U.S.' Infrastructure plan needs P3s for airports to make a difference

Summary

• US President Joe Biden's An 'Infrastructure Bill' will spend USD2.25 trillion.
• It comes on top of two COVID stimulus packages in 2020 and 2021, which amounted to USD4 trillion, of which USD1 trillion remains unspent.
• Critics say that less than half will go to 'infrastructure'.
• With the deficit soon to exceed USD30 trillion, the printing of money appears to be de rigueur in the US and especially under this administration, which is not yet three months old. New monetary theory, to which it aspires, has it that that is okay, but only if there is the production to match the money, otherwise inflation will result.
• The very low contribution to the airports sector means there will be little production there.
• So the onus may fall on the private sector, which was encouraged by the previous administration.
• But to maximise that sector's potential the taxation schedule on investment bonds must be revised.

Only 5 per cent of the 'Infrastructure Bill' will go to airports

Jjust 6% of the money is targeted for spending on roads and bridges, and 5% for airports.

It demonstrates that airports there will be one of the sectors to suffer the most if the paltry sum allocated to them is all they can expect while the pandemic continues.

USD2 trillion could be USD10 trillion if some got their way

At the end of Mar-2021 the Biden administration announced an eight-year duration USD2.25 trillion Infrastructure bill, one which was referred to as an 'investment bill' under questioning at the White House. In reality it invests little in infrastructure in the US airport sector.

It was also described as "temporary" by the White House Press Secretary, Jen Psaki, suggesting that further such packages may follow. Indeed, the leading and influential Democrat Congresswoman Alexandria Ocasio-Cortez said in a social media posts that she wants a USD10 trillion commitment, but did not say how it might be used.

But Ms Psaki later added that it is a "once in a century" then "once in a generation investment", so this may be the measure of it.

USD3 billion a year won't go far when the 'urgent project' demand is for USD115 billion

It amounts to just USD25 billion for airports over those eight years, or USD3.13 billion a year, which would possibly add a shiny new terminal at a major airport, or a runway and some new apron.

And if it is a once in a generation thing will this be the limit of government support for the sector for the next 25 years or so?

Airports Council International-North America (ACI-NA), on the other hand, believes the sector's funding requirement right now, never mind over eight years, to be USD115.4 billion, as that is the price of the "necessary project backlog" that has built up. And this within an industry that in normal times generates USD1.4 trillion in annual economic activity (more than half the administration's total infrastructure package) and supports nearly 11.5 million jobs.

ACI-NA has consistently proposed a need for such spending levels, in excess of USD100 billion, over the past few years. Under the current administration's plan it would get USD3 billion this year.

It is worth comparing what some other sectors get in the 'infrastructure bill'.

• Bridges, Highways, Roads, Streets - USD115 billion (exactly what ACI-NA wants for airports now)
• Waterways and coastal ports - USD17 billion
• Public transit - USD85 billion
• Electric vehicles - USD174 billion
• Road safety - USD20 billion
• 'Care-giving jobs' - USD400 billion
• Affordable Housing - USD213 billion
• Universal pre-kindergarten public schools - USD137 billion
• Modernise and improve federal buildings - USD10 billion
• Plugging oil and gas wells - USD16 billion
• Climate technology - USD35 billion
• Creating a 'Civilian Climate Corps' - USD10 billion
• Replacing every lead water service line in the US - USD45 billion
• Pandemic preparedness - USD30 billion*

*Not clear which pandemic this refers to. 'Preparedness' is too late for this one, so the assumption must be that more are expected.

ACI is thankful for small mercies, though

And yet strangely, ACI-NA welcomed this drop in the ocean with open arms, saying, "We support President Biden's infrastructure plan and the USD25 billion he would devote to modernising America's airport infrastructure." (Even though almost half that amount airports will get will go towards federal buildings).

To be fair, the earlier (Jan-2021) COVID relief package also provided the industry with USD8 billion in support, so the total is really USD33 billion, and one conclusion might be that ACI is grateful for small mercies.

