i3 senior editor Drew Campbell asks 32 Advisor head of Infrastructure Michael Likosky about infrastructure policy in the United States.
Congress is trying to pass several pieces of infrastructure legislation piecemeal rather than in one sweeping bill — can this approach work?
Let's start with why a sweeping approach is not workable. Two reasons: first, we do not face a financial crisis that facilitates the passage of a single bill, and second, a sweeping bill must have three main pillars: clean energy, transportation and water. A quick back of the envelop looks like 50 percent energy, 30 percent transportation and 20 percent water when you think about the needs across the states. So long as clean energy is off the table, there is no sweeping bill. You cannot pass sweeping legislation which leaves out a swathe of states with mainly clean energy needs, think about Congressional voting cards.
A clear path though to success exists with several discrete pieces of standalone legislation. However, the President and Congress must persist in keeping the big picture in mind as the bills move through. In other words, if a couple dozen states benefit from a piece of water public-private legislation, then something for others has to be reliably in the pipeline.
We also have to appreciate, over 40 pieces of legislation have been introduced into Congress to-date, a substantial amount bipartisan. The Administration’s approach was always to give an invitation to deal with Congress, rather than a take-it-or-leave it package. We have a basis for cutting a deal, or here a series of deals.
What comes first — transportation, water, something else?
Water will be first. A few weeks ago, a bipartisan bill moved through the House on a 408–2 basis and more recently a $44 billion bill for energy and water passed the Senate by an 86–5 vote. We will then see something partial in transportation. The Farm Bill, which recently passed through the House, with broadband and water, will also make its way through. Importantly, we should focus on the passage of bills more than their size, we are shifting to a leveraging model where money goes further. Also, more significantly, as the parties negotiate out additional infrastructure legislation, the Republicans will yield to the Democratic Party’s dollar levels, which are significantly higher.
When do you anticipate these separate pieces of legislation will pass in Congress?
If I had to speculate, this session. I would say water, a slice of transportation, and the Farm Bill first. At the same time, we need to take into account the immovable furniture in the room. A good amount of activity is already happening. Always, we have to view the use of the federal government from the perspective of governors, mayors and county executives. Our federal government is not the strongest one in the world. Instead, its job is to provide greater leverage to states, cities, counties and public authorities.
Viewed from this perspective, we have the Administration doing important initiatives without legislation needed: the Executive Order to streamline the environmental review process, the innovation of pre-existing platforms such as RRIF with Transit Oriented Development, the BUILD grant program with its program of projects, WIFIA with more P3s, the FTA removing P3 barriers for transit. In addition to the bills now in Congress, we have had the Omnibus Bill with over $21 billion for infrastructure including $600 million of discretionary broadband funding, and a Tax Bill with the Opportunity Zones, which will be an enormous infrastructure stimulus. On top of this, we have had many TIFIA, WIFIA, INFRA Grant, USDA and Commerce awards to-date.
What are opportunity zones and how will they affect infrastructure investment?
The Tax Law created Opportunity Zones. These zones are hived off territories based upon census tract and targeting communities facing economic challenges. Investors can defer capital gains taxes by putting money into projects within these zones. In fact, for example, if they hold an asset within a zone for over 10 years, then that capital gains tax can be extinguished.
As a result, infrastructure investments in zones such as broadband, transportation and water can return substantially more than ones outside of zones. Each state has its own portfolio of zones. For infrastructure investors on the ball, the Opportunity Zones will be a windfall. But, it will take a deliberate, strategic and rigorous approach coordinated within other investments within a zone to succeed.
The Opportunity Zones are important also because they will happen at the intersection of infrastructure, real estate and economic opportunity. This intersection is where an important part of the market is heading from rural to small and medium size cities, or even certain neighborhoods within mega-cities. The future is places like rural California with its wealth of human and natural resources, and proximity to state, national and global markets.
Where does the money come from now that taxes have been cut and additional cuts proposed — can the gas tax be increased?
