Could Asset Recycling Be the Answer for Trump Infrastructure Plan?

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In my April column in Public Works Financing, I pointed out that the Trump Administration faces a dilemma in its quest for a $1 trillion infrastructure program based largely on private capital investment via public-private partnerships (P3s). Any such program must be enacted by Congress, and therein lies the problem.
Most Democrats and many Republicans from rural states insist that a significant portion of the $1 trillion must be net new government spending. This is partly because the kinds of P3 projects investors are interested in have user-fee revenue streams—and few such projects are likely in rural states or for infrastructure like school buildings and new city halls that many legislators would like included. On the other hand, fiscal conservative members will insist that any net new federal spending must be paid for (generally by spending cuts), rather than being added to the national debt. So where is net new money for non-revenue-producing infrastructure going to come from?
One idea getting increasing attention is “asset recycling,” as pioneered several years ago in Australia and now under serious consideration in Canada. The basic idea is for governments to sell or long-term lease existing revenue-producing infrastructure (airports, bridges, highways, seaports, etc.) and use the up-front proceeds to invest in other infrastructure that does not have its own revenue stream. An example I used in the PWFcolumn is the Gateway Project in the New York metro area: new Amtrak and commuter rail tunnels under the Hudson River whose price tag (including various connections on both sides of the river) is $24 billion. Since neither Amtrak nor commuter rail does more than cover its operating costs out of the farebox, this project could not be financed as a revenue-based P3.
However, the lead agency—the Port Authority—owns revenue-positive transportation assets that it could sell or lease, as governments worldwide have been doing in recent decades. My January 2017 study for the Manhattan Institute estimated the market value of the PA’s three major airports as $16.4 billion, the bridges and tunnels as $28.2 billion, and the seaports as $3.3 billion, for a total of $47.9 billion.
What the federal government could do is to encourage state and local governments to engage in this kind of asset recycling, while making sure federal laws and regulations don’t stand in the way. One form of encouragement would be to provide incentive grants to such governments on condition that the net proceeds from sale/lease transactions be spent solely on needed infrastructure. A possible source of funding for such grants would be a portion of one-time federal revenues repatriated by corporations in response to proposed lower corporate tax rates.
Australian states (such as New South Wales and Victoria) have been doing this for years, most recently selling or long-term leasing (under P3 concessions) major seaports and electric utility enterprises. For several years, Australia’s federal government offered states a 15% bonus payment on net asset proceeds if those proceeds were all invested in needed infrastructure. Canada’s federal government is seriously considering a similar asset recycling program, with Toronto’s Pearson International Airport as a potential first candidate. In Brazil, the Sao Paulo state government just closed a deal under which Abertis agreed to pay $453 million up-front for a 30-year P3 concession to expand and modernize 250 miles of existing toll road, with the state government using the proceeds for other infrastructure.
Could such a plan actually gain traction in this country? Consulting firm McKinsey has urged both the Canadian and U.S. governments to pursue such a course. And last month Steven Ross, co-chairman of the President’s infrastructure task force, at a Bloomberg panel discussion, expressed interest in Australia’s asset recycling program, as described by fellow panelist John Schmidt of law firm Mayer Brown. At the forum, Schmidt also pointed to the long-term lease of the Indiana Toll Road as a U.S. precedent for asset recycling, in which the net proceeds were used for a 10-year program of highway capital investment in the state. Around the same time, the CEO of Blackstone Group, Steve Schwartzman, suggested in a TV interview that the United States emulate the Australian model.
Over the last five years, the 50 largest global infrastructure investment firms raised $250 billion, according to data compiled by Infrastructure Investor. Many would eagerly invest in U.S. airports, bridges, highways, and seaports if only there was a pipeline of projects open to revenue-based P3 investment. So would a great many domestic and overseas pension funds. They don’t want or need a tax credit (as proposed by the Trump campaign last fall). All they need are projects open to P3 concessions. Congress could open the door to such a pipeline of projects.
(This article first ran in the May issue of Surface Transportation Innovation)
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Study Questions Ethanol's Image

