondholders and federal and state officials prior to construction.

John Dizard in the Financial Times, points out a huge defect with the Trump plan: its dependence on equity tax credits. I must confess to not being familiar with this market at all, and merely having dimly wondered: “How will this work? Traditional infrastructure investors are pretty much the same as private equity investors: public and private pension funds, sovereign wealth funds, foundations, endowments, insurers. The overwhelming majority are tax exempt. So a plan that relies on tax goodies to make the returns work won’t appeal to the big money players who typically finance these projects.”

Dizard’s assessment is deadly. He points out that tax credit investors aren’t all that big a market, and banks are among the big players. He suggests that there is already a lot of product, meaning a that the effort to use this route to prime the infrastructure pump is likely to lead to even more of a buyers’ market, with the effect that infrastructure spending would take place on an even slower timetable than critics imagined. Yours truly, assuming the normal many moving parts in traditional “public-private” infrastructure projects, figured that there would be no meaningful new spending before 2018; Dizard suggests that even as of then, the additional investment would be modest.

Even worse for the long term, this market is teeny relative to the scale of the US economy. It may be because he could not get comprehensive data, but what appears to be the biggest segment of tax equity deals (and likely the overwhelming majority) is renewable energy projects, which totaled $13 billion last year. If any readers have figures on other segments, please pipe up in comments.

And the juicy part? Returns to tax-driven investors depend on having sufficient earnings to use the tax goodies. Trump’s plan to reform the tax code will make the value of those credits more uncertain and generally lower. And Dizard flags another issue: recessions mean these investments dry up entirely, which the reverse of what you want with a stimulus program. You want it to be most robust in bad times, and to tail off when the economy is strong.

Key sections from Dizard’s account, Tricky tax equity erodes US infrastructure boom:

Since the Republicans control the presidency and Congress, we can expect that, in one form or another, tax credits for infrastructure will play a larger role over the coming years. The incoming rulers are beginning to realise, though, that this will be a difficult path to faster growth.

We can see some of the problems by looking at the tax equity market. Tax equity deals vary considerably, but most of the time they involve the creation of a partnership between a developer and investors. It is a very odd sort of market, with slow-moving prices and extremely complicated, often idiosyncratic, documentation.

Tax equity is, in the end, a way to redistribute tax credits from cash-flow-poor developers to a small number of cash-flow-rich banks, institutional investors and corporations who have profits they need to shelter.

It works well when the state provides extra tax credits to induce investment in policy-favoured undertakings, such as renewables…..

In the early years of a project, the investor owns more equity and uses the value of the tax credits to offset their other income. In later years, the ownership ratio flips and the developer harvests more of the now less-sheltered income.

Not everyone can play this game. Both the buyside and the sellside in tax equity need sophisticated and reputable staff who know how to bargain over prices and, even more importantly, terms and conditions.

The developers need deal flow, which means they have to spend money on potential projects they might or might not be able to finance. The investors need to know which developers can be relied on to navigate projects through the engineering and regulatory challenges. Both sides need lawyers and consultants on tap who will come up with deal-specific analysis, rather than cut-and-paste boilerplate.

The investors tend to hold the advantage, since there is usually a larger weight of hopeful developers. Tax equity buyers get a return that discounts the value of tax credits, depreciation charges and taxable income. In recent months, wind energy projects with solid contracts and reliable developers might have earned them 7.5 to 8 per cent. Rooftop solar developers who bundle lots of small projects would be paying up to 11.5 per cent.

That is higher than the banks could expect from plain vanilla corporate lending, but cheaper than the developer would pay if he had to sell shares to a private equity investor…

This all sounds so virtuous and promising, with good returns and market growth, that you can see how it would appear to be a useful model for an infrastructure boom. However, there is a big difference between a cheerful PowerPoint version of the renewables tax equity market and the reality of turning it into a massive infrastructure programme.

To begin with, the “price” of tax equity is determined as much by tricky terms and conditions as it is by the returns I quoted. For example, if there is a chance that the target return for the tax equity investor could be reduced by any proposed changes in the tax laws, the developer has to make up the potential difference with cash payments to the investor.

Keith Martin, a project finance partner at Chadbourne & Parke, the law firm, in Washington, says more risk has been shifted to developers following the US election last November. For developers who are chronically short of cash, that is a problem.