There are two possibilities: first, Congress takes into account the future tax revenue, which will be generated through infrastructure-driven growth and carries out dynamic scoring; and/or we increase the gas tax. The real challenge is that voters do not always see a tangible benefit from federal infrastructure spending, so a hit to the wallet without a perceived benefit is a tough one. That said, at the state and federal level, folks do see benefits, and as a result a gas tax is increasing in a decent number of places and the rate of success for local infrastructure ballot measures is high.
Is there an indication of how much this legislation will be implemented at the federal level versus the state and local levels?
We are entering into a world where the federal, state and local governments pull together — everyone has to put their support in for a complex project to work. It is not unusual in the types of projects envisioned under the bills to have governors, mayors, county executives, members of Congress and the President all promoting, mobilizing and refining these programs. At the end of the day, for a long-term innovative project, the local government and private investors will ultimately have the most skin in the game.
Will federal policy give tools and resources to states and local governments to execute these plans?
The federal government will give increasing numbers of tools and resources including innovating on existing ones. However, the real question is for the governors. How do they use what are becoming a sizable number of tools and resources, from all that money in RRIF and Opportunity Zones. It is all about infrastructure-driven economic growth these days. So, the question becomes what is the growth story, and how can the federal tools and resources be put to work to advance that growth?
Are some states better positioned to take advantage of these programs?
The real benefit here accrues to the states with urban, rural and suburban populations where real growth can be had. Now is the opportunity to tell that story and pull on fresh federal resources to get that done. The new federal resources, in fact, allow us to catalyze growth in low and moderate income communities in urban, rural and suburban populations. The key will be how to understand and articulate that story of growth in a grounded achievable way — money and projects become available when that happens and, importantly, the projects are hard wired to produce that growth.
How are governments adjusting to this new environment?
The Republican and Democratic parties are adjusting to a seismic shift, prioritizing low- and moderate-income communities. The federal programs, our Congressional institutions and their legislative proposals, are adapting to this new perspective. Programs are being conceptualized, developed and unfolded. This is our new toolbox for P3s.
The regulatory and permitting processes are a part of this equation, too — can there be streamlining this year?
It is a good question. The Executive Order–driven process has started in earnest, and the current administration is building upon President Obama's streamlining initiatives. Whereas President Obama focused on the initial pilot projects, President Trump is now trying to do systemic changes. Each takes time; however, what will be important for the current administration is to have big short-term wins, like we saw with Governor Cuomo’s Tappan Zee bridge replacement, as we move forward to broader systemic changes.
Will President Trump sign into law what comes through Congress or is there a chance of veto?
The President's infrastructure plan was an invitation to Congress to deal, not an effort to tell Congress what to do. They are now dealing, a deal will be had, a series of deals.
What legislation can have the most impact?
In the fall, we will know much more about the Opportunity Zones and their use for private investment for infrastructure. I would say though that two things have to converge: the Administration continues to capitalize and innovate its existing programs and the private sector works with states and cities to find ways of combining those sources and doing draw downs to get projects going.
How do states and local governments go about selecting these programs?
If you have a couple dozen innovative federal programs and the same at the state/local level, then why not use as many as make sense for a single project? That’s how you get projects going — it is the emerging P3 formula — state, federal, local, private sources of capital coming to the table. Right now, we are picky eaters and our projects are thus not compelling to constituencies. Each source of capital allows you to add-on to the project essential elements. Why not find a way of bringing some economic development money from the Commerce Department to your project? For example, look at what the German companies like Siemens or BMW do. If they build a plant in South Carolina or Alabama, they start community college programs, apprenticeships and other initiatives. They go after DOT money for custom cranes. They get a load of incentives to produce jobs. U.S. Commerce Economic Development money from the Commerce Department is drawn down. Tax-exempt financing facilities. The list goes on. It is the type of story we need here. It is like a free Las Vegas buffet, you leave nothing on the table.
