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Michael Ross
March 15, 2021

Smith's Research & Gradings

An Infrastructure Program is Needed, But is it Feasible at This Time?

An Infrastructure Program is Needed, But is it Feasible at This Time?

Despite positive polling, the Biden Administration's first major piece of legislation was successful because enough Democratic senators agreed to tow the party line. But the process did not occur as smoothly as some may have believed.  We think that going forward, passing and implementing future major legislation will require a significant amount of political horse-trading.  Even that will not assure victory, because each side will be seeking to satisfy their constituents, especially with the 2022 mid-terms looming in the background.

Horse-trading has been a successful tool in the past, but we are living in a completely different political climate today.  Infrastructure is one area where horse-trading remains a viable option to finding common ground.  Most Congressional members still value the ability to "bring home the bacon" in their respective districts or states.  

In the coming weeks, details of Team Biden's vision will likely be revealed. A glimpse of this vision may already exist, but has flown under the radar because of airtime dedicated to the COVID-19 Relief package.  

On March 2, 2021 Transportation Secretary Pete Buttigieg announced that the U.S. Department of Transportation's (US DOT) Build America Bureau (the Bureau) has provided an up to $448.38 million consolidated Transportation Infrastructure Finance and Innovation Act (TIFIA) loan to the Central Texas Regional Mobility Authority (CTRMA) for tollway projects in the Austin, Texas metropolitan area. This is the first TIFIA loan to be closed under the Biden Administration. 

According to the US DOT, the TIFIA loan will finance a new project and refinance and replace two current loans that it provided to CTRMA for two tollway projects in November 2015 and March 2019, respectively. The new loans, at a lower interest rate, will save CTRMA more than $80 million in interest costs, providing relief from the COVID-19 pandemic. 

CTRMA privately placed $448,383,623 Subordinate Lien Revenue Bonds, Taxable Series 2021A that delivered on February 26, 2021.

Fluor Corporation announced on March 1, 2021, that Colorado River Constructors, its joint venture with Balfour Beatty Infrastructure, has opened the new U.S. Highway 183 South, formerly Bergstrom Expressway, one of Austin's most important arterial roadways.

The Fluor-led joint venture was awarded a $581 million design-build contract by the CTRMA in 2015 to design and construct approximately 8 miles of U.S. Highway 183 from U.S. Highway 290 in Austin, to State Highway 71 near Austin's Bergstrom International Airport.   CTRMA experienced problems in the past when the tollway operator SH 130 Concession Company, a partnership between Spanish-based Cintra and San Antonio-based Zachry American Infrastructure, defaulted in 2015 and owed banks and the Bureau, which had provided TIFIA loans to the project.

A possible glimpse of Biden's Infrastructure Program is somewhat reflected in the First Loans made by the USDOT to CTRMA.

A project seeking federal dollars must have the following characteristics: It must be purposeful and be capable of having an immediate impact on the local economy.

Upgrading and improving existing infrastructure projects would be consistent with the Biden Administration's Build Back Better theme.  
Potential projects seeking federal loans and grants must be cost effective and capable of generating operational efficiencies, as well as produce net savings that assure the repayment of federal loans.  

Biden's project focus on metropolitan areas with larger population concentrations, contrasts with the Trump administration policies with a more rural focus. (See Smith's Research & Gradings, September 28, 2020)

Public-Private Partnerships

P3s can leverage federal loans and grants — Under the TIFIA loans, repayment to the Federal government is typically subordinate and does not necessarily accelerate if other outstanding indebtedness defaults or becomes unduly stressed. The role of the private sector to bring capital will be a key ingredient.  

Also, potential projects will likely be required to have well-funded "Renewal and Replacement Reserves" to protect against unforeseen extraordinary events.  
Moreover, conduit issuers, like the CTRMA, have formed relationships with Public-Private Partnerships, which are beneficial to conduit issuers. In these relationships, the conduit must be willing and capable of providing leadership to forge and nurture relationships with the private companies.The private-sector companies must have solid reputations, capital market access, and sufficient financial flexibility to support the successful completion of the project.  Start-ups are still possible but will have to be beneficial to local infrastructure needs.

Finally, taxable municipal bonds could play a major role because of their ability to attract global buyers of U.S. debt securities.

Deficit Concerns Mount

The COVID-19 pandemic's effect on the economy continues to unfold and recovery signals have yet to materialize. It will take some time before an assessment can be made about the impact of the recent relief package on sparking a meaningful economic recovery. However, aggregate amounts spent by the federal government over the course of the pandemic have raised concerns by many economic experts. Continuing to engage in deficit spending is not sustainable, and the reins will have to be tightened.   Federal Grants will likely require higher matching funds by their recipients. If state and local government resources were also adversely impacted by the pandemic, it could result in scaling back the size and scope of President Biden's Infrastructure Program.  

Additionally, in September 2020, the CBO projected a cumulative transportation trust fund net deficit of $2.3 trillion.  The Transportation Fund has been instrumental in providing funds for roads and metropolitan transit systems. Transfers from Congress will likely be needed until a permanent source of funding for the Transportation Fund is developed and passed by Congress. This could prove to become another political battleground because of the possible effect on a growing federal deficit.  The current deficit is estimated to be approximately $130 billion (or 6 percent) larger than the $2.2 trillion deficit the CBO estimated in January 2020. Projections for the deficits were revised upward in part because of the economic disruption stemming from the 2020 coronavirus pandemic.

Vehicle miles driven impact the collection of the national gasoline tax. The gasoline tax has never been adjusted for inflationary effects and with improvements in fuel efficiency and a growing percentage of electric vehicles, gasoline consumption is down. The Transportation Fund has been underfunded for several years.  According to the Federal Highway Administration, US Monthly Total Vehicle, Miles Traveled is at a current level of 244,136 mln., up from 233,773 mln. last month and down from 272,191 mln. one year ago. This is a change of 4.43% from last month and -10.31% from one year ago. A rebound in economic activity is sorely needed to cause a substantial increase in miles driven, in order to have an impact on available revenues to pump dollars into the Transportation Fund.  

Politics and growing political factions will remain at the forefront of any proposed infrastructure plans. Stimulus funded through federal borrowing may prove to be challenging.  Horse trading is only viable if the two sides of the trade can obtain sufficient political value.

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