A Path to Federal P3s for Infrastructure? ABA Subcommittee Suggests Changes to OMB Budgetary Scoring

Much has been said already about President Trump's call to "rebuild our crumbling infrastructure," in his first State of the Union address. The President asked Congress to advance a $1.5 trillion infrastructure plan that, in part, should be "leveraged by partnering with state and local governments and, where appropriate, tapping into private sector investment."

But not all "crumbling infrastructure" is state and local infrastructure. The federal government's infrastructure also needs attention (e.g., river locks, some dams and levees, federal buildings, etc.). In late January of this year, a purported summary of President Trump's infrastructure "funding principles" briefly described two strategies for funding federal infrastructure: a planned executive order allowing for disposal of federal assets and creation of a federal capital financing revolving fund, presumably to help federal agencies finance their improvements.

Notably absent among these "funding principles" is availability of the P3 delivery strategy for federal assets. The likely reason is a remaining federal barrier: the need to change the federal Office of Management and Budget's (OMB) relevant scorekeeping guidelines when evaluating a large-scale, federal capital project.

Scorekeeping guidelines measure the budget effects of a proposed federal contract relative to the contracting agency's budget authority. For federal obligations under federal projects involving private capital, OMB Circular A-11 requires that all of any long-term obligation be "scored" in the first fiscal year, rather than in each fiscal year of the obligation. A fundamental, favorable risk allocation under many P3 structures is to contract for design and construction, but also to shift associated capital costs, to a private partner in exchange for the promise of repayments and a return over time. By scoring all such payments in the first year, the federal entity cannot realize this benefit of a P3.

On the same day as the State of the Union address, an American Bar Association committee published a white paper, titled "The Crisis in the Federal Government's Infrastructure: Additional Approaches to the Current Federal Budgetary Scoring Regime." The Committee's paper - a follow on to a white paper originally published in 2008 - was previewed in late November in a discussion about removing federal barriers to infrastructure development, which was held in Washington D.C. among the paper's authors, President Trump's Special Assistant for infrastructure, D.J. Gribbin, and several interested government employees, decision- and policy-makers, and private practitioners in the infrastructure space. Both papers describe in detail and then confront the impediment that the Circular A-11 scorekeeping guidelines pose to federal use of P3s, which effectively frustrate use of P3 project delivery to address pressing federal infrastructure needs.

In the 2008 paper, the Committee offered solutions to modify Circular A-11 scorekeeping guidelines to align the federal government with best practices for state and local (and international) infrastructure funding: changing certain scoring criteria, considering lease payments on the basis of their present value, treating sale/leaseback, purchase options or infrastructure projects as "operating leases" (thus removing them from the onerous scoring rule); and offering a menu of risk assessment, valuation and legislative change suggestions that lower projects costs or offer longer-term payment streams outside of the budget cycle.

The 2018 paper adds two suggestions. First, score the federal government's costs on net present value of cash flows from the government over the life of the transaction, taking into account the private party's obligations and adjustment for the risk of private party default, similar to its 2008 suggestion. Second, create "safe harbors" for infrastructure projects that allow annual scoring similar to that described above, arguing that existing and long-standing federal contracts that employ energy savings performance contracts (ESPCs) effectively do just that.

The removal of budgetary scoring impediments to consideration of new strategies for federal infrastructure projects - particularly those that have proven successful like P3s - merits consideration. As the President appears to be advocating for a partnership with state and local jurisdictions to solve many infrastructure challenges, the ABA papers offer suggestions to help solve the deficit of investment in federal infrastructure projects.

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