The Internal Revenue Service should axe a rule requiring tax-exempt debt to be retired when cities and states are considering long-term leases for their assets.
That's the view of public-private partnership advocates who are looking to inject more private capital into the U.S. infrastructure space.
"There's really no policy downside and a sizable practical upside," said DJ Gribbin, founder of consulting firm Madrus, who was first Special Assistant to the President for Infrastructure during President Trump's first term. "It opens opens up a whole new world in allowing innovators to provide a plethora of benefits to users of infrastructure."
Under current rules, tax-exempt bonds used to finance public facilities have to be paid off if a private entity takes on long-term operations of the facility. Eliminating the requirement would lower financing costs for local and state governments looking to lease or privatize existing assets that are to remain owned by the public entity, said P3 advocates.
Asset recycling — where a government enters into a long-term lease for an existing asset and often uses the proceeds from a large upfront payment for another infrastructure project — remains relatively rare in the U.S. One of the largest examples remains the $3.8 billion, 75-year
Part of the reason is the strict tax-exempt defeasance rules, say some P3 champions. Infrastructure investor giant IFM Investors in a
Paying off tax-exempt bonds "creates a significant upfront cost and discourages governments from pursuing P3 arrangements for brownfield assets, significantly restricting the pipeline of infrastructure investment opportunities," IFM said. "Notably, in the case of long-term leases, the requirement is counterproductive, as the asset remains under state ownership and continues to deliver essential public services."
IFM suggested that amending IRS regulation to allow the existing bonds to remain outstanding would clarify existing IRS law that "currently allow – under very limited circumstances – the reinvestment of proceeds into other qualifying infrastructure to be a permissible 'remedial action' to allow existing tax-exempt debt to remain outstanding in relation to the infrastructure subject to the concession transaction."
A newly formed U.S. Department of Transportation
"If those bonds could stay in place as tax-exempt bonds, you could, again, lower the cost of financing for the incoming operator," said board member Robert Valentine, senior managing director at Macquarie Group at what was the group's second meeting. "Everyone wins as there's more upfront money for the state as they receive upfront proceeds for that concession."
The requirement was crafted in the 1986 tax law when no one had envisioned the use of private capital for public infrastructure, Gribbin said. Since then, the government has created programs like tax-exempt private activity bonds and Transportation Infrastructure Finance and Innovation Act and Water Infrastructure Finance and Innovation Act loans to help "level the playing field" and encourage more P3s, he said.
"With those programs, the government is saying for transportation projects, we won't put the thumb on the scale for whether you can use a private delivery or a public delivery," Gribbin said.
But the requirement to retire existing debt acts "as a laggard that still hasn't been fixed and is serving as a drag on the P3 industry," he said.