On the other hand, ACI-NA has projected that US airports will lose at least USD17 billion between Apr-2021 and Mar-2022 due to the prolonged decline in commercial aviation traffic, on top of USD23 billion already lost between Mar-2020 and Mar-2021. That is a combined total of USD40 billion, and the losses won't end there, with various projections being made by 'experts' that there will continue to be successive waves of the virus for years to come.

So the industry is USD40 billion down over two years, has USD115 billion of immediate project requirement, and gets USD33 billion from the government. Hence, it is out of pocket on infrastructure by USD122 billion and counting.

Meanwhile the US government makes USD16 billion available to pull down the shutters on an industry (oil & gas). At least the word 'infrastructure' appears in it.

If one perceives an emphasis on 'green' in these proposals, that is what there is, and a lot of it. Again, to be fair, 'new' industries will be supported.

Of course, all this has to be paid for as well, at least under traditional economic theory.

Taxes will rise, jobs will be lost, firms will move away

As a result, Corporation Tax will rise from 21% to 29% (China's is 25%). That should raise USD1.5 trillion, but runs the risk of firms leaving (the population is already in decline in New York and California and has been for years) to seek out more sympathetic tax regimes.

It also risks prices going up, or workers being laid off, or all these things, as the maximum income tax will rise to 40% and state taxes are also going up. None of this is good for the aviation industry, and fuel prices generally are already rising, a trend which was initially fired by the cancellation of an oil and gas pipeline project from Canada, laying off 70,000 direct and indirect workers.

Even then, the tax dollars needed to compensate for the 'infrastructure bill' won't actually come in until 2036, according to one calculation, i.e. 15 years to pay back expenditure over eight years.

Modern Monetary Theory - MMT

That doesn't exactly make for good economic housekeeping, but there is a 'new way' of thinking on economics. Modern Monetary Theory (MMT) is not a new concept, it has been around for well over a century, and there are plenty of examples of it in history, a couple of which are detailed briefly below.

Technically, MMT is a heterodox (not conforming with accepted or orthodox standards or beliefs) macroeconomic theory that describes currency as a public monopoly, and unemployment as evidence that a currency monopolist is overly restricting the supply of the financial assets needed to pay taxes and satisfy savings desires. MMT is an alternative to mainstream macroeconomic theory. It has been criticised by well known economists but is claimed by its proponents to be more effective in describing the global economy in the years following the Great Recession of 2007-2009.

MMT argues that governments create new money by using fiscal policy. According to advocates, the primary risk once the economy reaches full employment is inflation, which can be addressed by gathering taxes to reduce the spending capacity of the private sector.

In traditional economics, the notion of printing money to solve a country's problems is almost universally regarded as a bad idea. Yet MMT proposes that money creation ought to be a useful economic tool, and that it does not automatically devalue the currency, lead to inflation, or economic chaos.

Instead, MMT says, the government ought to be able to create all the new money it needs as long as that does not generate inflation, and even if it does, that can be controlled through taxation policy.

MMT can work…

There are recent examples of its application.

USD1 trillion cash was printed to bail US banks out of the financial crisis in 2008/9. There was no fiscal element; taxes didn't immediately rise. But the total cost of that exercise was later put at up to USD30 trillion, the foundation of the current deficit which, with the addition of two COVID relief bills and this infrastructure bill is heading north of USD30 trillion (USD10 trillion more than annual GDP).

There is also the case of Japan, where government debt can be up to 250% of GDP while inflation has remained low and has in fact been negative, which is certainly a bad thing. (People decline to spend on the premise that prices will fall even lower, so they do, thus destroying product value.)

Hyperinflation was evident in Zambia where Robert Mugabe printed money like it was going out of fashion. And it actually was - with the country even printing a (Zimbabwean dollar)100 trillion note as legal tender.

But in that case the money printing was accompanied by the collapse of agriculture. Food production failed completely within months as the 'breadbasket of Africa' couldn't even feed itself.

Money continued to be printed and spent but there were no goods for it to be spent on and hyperinflation ensued.