Even in the relatively mature market for tax equity in renewables projects, these little tweaks can lead to substantial one-off costs that are hard to control. It is difficult to imagine how infrastructure tax credit enthusiasts will implement a programme 10 times as big (as some have proposed) over a much wider range of projects.

And tax equity tends to disappear when you need it most. In 2009, when the banks had no profits to offset with tax shelters, the tax equity market all but dried up.

So if, God forbid, there should be a recession in the next four years, would a conservative Republican House put massive payments to all sorts of developers into the federal budget? Or would the infrastructure plan go into a pro-cyclical tailspin?

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41 comments

  1. Scott

    If Trump really is committed to using public-private partnerships, then there is a very real possibility that there will be no infrastructure spending from these projects during his first term in office. Assuming the GOP can pass legislation this year, it will be mid-2018 or more likely early 2019 before any opportunities are put out to bid, following that, it will take another 18-24 months in the procurement process and six to twelve months to close. That would put it past the 2020 elections.

    I think the focus on the investors is a little misguided. In many of these deals, neither the equity nor debt investors meet their expected returns. Rather, these arrangements generate enormous fees for the lawyers, consultants and advisors working for the various parties involved (hence the long procurement process). One of the big benefits of private enterprises (as opposed to governments) is that their procurement cycles are shorter and they can manage vendors better. But the very structure of public-private partnerships eliminates this core benefit. Instead, governments still follow their procurement process but at millions in additional fees to outside advisors, who have ongoing interest as investors or advisors is other such projects.

  2. jgordon

    Let’s take an airplane’s eye view of the subject for a second: a unworkable infrastructure plan is actually a good thing, since we won’t have the energy capital to maintain the infrastructure for much longer anyway. It’s better to let the grand systems of our civilization benignly decay that to funnel the few free resources we have left into these albatross projects; in that, perhaps Trump proposing these delightfully inept plans just shows that he’s much more forward thinking than anyone else.

    It’ll work out to the people’s benefit in any event. What would really worry me would be him trying to pull some MMT voodoo to get every misguided project under the sun done, which really would be the dead end grand finale of American civilization.

    1. reslez

      Funneling billions of taxpayer dollars into PPP boondoggles is actively malign, not benign neglect (to use your framing since you believe MMT is “voodoo”). The idea that Trump is playing 11-dimensional chess and secretly believes the country is better off in a state of collapse is laughable.

      1. weinerdog43

        Well said. Exhibit A ought to be Chicago’s parking meter debacle wherein private interests scammed the public with exactly zero discernible benefit to said public.

        1. nonsense factory

          Indeed. Exhibit B could very well be the Reagan-era Housing & Urban Development scandals.
          Department_of_Housing_and_Urban_Development_grant_rigging 1980s (wiki)

          The HUD rigging scandal occurred when Department of Housing and Urban Development Secretary Samuel Pierce and his associates rigged low income housing bids to favor Republican contributors to Reagan’s campaign as well as rewarding Republican lobbyists such as James G. Watt Secretary of the Interior. Sixteen convictions were eventually handed down. . .

          The main legacy of the Bush-Obama era, however, is that this kind of corruption is no longer investigated and prosecuted – instead, a Fed bailout is arranged.

          Exhibit C would be the massive fraud involved in Afghanistan and Iraq Reconstruction contracts during the GW Bush-Cheney era, where a $1 million contract typically ended up, after passing through many layers of subcontractor’s offices, with a few guys digging ditches with worn-out shovels.

          Trump’s infrastructure programs, if not very carefully watched, could easily become replays of those debacles.

          If we want real infrastructure programs, we’d probably have to go back to the FDR era and examine how he structured his New Deal, particularly the Works Progress Administration (WPA) and Civilian Construction Corps (CCC). These were of course temporary programs, not long-term solutions, but they would give domestic local economies across the Rust Belt a needed kickstart.

      2. jgordon

        I never said that voodoo doesn’t work. In a sense, it does–just like MMT “works”. It does have the minor side effect of destroying the soul and compromising long term viability when used though.

        Also, I’m aware that Trump likely isn’t playing 11 dimensional chess. But as I thought I said, Trump being incredibly inept will work out exactly the same for the American people. If the absolute best thing the government can do is nothing at all, than the less able Trump is to get things done the better.

