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What Is the Infrastructure Investment and Jobs Act?
The $1.2 trillion Infrastructure Investment and Jobs Act, signed into Law in November 2021, authorized $550 billion in new spending over the next few years on a variety of infrastructure projects. Much of that spending will be at the state and local levels. In addition to authorizing an historic investment in infrastructure, the Infrastructure Investment and Jobs Act encourages public/private partnerships (P3s) to sponsor infrastructure projects and amends some rules regarding the use of private activity bonds to finance them.
What Are Private Activity Bonds?
Private activity bonds are debt instruments issued by state or municipal governments to help finance construction projects sponsored by public and/or private entities for the benefit of the public. These are financial instruments to attract private sector investment, not to be confused with surety bonds. Investors who buy private activity bonds are lending money to a state or municipal entity and earn interest on their investment, with the principal being returned to them at the end of the bond’s term, when the bond reaches maturity.
Private activity bonds allow states and municipalities to borrow from investors on behalf of private companies that otherwise would have to rely on bank loans or issue their own corporate bonds. These are not always viable or affordable options for smaller or newer construction companies.
Many private activity bonds are “qualified,” meaning that the interest earned by investors is tax-free. The federal government sets the criteria for private activity bonds to be tax exempt. Examples include private activity bonds issued to finance airports, commuting facilities, water and sewer facilities, and docks and wharves. The Infrastructure Investment and Jobs Act not only allocated $65 billion for broadband infrastructure in underserved areas but also added a new category of tax-exempt private activity bonds for financing qualified broadband projects. (The Act also added carbon capture projects to the list of construction projects eligible for tax-exempt private activity bonds.)
Private Activity Bond Volume Caps
One major impediment to the issuance of private activity bonds has been the federally mandated volume caps, which limit the total dollar amount of qualified private activity bonds that can be issued each year. In 2021, the total amount available for private activity bonds nationwide was $15 billion. That total amount is allocated among the states and capped at a certain amount for each state.
Each state’s cap or “state ceiling” is based on the state’s population and is recalculated annually. The ceiling amount is allocated among the various issuers of qualified private activity bonds within a state. The amount allocated to each issuing authority is referred to as the issuer’s volume cap. Any private activity bond that exceeds the issuer’s volume cap would not qualify for tax-exempt status.
To stimulate private sector investment in infrastructure projects, the Infrastructure Investment and Jobs Act doubled the total available private investment bond authority from $15 billion to $30 billion and exempted the $30 billion from state volume caps. This lowers the cost of capital for private sector entities and P3s interested in sponsoring infrastructure projects.
Advantages and Challenges of P3 Project Sponsorship
The Infrastructure Investment and Jobs Act encourages public-private projects as a way to bring fresh ideas and technology innovations to the table. P3s seem to work best for large or complex projects, which is what infrastructure projects tend to be. Several states have already implemented broadband and electric vehicle charging initiatives involving P3s.
One of the key challenges for construction companies that have little or no history working on private sector projects is their lack of experience with meeting construction bonding requirements. Companies that have worked on public works projects most likely have had to purchase performance and payment bonds to satisfy the bonding requirements mandated by the federal Miller Act of 1935 or the “Little Miller Acts” that exist at the state level. Although the number of private project owners requiring bonding of construction contractors is increasing, they have been relatively uncommon in the past.
However, the Infrastructure Investment and Jobs Act now requires payment and performance bonds for all federally funded infrastructure projects, including those with a private-sector co-sponsor. Additionally, the changes made to the Transportation Infrastructure Finance and Innovation Act (TIFIA) by the Infrastructure Investment and Jobs Act now mandates construction bonding for both public and private sector projects financed through TIFIA, with performance and payment bonds being the most commonly required.
Contractors hoping to participate in P3-sponsored infrastructure projects need to make establishing a relationship with a reliable surety bond provider and developing their bonding capacity a top priority.
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