A similar scenario ensued in the German Weimar Republic after World War 1 when, heavily burdened with economic reparations, the German government printed money rapaciously to pay bills, but the country's productive capacity to support that extra money had been destroyed, hence hyperinflation set in and was one of the causes of the inevitability of World War 2.

This suggests that it is the lack of goods, labour, or capacity that triggers inflation, rather than just the printing of money, but critically, it is when the two combine that it can be lethal.

…but only if newly printed money goes into production

Which makes for very good reasons for President Biden to instigate a two trillion dollar-plus stimulus package like this one, but only if it is genuinely ploughed into production. Too many of the 'investment' categories of the 34 made publicly known appear to lie outside an interpretation of 'goods, labour and capacity'.

Can the private sector fill the void?

It would be ideologically difficult for the government to allocate any such production resources, never mind cash, to airports as they aren't considered 'green' and are regarded as polluters.

But the reality of the situation is that if the government is not prepared to put its faith in its airport infrastructure, then it cannot reasonably expect the private sector to show much enthusiasm for it either.

The previous administration did, at least, envisage that infrastructure enhancement would come about increasingly by way of matched funding from the public and private sectors.

So if neither the government nor private enterprise is going to invest in the sector then who is?

Before moving on to discuss another reason why the private sector might step back from airports, a sector it has been attracted to in recent years, one other issue regarding the various relief packages has to be considered.

USD1 trillion remains unspent from the first stimulus package

There have been three stimulus packages now, two of them passed, while the current bill awaits approval at the time of writing.

The first COVID-19 relief package came in the first quarter of 2020 during the Trump administration's final year and the second one in Jan-2021 in the first month of this administration. They amounted to approximately USD4 trillion between them, and were already 'in place' before this infrastructure bill, which takes total spending since the beginning of the pandemic to well in excess of USD6 trillion. Monopoly money.

It appears that USD1 trillion remains unspent from the 2020 (Trump) COVID support bill, never mind the USD2 trillion 2021 bill, which has only just got under way. If there is no other use for it, why couldn't that money be diverted to genuine infrastructure needs? Like airports?

Assuming that will never happen, what prospects exist for the private sector to up its contribution to infrastructure?

In Feb-2021 the CAPA report 'US airports' funding crunch - are P3s the answer?' suggested that US municipalities are struggling to find the cash to run their airports, let alone invest in them.

See: U.S. airports' funding crunch - are P3s the answer?

Private sector investment into airports was encouraged from 2018

But a change in regulation in 2018 made private infrastructure financing more attractive and available to all airports by expanding the 1998 Airport Privatisation Pilot Programme (APPP) into an Airport Investment Partnership Programme (AIPP) and opening it up to all commercial service airports (previously it was limited to 10).

Now, public-private partnerships (P3s) for specific pieces of infrastructure such as refurbished terminals, car parking and hire buildings and transport interchange facilities are (comparatively) thriving, and moving into different aspects of the airport estate, offering a welcome alternative to municipalities.

But there is no positive movement on the full leasing of airports. There have only been two leases of public operated commercial airports since the APPP began in 1996, and one of those was returned to the public sector only seven years into a 99-year lease.

The airport 'sponsor' (i.e., the city, county, authority, or state that owns the airport) is free to seek qualified companies, or consortiums of companies and investors, to lease the airport under a long term public-private partnership (P3).

The leased airport would be exempted from the FAA grant assurance that requires federally aided airports to keep all airport revenue on the airport and used only for airport purposes. So airport owners can now liberate the asset value of their airport and use it for other public purposes, be they other forms of public transport, pension provision, garbage disposal, the sewerage system or whatever.

But AIPP also retains the provision of the original pilot programme that such value transfers can only take place if 65% of the airlines serving the airport agree (it is a little more complex than that, the double majority rule as it is known, but this explanation suffices here). And airlines can find many reasons not to go along with a private lease of the facilities they use, although that was achieved in Puerto Rico, and also in Chicago for the Midway airport there before that deal twice fell through.

Otherwise, the range of forms that private sector involvement can take in airports is wide, from simple management contracts (e.g. Albany, Westchester County, both in New York state) to developer financing of terminals (JFK Terminal One, also New York), to a long term lease (San Juan, Puerto Rico), or now even a sale, which was not allowed under the APPP.