        1. Deathtongue

          Without getting into the ends of your argument (that’s covered below) it’s still pretty weaselly to refer to MMT as “voodoo”. Using that word for something — especially in an economics blog — you don’t approve the ends of, rather than something you think the means (eugenics) or methodology (cold fusion) is misleading to the point of being dishonest.

          If you don’t like MMT not because you think that it’s wrong per se but because if true/applied it would weaken an unrelated aim then say so.

          1. jgordon

            I think your statement here is nonsensical. If something should not be done because either the process or result is evil, then it should not be done. You’re splitting hairs in defense, and it’s not even a very good defense.

            There are some things that should not be done, like genetic engineering and nuclear fission because the long term impacts on life and the planet are potentially so horrific as to be unthinkable. And I do class financial engineering into that category of things that should just not be done for the long term viability of our species and life on earth.

            Just think about it: if we did not have an extraordinarily complex financial and economic system our days of liberating carbon from the depths of the earth would have been over with years ago. Ergo the upcoming climate catastrophe would be nonexistant.

            Humans as a species are like chess players who can only see one move ahead, and when someone comes along and points out the bad things that’ll happen two or three moves ahead that person called a big meanie or a Negative Nancy. Well, ok. Hopefully our descendants trying to survive the searing heat down there at the south pole in a flooded, radioactive world while being hunted by giant mutant penguins won’t know enough to blame us for what we did to them. Luckily there won’t be anything like formal education by that time, so I think there’s a good chance of that.

            1. Deathtongue

              I think your statement here is nonsensical. If something should not be done because either the process or result is evil, then it should not be done. You’re splitting hairs in defense, and it’s not even a very good defense.

              The argument that MMT is “voodoo” because it doesn’t work =/= to the argument that it’s evil because it more effectively enables financial engineering. If you want to argue that we shouldn’t build fission plants, declaring nuclear engineering as a junk field is dishonest. That Hitler used proto-Keynesianism to turbocharge his war engine doesn’t make Keynesianism evil/wrong/voodoo.

              There are some things that should not be done, like genetic engineering and nuclear fission because the long term impacts on life and the planet are potentially so horrific as to be unthinkable. And I do class financial engineering into that category of things that should just not be done for the long term viability of our species and life on earth.

              I’m not even going to get into the moral and practical problems of intentionally sabotaging scientific progress for links in the causal chain two or three steps removed from the end. It’s just not worth engaging with; it’s like trying entertain an argument of solving the problem of the proliferation of human eugenics by banning organic chemistry and anatomy classes. You know, just to be on the safe side by ensuring that fewer people will be intellectual able to experiment on the human genome despite bans.

              But even beyond that, putting MMT in the class of things that shouldn’t leave Pandora’s Box because herpa derpa growth is bad is especially stupid even on your own idealized terms. For three reasons.

              First of all: most governments ALREADY act as we’re on the gold standard and there’s no reason to think that regressing to 19th century economics will reduce carbon extraction. Take a lot at the charts right now: carbon output and GDP is uncorrelated over the generational term for any industrialized nation. The carbon output of the PIIGS didn’t, despite my snark, in fact decrease noticeably despite being in a worse economic situation in many ways than the actual Great Depression. You’re just inflicting pain because of a rather stupid composition and division fallacy where ‘industrialization is necessary for carbon extraction, growth is correlated with industrialization, therefore getting rid of the growth will tamp down on carbon extraction’. I suppose that’s true on a brute existential level that if economic and societal organization decays enough people won’t be able to run factory farms and drive petrol-powered cars, but considering how CO2 output has barely budged despite the worst economic crisis in generations I’m wondering just how much farther you think things need to decay. Reminds me of talking to tankies who claimed that the Great Depression didn’t lead to more communist revolutions because the contradictions needed to be heightened even more.

              Second of all, trying to protect the climate by sabotaging the levers of financial engineering isn’t just pointless, it’s also counterproductive. I touched on this already, but just to recap: the masses of citizens aren’t going to just dwindle in quiet desperation while you passively implement your Malthusian vision. The endgame of crushing austerity isn’t the kind of endless technocratic liberalism needed to enforce endless economic degeneration: it’s authoritarianism, nay, fascism. And fascists don’t give a care about the long-term environment, let alone sacrificing so that other nations can help implement the changes needed to protect the environment. The reason we have Trump in the first place is because people like you insist that we can ignore the sociopolitical needs of the masses. And if Trump does fail in the way you insist, people aren’t just going to slink off and peacefully watch their communities rot. They’re going to install a sincere leftist if you’re lucky or just nominate someone even more extreme.