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The Heritage Foundation Blueprint for Agriculture includes a lengthy chapter on U.S. biofuels policy and the renewable fuel standard (RFS). Heritage concludes that ethanol and other current biofuels are harmful to agriculture, the environment, and consumer.
My first two reviews of Heritage’s positions on ag, found here and here, may have concerned you; I suspect the charges made by Heritage against ethanol will anger many of you.
Heritage claims the U.S. biofuels policy “is a case study in the unintended consequences of government intervention.” For example, biofuels have created higher livestock prices for livestock farmers and ranchers. Heritage suggests biofuel policies, over a 30-year time frame, have diverted over $35 billion in taxpayer money to agriculture. It goes on to conclude renewable fuel mandates have assisted corn growers at the expense of livestock producers. (I suspect my friends in the livestock community are not complaining about corn prices now.)
Higher food prices?
The report claims “The renewable fuel standard has certainly contributed to increased prices [in food].” To support this charge, Heritage quotes the USDA Economic Research Service, which writes, “Increased corn prices draw land away from competing crops, raise input prices for livestock producers, and put moderate upward pressure on retail food prices.”
Heritage also claims that diverting food to fuel has hurt both rural America and the world’s poorest citizens. I suspect there is some dispute over this assertion.
The report relies on the 2012 summer drought to assert that existing subsidies for ethanol and other biofuels “needlessly” diverted food to fuel. Although the report does accurately state “The magnitude of the ethanol mandate’s effect on corn prices and overall agricultural products is difficult to determine, partly because of the uncertainty of estimates regarding how much ethanol would be used for fuel absent a mandate…”
Heritage claims biofuel programs and the renewable fuel standard create unintended adverse environmental consequences. Heritage cites the United Nations’ Intergovernmental Panel on Climate Change (IPCC). IPCC asserts that United States biofuel policies negatively harm the lives of the poor and divert land to produce biofuels and suggests biofuels have “…dubious climate impacts.”
EPA is also quoted. Regarding renewable fuels, EPA writes, “…that increased renewable fuel would result in higher emissions of air pollutants such as particulate matter and nitrogen oxides while adversely impacting water quality.” (A dubious claim.)
Heritage has specific recommendations to the new farm bill relating to biofuels such as ethanol and biodiesel. For example, it believes the Renewable Fuel Standard (RFS) has promised a great deal but delivered little. Heritage believes “…bioenergy policies have hurt taxpayers, energy consumers, the environment, the world’s hungriest citizens, and the large segment of the agricultural community that does not profit from subsidies and the RFS.”
Repeal all energy programs in farm bill
Heritage would have Congress repeal all of the energy programs in the farm bill set forth in Title IX as well as those in Title VII. It further requests that the new farm bill repeal the renewable fuel standard in its entirety and have consumers determine how much biofuel they want to buy at the pump. It wants Congress to repeal not only the corn-based ethanol requirements but also get rid of the cellulosic requirements.
Heritage has a valid point in asking Congress to eliminate the cellulosic ethanol requirement. For example, the RFS mandates that 16 billion gallons must be created by 2022. In 2010 the U.S. was to “create” 100 million gallons of cellulosic fuel. In 2010 only 6.5 million gallons of cellulosic fuel was refined. Clearly this requirement is nonsense. For example, in 2016, the nation was to create 4.25 billion gallons of cellulosic biofuels. EPA mandated 230 million gallons and the production is so insignificant Heritage doesn’t even give a number. This nonsensical requirement does require the refiners to spend millions of dollars because they cannot comply with EPA’s minimum volume requirements because the fuel does not and cannot exist. These fines on the refiner, imposed by EPA, are passed on as costs to the consumer. As on so many issues, cellulosic requirements are simply out of touch with the market.
Again it is important to read and understand what the Heritage Foundation is advocating which may have an impact on your bottom line.
(This article first appeared in Farm Futures on June 8, 2017)
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Tax Reform is Key to Virginia's Future

