Infrastructure Act advances U.S. public-private partnership growth

The Infrastructure Investment and Jobs Act (IIJA) was signed into law on Nov. 15, 2021, promising a long-awaited and significant capital infusion into our nation’s physical and digital infrastructure. The $1 trillion bill includes approximately $550 billion in new investments across all key infrastructure sectors: roads and bridges, public transportation, water and sewer, energy and broadband.

While the IIJA did not explicitly create funding mechanisms designed to attract private capital, there are several provisions within the bill that indirectly do just that. For anyone tracking public-private partnership (P3) projects and opportunities in the U.S., this is a very exciting proposition. Although commonly used in many other parts of the world, the P3 approach to developing major infrastructure is considerably rare in the U.S. at this time. While there has not been a single conclusive study of the space, it is believed that while P3 projects represent between 5% and 20% of total infrastructure spending in other developed countries, in the U.S. that proportion is closer to 1% to 2%. Historically, P3s have not been as favored in the U.S. for a wide range of reasons. However, the confluence of an ever-growing major infrastructure needs backlog at the local, state and national levels, combined with significant funding coming to state and local governments from the recently passed IIJA, suggests that there may be a growing appetite for alternative project delivery models.

IIJA provides P3 growth opportunities

The following are several ways the IIJA could help P3s gain popularity in the coming years.

  • Value for Money analysis requirement: One reasons for the slower uptake of the P3 model in the U.S. is the general lack of an incentive and/or regulatory structure that encourages public entities to explore this method of project delivery instead of other more traditional methods. The IIJA attempts to begin to address that through a new requirement that all projects over $750 million applying for Transportation Infrastructure Finance and Innovation Act (TIFIA) or Railroad Rehabilitation and Improvement Financing (RRIF) funding complete a Value for Money (VfM) analysis to determine the delivery approach (public vs. private vs. P3) that would generate the most value over the life of the project.
  • Expanding TIFIA: On a related note, the IIJA also expands the TIFIA program scope to include transit-oriented development (TOD) and airport upgrades and modernization. Both TODs and airports have historically favored P3 development given the public/private nature of both their use and ownership.  
  • Substantial competitive funding: In addition to increasing funding distributed formulaically between states (e.g., through the Federal Highway Trust Fund), the IIJA increases funding for existing competitive grant programs as well as creates new competitive programs. The transportation sector alone is receiving upwards of $15 billion in new, competitive funding across the National Infrastructure Project Assistance (NIPA), Rebuilding American Infrastructure with Sustainability and Equity (RAISE) and Infrastructure for Rebuilding America (INFRA) grant programs. Billions more are allocated towards electric vehicle charging, passenger and freight rail and aviation. Keep in mind these grant dollars are highly competitive. As an example, in the 2021 funding round for INFRA grants, 157 applications were submitted for a total of $6.8 billion in funding – while only about $900 million in funding was available. Due to the competitive nature of these funding sources, local and state entity agencies will be incentivized to develop applications that leverage innovative financing and delivery techniques as a strategy to set themselves apart from other applicants. A number of these grant programs expressly state that “innovative financing,” “innovative project delivery techniques” and “collaboration with other public or private entities” are factors that will favor an application.
  • Permitting reforms: Another reason for the slow adoption rate of the P3 approach in the U.S. is the extraordinary amount of red tape and bureaucratic processes that a project needs to pass through before any project work can even begin. The adage that “time is money” holds and the private sector typically prefers to participate on projects with a predictable and efficient timeline. The IIJA sets out a goal of decreasing the time it takes to review and permit projects with a federal component to two years, increases funding for federal agencies that are in charge of permitting and makes the Federal Permitting Improvement Steering Council permanent.
  • Increasing Private Activity Bond cap: The IIJA adds $15 billion to the Private Activity Bond (PAB) cap on highway and surface freight transfer facility projects, on top of the $15 billion allowance that has already been fully exhausted. PABs allow private entities to borrow money at tax-exempt rates comparable to those enjoyed by public sector entities. Increasing the cap directly translates into additional P3 activity as private entities can borrow at public sector rates when working on public sector projects.
  • Allocating funding for professional services: The IIJA provides $20 million in competitive annual grant funding that can be used by state and local governments to retain professional services firms to explore, evaluate and plan P3 projects and asset concession agreements. In a similar fashion to some of the other items listed above, this funding can help encourage governmental agencies to explore new approaches to funding, building and operating critical infrastructure.

There is no expectation that P3s will become the dominant means to funding and delivering projects overnight, as there are numerous instances in which this approach is not appropriate or the most cost-effective. However, the elements outlined above promote some alternative thinking and may prompt infrastructure agencies and local governments to give P3s further consideration as they work to extract the most benefit out of the IIJA for rate payers and community constituents.

Baker Tilly’s specialized P3 team helps public and private sector entities work through the entire lifecycle of a P3 endeavor. For more information, or to learn how we can help your organization, contact our team.

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