              Thirdly and most importantly: actually getting out of the cycle of fossil fuel extraction without relying on technological innovation, military intervention, or some independent ecological disaster will require accurate financial engineering. Full stop. If you come up with the list of things needed to halt the worse of climate change: moving away from a meat-based diet, switching to nuclear fission and renewable energy, investing in the infrastructure of non-OECD industrializing nations, retiring large portions of workers, accelerating the pace of urbanization, etc. you’ll notice that this shit is difficult and expensive to do. Unlike your ‘let the proles decay in their cities with crumbling infrastructure’ plan, these things actually have a short-term mechanism for working. Reactionaries will love to keep using the excuse of ‘we can’t retire all of the fossil fuel power plants in 10 years; that’s EXPENSIVE’ The only way to undercut them in the short term is better financial engineering, meaning MMT.

    2. Katharine

      You sound content to live with this. Do you really not live near any endangered bridges or railway tunnels conducting daily hazmat trains or disintegrating water and sewer lines that could in the worst case undermine the foundation of your home?

      1. jgordon

        News flash: America is going to hell anyway. Letting it decay away is one of the least painful options we have available to us at the moment.

        1. Deathtongue

          The citizens of one of the most reactionary, authoritarian, genocidal nations this planet has ever seen will be definitely content to quietly fade away in their inchoate hovels while the technocrats use their suffering to plan for the future. They definitely won’t retaliate mid-transition against the elites phasing them out Morlock-style by installing more violently authoritarian anti-environmentalists who claim that they’ll give them 10 years of relief so long as they take what crumbs remain from the non-herrenvolk. This is why Trump isn’t President right now, after all.

    3. Deathtongue

      What would really worry me would be him trying to pull some MMT voodoo to get every misguided project under the sun done, which really would be the dead end grand finale of American civilization.

      Reactionaries like jgordon hate post-Keynesian economics even more than they hate Marxists. Because it strips them of their ‘there are only limited amounts of pardons to live; better to give it to the elect’ impetus and reveals them to be the anti-civilization sadists that they really are. Even Eugene Debs’ vision was chained by jgordon’s false god of limited money.

      1. jgordon

        Just to be clear, you have absolutely no underrstanding of what I’m saying or what I believe. You aren’t even wrong here, so there’s no point in replying.

        However I will reply a bit: the earth does in fact have a limited and shrinking pool of resources left for humanity to exploit, and when they run out humanity is hosed. And here I’m a bad guy for suggesting that maybe it’s not a good idea to light the house on fire just because it’s cold outside. I mean, sure we definitely have great tools at our disposal for lighting houses on fire, but do we really want to?

        1. nonsense factory

          I’ve heard this resource argument many times but it is fundamentally flawed. Natural ecosystems are also resource-limited, but notice that the resources they rely on are continually recycled back into the ecosystem with the assistance of solar energy (and some other natural processes, like atmospheric and oceanic circulation).

          The real limiting number in the long term for sustainable civilization is the fraction of land mass used by humans and the fraction of “global primary productivity” (basically photosynthesis, fisheries, etc.) diverted to human use (perhaps 10% would be reasonable). This would be the situation for the case of zero non-renewable resource use (i.e. elimination of fossil fuels). And, yes, modern solar/wind/storage technology can replace fossil fuels for global civilization when coupled to high-efficiency technologies (like LEDs and electric motors). And yes, this also implies a maximum sustainable global human population, which is likely maxed out at present for this scenario.

          However, switching to such a non-fossil fuel sustainable system requires massive infrastructure development; and that will also put the fossil fuel interests out of business, along with all their shareholders. Hence the resistance to this transition. Better to burn out than to fade away, they say. Nihilistic, isn’t it?

          1. jgordon

            Yes, I’m very well aware that humans could arrange the resources and ecology sufficiently to easily support 20 billion people on the planet. However we will not do that because we are ignorant, short-term thinkers.