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As of March 2017, our state’s unemployment rate was over 3%. Granted, these numbers are not awful, but I would argue there is room for improvement.  Many of these jobs are held by people who had better paying jobs just a few years ago.  And we still have too many who have taken themselves out of the potential work force and this makes that 3% number look better than it really is.
Our state’s economy should be and can be much stronger. The most important thing we can do to make this a reality is overhaul the burdensome federal tax code.
It’s been more than 30 years since our tax system underwent serious reform. Today, the tax code is too complex, too long, too unfair to small businesses (where most employment takes place), and has a far too high corporate rate. These factors prevent Virginia’s small businesses from growing, creating jobs, and maintaining vibrant local communities. The Thomas Jefferson Institute for Public Policy supports tax reform that will put in place a lower tax rate and foster an environment in which Virginia’s business community and our citizens can thrive.
The current federal tax code is incredibly complex and far too long—roughly 70,000 pages of incomprehensible jargon. This complexity makes it nearly impossible for small-business owners to file their own taxes, effectively forcing our small businesses to hire expensive professional tax preparation services.  This is also true of the average taxpayer who finds the tax code simply too complex to navigate without professional help.   
At the same time, big businesses and the wealthy individuals can afford armies of lawyers and accountants to make sure they pay as little tax as possible by taking advantage of the loopholes that are buried inside these 70,000 pages.  This gives big business a major competitive advantage over small-business rivals. The tax code must be made more fair for small businesses by getting rid of the vast majority of these loopholes while also greatly simplifying the tax code itself.
At the same time, it is vital that Congress and the President actively work to cut the corporate tax rate down considerably. At 35%, our nation has a corporate tax rate that is the highest in the industrialized world. This puts all American businesses at a significant disadvantage in the global marketplace. Cutting the rate to a more reasonable level — maybe to 20% — would go a long way towards improving the competitive position of the U.S. business community.  Indeed, a couple of years ago in congressional hearings, business executives testified that they would support getting rid of many loopholes if the corporate tax rate was significantly reduced.  Yet, nothing has happened!
If our leaders in Washington, D.C., are able to pass a modernized tax code along these lines, their efforts will translate into higher paying jobs and a more competitive job market in Virginia, stronger growth, and thriving small businesses, wealthier working families, and more vibrant communities.
Congress and the President have both introduced plans that generally align with the pro-growth approaches outlined above. Now they must move forward and actually get a final plan passed and on the books so our state and nation can return our economy to robust growth.
An economy that is growing at a more reasonable and historic rate of 3.5% to 4.00% (which we haven’t seen in ten years), will do wonders for our country.  Our companies will prosper, more people will be hired at better wages, the federal deficit will decrease, our entitlement programs will be on firmer financial footing, etc.
We cannot afford to wait any longer or we will pass up this unique opportunity. In 2017, both houses of Congress and the White House are in Republican hands.  This should make reasonable tax reform easier.  We may not see another chance like this to reform the federal tax code for a very long time. It is time for our elected officials to support serious tax reform that will encourage economic growth, boost investments in the Commonwealth, and create a more robust economic future for all Virginians.
For too long, we have accepted the status quo and allowed our small-business communities to suffer and placed our major corporations in a less competitive position worldwide.  This has been done by policy voted on by our elected representatives. It’s time to make the tax code work for better for our businesses, large and smaller, and for our families as well. It’s time we close unfair loopholes, lower our tax rates on businesses and on individuals. And we must not forget that many small businesses are “Subchapter S” corporations and pay taxes at the individual tax rates.  Lower individual taxes will be a big boost to these small businesses.  Tax reform will re-energize Virginia’s business community bringing wholesome good-paying jobs back to our state.  It will do the same nationwide.
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Building on Virginia’s Data-Center Boom

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Map credit: “Intertubes: A Study of the US Long-haul Fiber Optic Infrastructure“


Data centers are the hottest trend in Virginia economic development these days. But the state is only beginning to think through the implications.
Loudoun County, home to 75 facilities, has developed the largest cluster of data centers in the country (and perhaps the world), and next-door-neighbor Prince William County is rising fast. Rural Mecklenburg County has attracted nearly $2 billion in investment as the location of Microsoft’s East Coast hub for online services. QTS has retrofitted an old microchip factory in Henrico County to open a data center, while DP Facilities, Inc., opened a $65 project center in Wise County. Soon, Virginia Beach will enter the data-center sweepstakes when construction is complete on a 4,000-mile transatlantic cable connecting Virginia to Europe.
According to Paula Squires writing in Virginia Business magazine, Virginia boasts more than 650 data processing, hosting and related establishments that employ more than 13,900 people. Since 2006, the industry has announced more than $11.8 million in new investment and 6,600 jobs. The jobs, while relatively few in number, pay well (more than $100,000 a year in Northern Virginia), and generate a gusher of local taxes.
Billions of dollars are flowing into the sector as the global economy embraces cloud computing to handle the massive surge in data collection and storage. A Markets and Markets research report estimates that the cloud storage market will grow from $23.76 billion in 2016 to $74.94 billion by 2021 — a compounded annual growth rate of 25.8%.
Loudoun County was one of the first localities anywhere to see the economic development potential. The county had a built-in advantage — a massive network of fiber-optic cable built by AOL and WorldCom during the heyday of the 1990s Internet bubble. WorldCom went bust and AOL has a much-diminished presence, but the cable infrastructure remained — and high-capacity connectivity is an essential prerequisite for a data center. Loudoun claims that 70% of the world’s Internet traffic passes through the county. The concentration of data centers is so pronounced that economic developers refers to a six-mile radius around Waxpool Road and Loudoun County Parkway as “data center alley.”
The county has built on its infrastructure advantage by learning how to expedite zoning, permitting and construction. CyrusOne completed construction of a 220,000-square-foot data center in Sterling in 180 days — reputedly the shortest construction time fever for a center that size, reports Squires.
To incentivize investment, the state exempts computer equipment bought or leased for a data center from the retail sales and use tax. Henrico County has dropped its business property tax rate on computers and related equipment from $3.50 to $.40 per $100 of assessed value.
Also, Dominion Energy has emerged as a significant partner. The endless racks of servers inside data centers consume electricity and generate heat, which must be cooled by massive HVAC systems. Dominion charges 5.2 cents per kilowatt hour for large facilities, and a slightly higher rate for small ones. “We’re very competitive,” says Stan Blackwell, director of customer service and strategic partnerships for Dominion. “We have some of the lowest data-center rates in the nation.”
Bacon’s bottom line: The rise of the data-center industry raises two pointed sets of public policy questions.
First, how can Virginia optimize this opportunity? What are the critical drivers? Obviously, the existence of high-capacity fiber networks is one consideration. It appears from the map atop this post that Virginia has one of the densest clusters of long-haul fiber capacity in the country. How crucial is that advantage? Does Virginia’s proximity to a relatively fiber-poor Southeastern U.S. give data centers serving that market an edge? Is the competitive advantage bequeathed by fiber-optic infrastructure such that Virginia should consider encouraging investment in more? Conversely, does it do any good for Virginia to invest in its own fiber infrastructure if connections to neighboring states are lacking? Many, many questions.

