Since President Joe Biden signed the Infrastructure Investment & Jobs Act (IIJA) into law at the end of last year, politicians and industry experts have been lining up to talk about the legislation’s potential to transform America.
Biden himself believes the Act provides a crucial part of his wider package to rebuild the country, while many economists hope that the trillion-dollar-plus investment promised through the Act can stimulate an economic recovery that literally builds the US out of the slump caused by restrictions imposed to reduce the deadly threat of the Covid-19 pandemic.
However, there remains plenty of caution in the market, as some experts point out that putting the architecture around the IIJA to make it work efficiently and effectively will take time.
“There is a grab-bag of things that the Act proposes to offer,” says Nic Sarad, partner at law firm Bracewell. “It is all about how and if each one gets implemented.”
From a P3 perspective, the IIJA holds out plenty of promise, but turning that into real projects on the ground will be a long process. Roddy Devlin, partner at law firm Nixon Peabody, explains: “It is a seismic change but it won’t be immediate. Some grant funds that will be allocated in the short term, and projects like the Gateway Tunnel can count on receiving long delayed funds, but much of the rest - including funds under the TIFIA program - are subject to DC rule making, so it will be a while before those funds start to flow to projects.”
“We are cautiously optimistic about the legislation’s impact on P3s overall, and the opportunity it provides for private equity participation across all sectors,” adds Sia Kusha, group head of business development & partnering at Plenary Group. “We, (the industry) are now working with several federal agencies to ensure that P3s are included in the rule-making process. Once the rule-making process is completed, which could take a year or two, there will hopefully be a great opportunity for the private sector to participate in project development and delivery across all sectors.”
So those hoping to see a raft of new P3 projects emerging as a direct result of the Act will need to be patient.
However, when the money does begin to flow, there is one sector that could benefit significantly - and is an area of the Act that has largely been overlooked in much of the discussion around its potential: transit-oriented development (TOD). According to Devlin, the language relating to transit-adjacent investment is “one of the hidden gems” in the IIJA.
As part of the expansion of the TIFIA program included in the Act, the new wording allows for TIFIA loans to be used for public infrastructure located near transportation facilities, to promote TOD. The White House fact sheet produced following the passage of the IIJA states that the legislation includes $39bn of new investment to modernize transit, in addition to continuing the existing transit programs for five years through the reauthorization of surface transportation legislation.
“In total, the new investments and reauthorization in the Bipartisan Infrastructure Deal provide $89.9bn in guaranteed funding for public transit over the next five years - the largest federal investment in public transit in history,” the White House claimed.
“The new adjacent real estate element for transit projects is the closest we get in the Act to investment for social infrastructure,” says Sarad. He explains that there had been hopes in the industry for an equivalent to TIFIA that could support social infrastructure projects, perhaps through an expansion of the private activity bonds (PABs) regime.
Nonetheless, Sarad and others are hopeful that the expansion of TIFIA will lead to the development of more transit-oriented infrastructure. “If states can find ways to diversify the use of funds from the Act for real estate around TOD, for example to install EV charging stations (which is promoted by the Act), that would be a powerful linkage, and a means to maximize the value of the federal support,” he adds.
Kusha agrees that the changes will “certainly provide additional opportunity” for the private sector to expand into TOD, but the types of organizations that will be involved will also be interesting. While Kusha’s Plenary can operate in this space, there are plenty of P3 companies that may balk at taking on what is essentially a real estate play.
“There is a bit of a line between real estate developers and P3 developers,” says Devlin. “But once real estate developers realize they can get low-cost government loans to build a hotel or commercial development if it includes work on a railway station, for example, there is likely to be a lot of demand for TIFIA financing from this sector.”
Sarad’s colleague, Fernando Rodriguez Marin, suggests there is strong interest from real estate companies looking to get into the P3 space. “Many have had experience in military housing, for example, so we would expect those to come in,” he says. “That should be an area to grow, and having TIFIA soft loans available for that would be a great incentive for investors in new transit-oriented transportation projects.”
The other side of this coin is to what extent the federal government will be willing to move into the real estate area as a way to deliver the transportation infrastructure it believes is required. How far will the government go to support new shops, offices and housing to get its train station built?
As one source points out, TIFIA has generally been timid and not pushed the envelope, so it will be interesting to see to what extent the mechanism will be used to support commercial developments. There is enthusiasm within the US Department of Transportation for using P3s to stimulate development, so there is some optimism that this will put pressure for TIFIA to be distributed in a more innovative way than has previously been possible.
The big question that hangs over all of this, however, is whether TOD is still in demand in 2022. While it has been seen by many across the world as an obvious way to get infrastructure built while serving commuters looking for quick and reliable access to their offices, the impact of the Covid-19 pandemic of the past two years has changed the way in which millions of people work. And although there remain plenty of jobs that require people to be on-site, the pandemic has resulted in many people discovering they are able to have a less intimate relationship with their office and still get their work done.
So building a tower block on top of a new station in the suburbs may not be the no-brainer it was a few years back. Working out commuter patterns and where to put new infrastructure to support those who do need to ride into the city center will be a harder job - especially at present, as businesses and individuals around the globe strive to find the right balance amid the continued threat of the virus.
North of the border, there was some insight into the thinking on this area during November’s CCPPP conference, when Infrastructure ontario chief executive Michael Lindsay suggested that the province had such a large backlog pre-pandemic that new transit development would remain a necessity.
In the US, many cities will be in a similar position, and there are signs that the flight out of urban areas seen at the start of the pandemic has now largely dissipated. In October 2021, for example, figures from New York revealed that apartment sales in Manhattan reached a 30-year high. “That says that the cities are back, and suggests TOD won’t suffer: TOD also often helps link cities to more rural areas as well, enhancing those property values,” says Sarad.
“The transit owners and operators that we speak to are indicating numbers are beginning to come back and the impact of the pandemic is beginning to wane, although we need to see what impact Omicron will have in the short term,” adds Kusha. “We believe the current pandemic will eventually become an endemic health issue, similar to other known illnesses that we currently deal with on a regular basis. As such we believe daily activities will return to a new normal and infrastructure needs will continue to be addressed in a variety of ways.”
Experts also point out that, as discussed above, it will take years for the IIJA monies to trickle down into projects, so by that time the picture related to the pandemic will be even clearer.
“People may work from home more than before, but most passengers are back and the need for efficient transportation is as real as it was before,” concludes Rodriguez Marin. “Residential projects will continue to be successful where there is a transportation link.”
The difference today is that the expansion of TIFIA through the IIJA may give the industry the investment stimulus it needs to deliver those projects at scale, in a holistic manner that creates well-connected communities.