            I can demonstrate that by the simple observation that you will continue crapping in perfectly good drinking water, subsequently to be flushed into the ocean or processed with toxic chemicals–despite knowing that people are dying of thirst in Africa.

            Yes, everyone could have a pony and swine could fly if only we put our minds to it.

            1. nonsense factory

              Actually I doubt that’s very plausible long-term, 20 billion people, and arranging matters thus would not be a good idea, more like some authoritarian Stalinst monstrosity of existence. Current levels are about all the planet can take, and even so, we all need to consume much less, on average.

              And, as with clean drinking water and sewage regulations, we can’t just crap anywhere we feel like it when the urge takes us. Not unless we want to live in it, that is.

        2. Deathtongue

          Just to be clear, you have absolutely no underrstanding of what I’m saying or what I believe. You aren’t even wrong here, so there’s no point in replying.

          jgordin doesn’t like it when his Malthusianism disguised as Mellonomics gets exposed. Got it.

          However I will reply a bit: the earth does in fact have a limited and shrinking pool of resources left for humanity to exploit, and when they run out humanity is hosed. And here I’m a bad guy for suggesting that maybe it’s not a good idea to light the house on fire just because it’s cold outside.

          The idea that it’s better to passively starve out and impoverish the lower-class masses because they’re too stupid/self/ineffectual to move out of the transition period of industrial development is super-reactionary and sadistic. Sorry if people don’t really care much about the underlying utilitarianism of your argument and focus more on the ‘this guy wants one of the most poverty-stricken OECD nations to dwindle more in poverty for vague ecological progress’ portion.

          Hey, while we’re entertaining your dumb argument, consider this: most of the industrialization and hence carbon addition to the environment over the next decades isn’t going to be done in the industrialized nations. It’ll be in mid-development nations like Nigeria and Brazil and India. Maybe the OECD nations should declare war on these places and crush them (passive economics or direct military intervention, either way) to a pre-industrial state, for the good of humanity?

          Or maybe we just need another Great Depression 2.0. You definitely can’t say that 50% youth unemployment in Spain is a relatively positive ecological impact compared to full employment, yes?

          1. jgordon

            Sorry, but we just have two entirely different paradigms for viewing reality. There’s really no point in talking to you about this.

  3. Tom

    While politicians dither about infrastructure spending, entropy ensures our roads, bridges, ports, airports, pipelines and grids continue to decay.

    The most obvious solution is direct government spending and one would think that any government worth its salt would see that ensuring robust infrastructure is probably one of a handful of its most fundamental tasks. So how have we been doing (bf added)?

    The American Society of Civil Engineers gave America’s infrastructure a grade of D+ on its 2013 report card and estimated that roads, highways, bridges, water systems, schools and transportation systems collectively need $3.6 trillion in investment by 2020. Though civil engineers might be seen as having a stake in painting a dire picture, the raw numbers are pretty bleak: 28 percent of major urban roads in substandard or poor condition, 240,000 water main breaks each year, 58,791 structurally deficient bridges at the start of the year. The average age of the nation’s fixed assets in 2015 was 22.8 years, the oldest in data back to 1925.

    Time is the one taking a toll on infrastructure so far, but for all the talk of P3’s (Public/Private Partnerships) being the solution, not only is the track record very spotty; all the P3s added up account for a tiny fraction of the work that needs to be done. As an example, CNBC recently did a tally of P3 road projects (bf added):

    In the last 25 years, for example, there have been 36 privately financed road projects that are either completed or under construction, according to a report last year from the Congressional Budget Office. Of the 14 that have been completed, three of them declared bankruptcy and one required a public buyout of private partners, the report said.

    But even when those public-private projects are financially viable, they represent just a tiny fraction of the funding needed to maintain and upgrade existing roadways and bridges. Those 36 projects generated total investment of just $32 billion, or less than 1 percent of the roughly $4 trillion in highway spending during that period, the CBO found.

    At a rate of 1% of needed projects completed every 25 years, I’d say the P3 route is a dead-end.

    Another wrinkle is that only 34 states even allow P3s for transit and transportation projects, as seen on the Federal Highway Administration map.

