February 27, 2020
Game Over: CBO Calls a Tie on Cost of Capital
One of the well-known, yet misplaced arguments lodged against private infrastructure finance is cost: why, in the opponents’ view, would an agency deliberately increase their borrowing costs by using seemingly more expensive private equity or debt, rather than the alleged “cheaper” option of traditional municipal bonds?
As public agencies and the P3 community at large know well, opponents of private infrastructure finance wield this battle axe at nearly every opportunity. Just the expression of interest by a well-intentioned governor or mayor is enough.
Privatization! Wall Street fat cats! Foreign ownership! Sadly, that kind of reaction is incentive enough for our representatives to keep their heads down, focused only on “the way we’ve always done it” because that’s the best way to stay out of trouble.
Well, in case you missed it recently, into this intrepid debate stepped the highly influential accountants at the Congressional Budget Office. In an applause-worthy January 21, 2020 report entitled Public-Private Partnerships for Transportation and Water Infrastructure, the Capitol Hill watchdog said something out loud that was nothing short of revolutionary for the U.S., but has been well-understood in other countries:
“In general, the overall cost of private financing is similar to that of public financing when interest rate subsidies, the cost of risk, and transaction costs are accounted for.” CBO continues, “Even though the interest rates on tax-exempt municipal bonds are relatively low, ultimately the cost of the private financing itself is roughly equal to the cost of public financing…”
And with the P3 community gathering in Dallas next week, CBO spoke directly to the P3 model: “The total cost of a public-private partnership does not depend on whether its financing is provided by the public sector or the private sector. If financing is provided by the public sector, the taxpayers directly bear the cost of servicing any debt and indirectly bear the cost associated with the risk that the value of the infrastructure will be unexpectedly low (or high) relative to the cost of the financing.”
I am a former Congressional Chief of Staff. Like many others who have worked in Washington, I have had plenty of opportunities to take umbrage with CBO’s views. But this report is different. It says something clearly that almost all of us in the P3 and private infrastructure finance community hammer on nearly every day: when it comes to the cost of capital and the cost of risk that resides on someone’s balance sheet, there really is no difference between municipal debt finance and properly structured alternative finance.
CBO continues: “The interest rates on some tax-exempt bonds do not incorporate the cost of the risks inherent in projects they finance. When bonds are backed by the government, which has the authority to raise taxes if a project does not bring in anticipated revenues, bondholders have generally not required higher interest rates because the risk of default is borne by taxpayers rather than the bondholder.”
The report continues a few sentences later: “Similarly, if cost overruns or delays make a project more expensive and postpone its use, state and local taxpayers absorb those costs as well.”
The deeper issue here is what infrastructure finance experts call the “unrecognized risk” fallacy in municipal general obligation financing. Put more succinctly, it’s “knowing exactly what we’re paying for.” Recognizing and pricing that risk, which is inherent and significant to any complex infrastructure project, is just good government and good management. It means being transparent with the taxpayer and with elected officials on what this project is going to cost over its entire life. This is what private infrastructure finance and the disciplined due diligence of a P3 works to accomplish for agencies.
Does that due diligence and public transparency take more effort? Yes. But as Americans and taxpayers, I’ve got to think that making the business case for the proposed delivery method should be the standard – and not the exception.
For argument’s sake, let’s say that CBO seems objective and fair in its assessment. I think the question shouldn’t be whether we should consider private finance. Rather, I think if private investors are willing to shoulder some risk and help protect our shared investment, we should instead ask: why wouldn’t we as taxpayers take full advantage of that opportunity?
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Marshall Macomber is President of ThinkP3 and Senior Policy Advisor for the Association for the Improvement of American Infrastructure (AIAI).
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