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Announcement:

Moody's: The Trump administration's infrastructure plan provides opportunities for public and project finance, but significant challenges stand in the way of $1.5 trillion investment target

29 Mar 2018

New York, March 29, 2018 -- Moody's Investors Service has issued a pair of reports examining the potential impact of the Trump administration's infrastructure plan on a range of sectors related to public and project finance. While the limited new federal funding, increased availability of low-cost financing sources and supportive regulatory changes would provide much-needed capital for addressing the infrastructure gap, the ultimate impact on debt issuance for actual projects remains unclear.

The Legislative Outline for Rebuilding Infrastructure in America involves $100 billion in new federal infrastructure grants to states and local governments for projects that are least 80% funded by non-federal sources. An additional $50 billion would be distributed to states as block grants for rural communities. The proposal also expands eligibility and increases funding for low-cost financing sources with TIFIA, WIFIA and private activity bonds (PABs), and aims to streamline permitting and environmental review processes.

"An injection of $200 billion into the municipal sector would be a noticeable and much-needed increase in federal infrastructure spending over the next decade," says Marcia Van Wagner, a vice president at Moody's. "However, the plan relies on the ability of participants to increase leverage and attract private sector partners, which may be unattractive or unattainable in light of state and local funding constraints and competing budget demands."

State governments are central to the administration's approach to infrastructure stimulus given their broad legal powers to implement taxes and fees. Compared to local governments, states also have more flexibility and greater institutional capacity to line up funding sources, including from private sector partners. These qualities make state governments the best positioned entities for the new funding approach at the federal level.

However, absent new recurring revenue sources or meaningful revenue growth, states will face constraints on spending priorities in the coming years due to rising pension and Medicaid costs. State governments would likely find it difficult to fund additional debt to meet requirements for federal grants, which many states will find unappealing or unrealistic.

For large local governments, the plan's emphasis on competitive grants and matching funds presents opportunities given their capacity to raise revenue and engage in large-scale capital planning. Large local entities are also often better able to manage more complex alternative procurement options like PPPs.

Much like state governments, however, competing spending priorities would limit local governments' capacity for capital investment given the steep cost of attracting federal dollars under the plan. Most local governments have annual operating revenues of less than $100 million, and the costs required to receive significant federal funding would preclude their ability to take advantage of the administration's funding approach.

The administration's plan would make it easier for transit systems to manage their capital projects with their own resources, but would not provide additional federal funding support. Additionally, it would make the use of incremental tax growth around transit hubs -- known as value capture -- a prerequisite for Section 5309 Capital Investment Grants. Given the difficulties that many systems would have in implementing significant value capture, the federal infrastructure plan could actually decrease the availability of the 5309 program, which is administered by the Federal Transit Administration in the form of grants for transit, light rail, commuter rail, bus rapid transit and other fixed guideway systems.

"While budget constraints and political concerns may limit state and local governments' ability to deliver new revenue sources, certain infrastructure sectors have the capacity to generate the revenues required to leverage the new federal funding," says Moses Kopmar, an analyst at Moody's.

According to Moody's, among infrastructure sectors, toll roads are the best positioned to identify new revenue sources to attract federal funding. The infrastructure plan provides federal authorization for states to toll interstate systems, and local momentum appears to be building in several locations throughout the country. The magnitude of these potential new revenue sources would advance surface transportation investments more quickly than existing tax-supported federal grant funding would allow.

The proposed expansion of TIFIA eligibility to airports will provide an option for lower-cost debt issuance with a wider investor base. The proposed elimination of the alternative minimum tax on PABs would also reduce borrowing costs on terminal development projects. However, Moody's expects project necessity and airline support to remain the key determinants of new capital investment in airports.

Similarly, the proposal would expand TIFIA eligibility to seaports and remove the volume cap on transportation PABs, both of which would support increased access to capital for the sector. Ports and inland waterways would also be considered eligible asset classes under the rural infrastructure program, and would benefit from the proposed streamlining of the environmental review apparatus.

The plan also proposes to extend and expand the WIFIA program, which could subsidize the capital costs of water and wastewater infrastructure investments. Additionally, it would expand PAB eligibility to flood control and storm water facilities and eliminate the current state volume caps for PABs based on population for clean water and drinking water projects.

For the power sector, the plan's streamlined permitting process would reduce project lead time, administrative inefficiencies and regulatory costs -- each of which would promote sponsor investment. The plan would also broaden PAB eligibility to hydroelectric generating facilities and make a new source of federal funding to power generation, transmission and distribution projects in rural areas.

"States, local governments, transit authorities -- US: State, local infrastructure borrowing boom unlikely without greater federal funding," is available to Moody's subscribers at

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1112626.

"Infrastructure & Project Finance -- US: White House plan supports investment to varying degrees across sectors," is available to Moody's subscribers at

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1116366.

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NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Moses Kopmar
Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Marcia Van Wagner
VP - Senior Credit Officer
Public Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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