Infrastructure Plan Could Be Great for Private Bonds, but Lags in Overall Funding

A recent Fitch Ratings report finds that one highlight of the Trump administration's infrastructure proposal would be that it could expand private activity bond (PAB) usage and speed the approval process, which would be credit positive for infrastructure projects.

"However, the proposal's effects on overall infrastructure development will be small as the proposal lags the need in the U.S.," the report concludes. "In addition, there are political risks to implementation with uncertainties including legislative support and potential opposition from states."

Under the plan, PABs would be applicable to a wider range of infrastructure projects and would also increase the amount of PABs that could be issued by raising state volume caps, Fitch said. This expansion would offer a wider set of funding options and could enhance private investment in infrastructure, thus potentially benefiting the country's aging infrastructure. "It is Fitch's view that the current range of funding options is too narrow."

Environmental permitting timeframes would also be reduced by putting the agency with the most expertise in the lead and giving it a coordinating role, analysts said. Faster projects would bolster project credit, assuming legal exposures aren't increased.

The proposal includes $200 billion in federal funding over 10 years, with $50 billion in block grants going directly to state governors for rural infrastructure, $10 billion for federal office building infrastructure and $20 billion to expand existing federal loan programs and PABs. The funding amounts are underwhelming. As an example, the Gateway Program to expand the train connection between New Jersey and New York City is a $12.9 billion project alone.

The plan also doesn't address the ailing Highway Trust Fund, the primary source of existing federal support for infrastructure, which the Congressional Budget Office estimates will run dry in two years.
"Providing funding from state tax revenues could be challenging for some state and local governments as many have already raised revenues in recent years to fund infrastructure investments and general revenue growth has been slow," Fitch said.

– Nicholas Stern, managing editor