    And a really nasty wrinkle is that some of these P3 deals include a strong whiff of ISDS B.S. wrapped up in the fine print, as revealed in the State Route 91 P3 deal in California (bf added):

    Look no further than State Route 91 in California to see a public-private partnership gone awry.
    When Orange County initially agreed to let a private company build a 10-mile stretch of tolls along the Riverside Freeway in the 1990s, the project was hailed as a transportation solution. Years later, after a non-compete clause in the contract prevented the county from upgrading nearby roads, the public turned against the project. In the end, the county paid the company $207.5 million to buy itself out of the contract and take over the express lanes.

    So while P3’s may be workable for a small fraction of projects, in some states, they also include onerous costs and restrictions on the public and often end in bankruptcy and bailouts — not exactly a slam dunk solution for a continent-spanning problem that is simply not going to go away.

    And for all this dithering over how to repair and replace exisiting infrastructure, where is the soaring discussion among our enlightened leaders about how to take this opportunity to completely rethink and redesign our infrastructure instead of merely replacing it? To what extent are solar, wind and hydro power going to replace fossil fuels? Should we build de-centralized energy generation capabilities? How will driverless cars/trucks change highway design? How do population shifts affect investment? How does climate change affect where and how infrastructure is built?

    I have a sinking feeling that the answers to these questions are far beyond the capabilities of our dim-witted representatives, who can’t seem to imagine any solution that doesn’t involve the magic of the free market.

    1. Pat K California

      The ASCE does these US infrastructure report cards every four years … so the next one will be published this year during Trump’s first year in office. I for one do not expect any grade improvements in the foreseeable future.

    2. craazyboy

      I think at this point, the least worst approach is some form of triage. Fix what is obviously broken now. Redesigning top down the entire country to make it fossil free and carbon neutral takes long term planning, and that is inconsistent with “we need to create a boatload of jobs next week so we can spike next quarter’s GDP number and keep our bullshit jobs”, to quote the mayor in “Blazing Saddles”.

      Plus there isn’t really a glaringly obvious solution to our energy/climate/lifestyle problem. The states have put in affirmative action alt energy programs that are significant. But really, that was a big experiment and we all are “early adopters” of new tech. I’d like to see some real world analysis of how that’s working so far, and sometime very soon, this country needs to do some much dreaded, but serious central planning.

      1. Tom

        I guess my point is this: if we are already bogged down arguing about what kinds of tax credits may entice a few private sector players to invest in a few, relatively tiny infrastructure projects in a few locales, we have already lost the war.

        To wit:

        A Reuters examination of lead testing results across the country found almost 3,000 areas with poisoning rates far higher than in the tainted Michigan city.

        Aging US Power Grid Blacks Out More Than Any Other Developed Nation, costing American businesses as much as $150 Billion per year.

        Due to leaky pipes, American consumers pay about a billion dollars a year for natural gas that never reaches their homes.

        Freight and passenger delays on the nation’s congested railroads cost the economy an estimated $200 billion a year.

        Crumbling roads and pothole damage costs U.S. drivers about $3 Billion in vehicle repairs every year.

        The list goes on and on, but it’s clear that doing nothing about infrastructure is costing us all a lot money already.

        And in terms of global competitiveness, we no longer have a world-class infrastructure. In overall quality, we rank 18th in railroads, 19th in ports, 20th in roads, 30th in airports, and 33rd in the quality of our electrical system.

        From a purely economic perspective — putting aside any considerations for the improved health and quality of life of citizens — you would think that our fearless leaders would realize that massive infrastructure investments aren’t really optional.

        1. craazyboy

          “we have already lost the war.”

          I’m getting nearly convinced, absent Divine Intervention (and I’m a secular dude), that Mother Nature is going to be entity re-designing the planet.

          1. susan the other

            Yes let’s do that much dreaded central planning. Why nobody can even mention the words is evidence of our embarrassment that free-wheeling capitalism made a big fat mess. Here’s what I want, and I’ve been asking why not do this for years.: Let’s use the military – those guys are definitely shovel ready. Since we give them 1.2 trillion dollars a year (and that’s just the figure that is made public – for sure there’s a lot more going to them…) we could mobilize them to fix everything from bridges to flood control to you name it. Make the military into the Military Corps of Engineers. Create a zillion jobs and go to work on some very constructive projects. 1.2 trillion is a lot of money. And as Eisenhower said – we can turn swords into plowshares in pretty short order.