So why are there so few airport leases, apart from the airline objections? After all, they are common and popular in Europe, Australia, Latin America and some Asian countries.

Part of the reason is the long and cumbersome FAA review process, which took more than three years for San Juan - which has been a success all the same - and which still hinders the Hendry County Airglades airport lease in Florida. Also the double-65% airline approval requirement, and the remaining detailed FAA "grant assurances" that the leased airport must still comply with.

But the tax rate on bonds remains an insurmountable obstacle

But the most important obstacle is the major financing difference between public-serving infrastructure in the United States and the rest of the world.

In most other places, an airport issues bonds at the same taxable interest rates whether it is owned and operated by a government or by investors. But in the US, in the land of tax-exempt municipal bonds, government airports borrow at tax-exempt rates while investors who lease them can only access taxable bond finance.

And this applies even to the transaction under which investors acquire the airport on a long term lease. The US tax code requires that in the event of a material change of control, existing tax-exempt bonds cannot transfer to the new company. Instead, the airport sponsor (city or county) must use a potentially large chunk of its up-front lease payment to retire the airport's outstanding bonds. And of course, the acquiring company, unless it makes an all-cash offer, must issue new taxable bonds to pay for leasing the airport.

This is likely to be the single most important difference in the appeal of airport P3 leases in the rest of the world versus the US,

However, there is a possible change on the horizon. The Congressional Research Service (CRS) has produced an updated report on the subject, 'Airport Privatisation: Issues and Options for Congress', 11- Mar- 2021, report R43545.

The CRS suggests that one thing Congress could consider would be to "offer the same tax treatment to private and public infrastructure bonds."

In fact, this was one of the proposals in the 2018 White House infrastructure proposal, which also recommended "mainstreaming" the pilot programme, as Congress actually did.

Foreign corporate interest in the sector remains

Where the CRS report still falls somewhat short is in its treatment of the high degree of investor interest in US airport P3 leases, despite the problem of disparate tax treatment.

When the city of St. Louis got a slot in the former pilot programme for Lambert International Airport (STL) and its consulting team developed a procurement process (after having done extensive homework on best practices), many were taken by surprise that the request for qualifications received submissions from 18 teams, either individually or in consortiums, from many of the best-known investors in the sector in the world.

The best-qualified 12 teams were invited to make in-person presentations in St. Louis in Dec-2019; 11 of them attended and their presentations were widely acknowledged to be sophisticated and detailed.

A pro-forma agreement by the main airlines serving STL was reached, and it looked as if the process would soon proceed to the RFP stage. But it was abruptly terminated by the mayor of St. Louis just before Christmas 2020, due to jurisdictional concerns and behind-the-scenes efforts by some business and government leaders in the wider metro area to create a regional airport authority instead.

One assumption from that experience must be that even with the current tax treatment of airport revenue bonds, there is global interest in US airports, as demonstrated by the responses of global airport companies, infrastructure investment funds, and public pension funds in the St. Louis case (and to a lesser degree at Puerto Rico and Chicago). It just needs a push on the equality of bond tax treatment.

For further details see: St Louis airport lease is off: the end for U.S. lease deals?

The opportunity is there...

So, in the absence of a healthy handout to the sector from the 'infrastructure bill' and the continuing failure to modernise the Passenger Facility Charge (PFC) - the main funding mechanisms for airports - in over 20 years, this would appear to be the 'way to go' for the Biden administration if it does want to see its airports regain that 'Third World' tag, which they had acquired.

But will it rise to the occasion? Probably not. Airports are simply not a priority.

The USD25 billion figure speaks for itself. All the changes to the regulatory system - the replacement of the APPP with the expanded AIPP - the encouragement for more public-private sector co-operation, the beginnings of a review of the PFC, and the drafting of a proposal to equalise the tax treatment of public and private bonds appear currently not to be a priority for the US administration.

(Acknowledgement for the technical detail on the taxing of public and private bonds is given to the Reason Foundation/Bob Poole.)