In a number of recent conversations regarding using Public-Private Partnerships (P3s) to deliver large infrastructure projects under an availability payment structure, I’ve heard a lot of angst by public owners over the cost of private finance and that AP’s may be viewed as “debt” by the rating agencies.  It’s true the rating agencies have indicated that AP’s can be considered debt for purposes of assessing an agency’s debt capacity but that’s only one aspect of the delivery method to consider.

S&P has issued several reports/FAQs regarding P3’s in the last couple of months, including the conditions under which the rating agency would factor in the annual AP when looking at a public agency’s debt profile.  But what caught my eye is their most recent report “U.S. State Debt Levels may be More Sustainable Than the Condition of the Nation’s Infrastructure”.   States have typically used tax exempt debt when there’s the need to advance construction of a major infrastructure project.  After noting the modest and sustainable pace at which U.S. states have issued debt since the financial crisis in 2008, S&P looks at the bigger picture—the infrastructure costs relating to long-term O&M that go well beyond the initial capital investment—these costs CANNOT be funded with tax exempt debt and except for major maintenance are not eligible for federal grant funding.  To highlight the issue S&P cites an analysis by the Congressional Budget Office (CBO) suggesting that more than half (50% to 55% from 2000 through 2007) of total public spending on transportation and water infrastructure has been for O&M. These estimates may even be understated because they exclude spending on public power, equipment, or buildings. According to S&P, “relying solely on traditional forms of tax-secured debt to finance the nation’s infrastructure needs, therefore, would likely result in negative credit pressure for numerous states. Furthermore, by overlooking the O&M costs, the estimate presented above almost certainly understates the fiscal pressures that would arise from an exclusively debt-financed approach.”

In conclusion S&P opines that the states can’t solve their infrastructure gap with debt financing alone.  “We anticipate that both because of what it would do to their direct debt levels and because of the O&M implications of funding the nation’s infrastructure needs with tax-supported debt alone, states will increasingly consider alternative financing strategies. P3s are one such avenue.”