            1. craazyboy

              Makes sense. I think we have a quarter million man and some female army with certainly nothing better to do. The Army Corps of Engineers has engineers, plus the private sector has plenty of engineering firms that could use the work too. I hear we may need a new Hoover Dam here, otherwise first we get a huge flood, then nothing for who knows how long. All they need is a plan and marching orders!

              We can then keep Mother Nature at bay a little while longer.

            2. Tom

              Well, we spent $60 Billion rebuilding Iraq and another $100 Billion rebuilding Afghanistan — why not see what we can do at home for a change!

        2. Vatch

          Yeah, but the United States has the most billionaires in the world. They’re the creative job creators! With our money, they can fix our infrastructure!

          I may be coming down with something. . . .

      2. Tom

        I posted a long, eloquent comment that may have been disappeared by our aging, glitchy Internet infrastructure (Ha!).

        Anyway, triage is probably the best we can do. But my, how things have changed — from building space ships and putting men on the moon, to bumming rides on other people’s rocketships. Sigh.

        1. craazyboy

          If you want a rocketship that isn’t mostly imaginary, be sure to hitch a ride on a real Space Alien rocketship.

          Instead of rooftop solar, maybe we should be putting huge plastic hitchhiker thumbs on our roof tops?

  4. RenoDino

    When Trump says infrastructure he really means traditional, privately funded projects that will now be subsidized by the taxpayer. By and large, they will not be roads, bridges and tunnels, but refineries, factories, distribution centers, and maybe even a mega-resort or two. As a developer constantly desperate for funding, Trump wants to streamline the process for access to low-cost public money. The model for this type of public/private partnership is already in place across the country where states compete for the relocation of private businesses by offering tax credits. These deals move pretty fast and will allow him to point to more immediate results like capital investments and jobs. Maybe the developer will throw in a new access road or playground to “qualify.”

    Wether these deals are a sound use of taxpayer money is a subject of intense debate, but don’t look for Goldman to take on a Big Dig.

  5. Carolinian

    It’s really all about taxation isn’t it? After a multi-decade propaganda effort the Republicans have finally managed to drown the infrastructure portion of our government in a bathtub and now nobody knows what to do with the corpse. In my own state there was a debate last year about whether to raise the gas tax (one of the nation’s lowest) to repair roads but Nikki Haley refused to go along unless state income taxes were lowered an equal amount. The Republican creed is now that government and taxes are evil while at the same time they are making money by doing deals with the thing they want to kill. It’s the sort of fuzzy brained but politically successful stance one might expect to spring from the Mind of Ronald Reagan (cf Gary Trudeau). The Dems play along–having lost interest in their own New Deal ideology–and when Bill Clinton declared “the era of big government is over” the white flag was finally raised.

    Bottom line to those who think this is a new crisis: please don’t pretend that it is only the Trump who is the stupid. He fits right in. Given the current elite climate what can he do, really?

    1. craazyboy

      Whodathunk 15 years of Bush tax cuts would result in a great big pile of money being hoarded in the private sector and now we need to entice them to invest it by handing over the “commons”?

  6. ocop

    One quick addition on Tax Equity. The substantial growth in renewables over the past 10 years or so has relied on the federal investment and production tax credits (ITC and PTC), the magnitude, duration, authorized window, and eligibility for which all have varied greatly for differently technologies at different points in time (this is a completely different discussion).

    However… during the depths of the great recession tax equity froze up (no profits to take credits against) and wasn’t adequately large to support the fiscal stimulus necessary to begin with. So for renewables ARRA included the “Section 1603 Cash Grant” provision which made the ITC and PTC refundable–refundable meaning the treasury would issue direct cash to the applicant in lieu of a tax credit. This is literally direct fiscal stimulus. The cash grant had the added benefit of reducing the need for complicated project financing structures to direct value to the tax equity. Less rent extraction by the financial industry.

    In application to the infrastructure plan I think you’d have to do the same thing to reach anything resembling scale. The catch–well documented here and elsewhere–is that there are no private developers of infrastructure to begin with. The whole thing would become a boondoggle. That cash would be better served being directly allocated to public projects. Build-America-Bonds were effective previously, but if interest rates remain low direct stimulus is really the only option, but can’t be back-doored through the tax code like the 1603 program.

