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Public-Private Partnerships Hinge on Tax Policy

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Repairing roads and bridges can cost billions. Photo by Justin Sullivan/Getty Images

I used to think that public-private partnerships were mainly a Republican idea because they rely on the private sector's involvement in public infrastructure. They are a way to trim some of the government's role in roads and bridges in favor of a system that is more market-oriented.

Increasingly, however, public-private partnerships are becoming a topic of conversation among Democrats, another signal that the Eisenhower, big-government highway era is over. (We've known that's been coming for several years.) Last week, the Progressive Policy Institute, a Clinton-era think tank, released a policy memo making the case that public-private partnerships are a good way to supplement our infrastructure needs without relying on the government to fund everything.

 

As a country, we are way behind on such arrangements. Only a handful of states make use of public-private partnerships now, says PPI economist Diana Carew, and 26 states have no experience with them. By contrast, the United Kingdom and Australia have been successfully using public-private partnerships in infrastructure for decades. Following on their success, Canada has now become one of the most advanced and active markets for public-private partnerships. It has over 200 projects running, according to Rep. Jeff Denham, R-Calif., who highlighted these achievements in a House hearing in April.

But in order to make the market work for nongovernment investors, it needs to be fair from a tax perspective. The most striking thing to me about the PPI report is not that a politically progressive organization is touting the potential of public-private partnerships (although that's certainly notable), but that Carew's main policy recommendations are about taxes, not transportation.

Right now, the tax code isn't particularly friendly to private investment in public goods like roads and bridges. Carew says the ground would be more fertile for public-policy partnerships if Congress expanded tax-exempt private activity bonds and loosened foreign investment restrictions under the Foreign Investment Real Property Tax Act. Those changes could tilt the scale toward investors, foreign or otherwise, who want to get involved in building a road or a bridge.

 

Larry Blain, Chairman of the Board of Directors at Partnerships British Columbia, told the House Transportation Committee that a successful market for public-private partnerships is one that has "fair and transparent procurement processes" and "an ample supply of aggressive and competitive bidders."

Many of the most prominent bidders in the infrastructure space are international firms. They are looking for places around the world to invest their cash. Why not here? The executives I've spoken to say they are constantly looking at projects in the United States, but that navigating the matrix of state and federal laws can make the deals less attractive. Carew argues that a few changes in the tax code might help that problem. As it turns out, the biggest legislative challenge in supporting public-private partnerships may not be in convincing the transportation chiefs on Capitol Hill to act, but the tax writers.

For our insiders: What does the current U.S. market for private investment in infrastructure look like? Is it close to fair or wildly biased? How difficult would it be to lift the cap on tax-exempt private activity bonds? What about changing the Foreign Investment Real Property Tax Act? Are there other changes to U.S. law that could encourage public-private partnerships? What is the best that the country can hope for in terms of private investment in infrastructure, assuming the market worked optimally?

(Note: This is a moderated blog on transportation issues. Comments are approved on a case-by-case basis. Contact me if you want to be a regular commenter.)

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