    1. Yves Smith Post author

      Dizard alludes to tax grants in his piece.

      The reason that won’t work here is Republican deficit hawks. That’s one of the reasons the Trump plan relies on tax smoke and mirrors. This is not 2009 when the economy was in crisis, you had a Democratic president and a filibuster-proof majority in the Senate as well as in House and everyone agreed we needed a lot of stimulus, the question was how much and how to deliver it.

      To give you another indicator: one of my close contacts is a top tax expert, as in makes a living opining on tax matters to tax lawyers. Said expert is not at all worried about the Trump tax plan. Says the tax gimmies to the rich will wind up being a fraction of what Trump is asking for because the deficit hawks will insist that the tax breaks be met by expenditure cuts and there aren’t enough expenditure cuts to be had. With Federal spending at 18% or so of GDP, meaningful reductions are not to be had (unless we were to go after the military which is na ga happen).

  7. Enquiring Mind

    When there are reports of billions of dollars chasing very low yields, the prospect of guaranteeing or subsidizing higher yields seems counter-intuitive.
    How much of the higher yield ‘requirement’ is due to political risk such as change in administration and rules?
    How much is due to political interference such as pork barrel additions, fees, time-consuming extraneous reviews and similar issues?
    It would be instructive to see a cost breakdown of projects that laid out the hard and soft costs, and to compare those even-up across jurisdictions both domestic and foreign.
    For large infrastructure projects, why not use a BRAC list (base closure) approach requiring an up or down vote to (try to) reduce the politicking, and get some actual competition among constructors?

  8. bob

    Green Bonds-

    http://www.syracuse.com/news/index.ssf/2012/03/irs_says_destiny_usa_green_bon.html

    However, the developer’s lawyers said the bonds should be allowed to remain tax-exempt because the federal law creating the program only required it to describe the energy efficiency, renewable energy and sustainable design features planned for the project and did not require that the project actually include all of them.

    A green mall. That’s what we need more of. No need to do any of the actual green stuff, just tell a story. Fiction Stimulus.

  9. Ep3

    Yves, regarding the statement of where investment dollars will go. I don’t think it will “city versus boonies”. Here again Michigan will be a great example. The Grand Rapids area is the only part of the state with economic growth and was hit far less hard than the rest of the state with the 2008 recession. So you would think GR wouldn’t need help as much as Flint! But! Guess what! Grand Rapids is controlled by the Devos and a few other extremely conservative right wing republicans. So what I see is these investment dollars will go to Grand Rapids, who does not need the help, instead of the rest of the state. So Flint can keep drinking water out of 50 year old pipes, while Grand Rapids wealthy white folks will get their 10 year old pipes replaced.
    In other words, Michigan roads are terrible. But instead of focusing on areas in need of an economic boost (or as trump says, those that lost manufacturing jobs) like Flint, the money will go to areas like Grand Rapids where several large republican financial supporters live. Then, Detroit and Flint can continue to be scolded for not taking after Grand Rapids in revitalizing their communities.

  10. Dave

    I have a suggestion.
    Why not allow the corporations to repatriate the money on the following conditions:
    They lend it to the government, interest free to do infrastructure and then as the government pays them back over time the money is taxed at a low rate equal to what the bonds would have paid.

    Thus government gets free money, other government borrowing through bonds is paid off by the corporations and the corporations pay a really low tax rate.

  11. rrennel

    The real issue concerning infrastructure is who pays. Public goods can be paid for through user fees or through taxes (or tax credits; essentially the same thing at a macro level). I’ve been told that users pay approx. 60% of the cost of operating a public transit system (think MTA, Amtrak, etc.). I cannot substantiate this, but it seems to be a reasonable approximation, in which case the general public has to pick up the remainder through taxes. We can let our governments budget this money or borrow it in the near term, or we can let the private sector fund a part of the costs. The problem with public-private partnerships has been one of equity (i.e. fairness), where too often the public is expected to bail-out failed investments that have already generated positive returns for the equity investors. Given the Trump/Ross/Navarro proposed tax credit of 82%, payback to equity should be substantial and quick (even accounting for the already generous reduction in corporate tax rates). For public-private partnerships to provide real social benefits, there must be a true sharing of investment risk with private investors. We cannot again tolerate the socialization of the costs of financial losses while subsidizing the investor class.

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