Electricity is one of the largest costs associated with operating a data center, accounting for roughly 10% of the total cost of ownership — and it is one of the largest costs that vary by location. Dominion’s electric rates confer a significant competitive edge for locations within its service territory.

Graph credit: Dominion Energy

One of the biggest challenges for Dominion — and the further expansion of the data-center industry — is delivering electricity to these data centers. In one particularly controversial case, the utility wants to build a 230 kV transmission line and substation from Gainesville to Haymarket to serve an Amazon data center. Locals have organized in opposition, claiming that the 100-foot-tall towers will disrupt views and harm property values to benefit a single industrial customer. They insist that Dominion bury the line at considerable expense. If Virginia wants to develop the data-center industry more fully, it may need to find ways to resolve the inevitable utility-landowner disputes fairly expeditiously. No company wants to wait years to find out whether a project will get the electric power it needs.
A second big public policy question centers on the implications of the data-center boom for electricity demand in Virginia. According to Virginia Business, data centers represent Dominion’s fastest-growing customer segment: About 7% of the company’s retail portfolio consists of data centers.
This feeds into the debate over Dominion’s future electric generating mix. Dominion’s 2017 Integrated Resource Plan (IRP) assumes that electric load will increase at a compounded rate of 1.5% over the next 15 years — considerably higher than PJM Interconnection’s forecast for the Dominion service territory. Dominion argues that PJM has not taken into account the phenomenal growth of demand by Virginia-based data centers. These projections matter because they influence how much new generating capacity — including nuclear, as I will explore in a forthcoming post — Dominion adds in the years ahead, with tremendous implications for rate payer and the environment.
The data center surge could prove to be an economic development boon for Virginia. But the industry’s growth impacts local zoning and land-use practices, tax policy, fiber-optic infrastructure development, and energy policy. The McAuliffe administration would be well advised to pull together a conclave to determine how to sort through these issues.
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(This article first appeared in Bacon’s Rebellion on June 2, 2017)
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An Unhealthy Obsession with Climate Change

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On June 1 came the encouraging news that President Trump has decided the United States will exit the U.N. Paris climate agreement. The agreement imposes huge burdens while producing little or no impact on the global climate.
From the outrage shared by the media, one would think Trump has doomed the world to certain destruction. Signs are clear the noise will continue, in one form or another: In March, just two months after Trump took office, a “Medical Society Consortium on Climate and Health” was launched to advise (alarm) the American public about global warming.
The consortium published, “Medical Alert! Climate Change is Harming Our Health.” In contrast to the public perception that climate change is in the future, the “alert” declares, “The reality, however, is starkly different: climate change is already causing problems in communities in every region of our nation, and from a doctor’s perspective, it’s harming our health.”
The consortium of nine organizations includes the American academies of Pediatrics, of Family Physicians, of Asthma, Allergy and Immunology, and the American College of Physicians. The alert lists calamities already occurring.
The first is “more very hot days; greater humidity; and longer, hotter and more frequent heat waves.”
A graph of heat waves since the late 1890s (attached) from an Environmental Protection Agency web page, however, shows the 1930s were far hotter than the past couple of decades.
The obvious benefits to warmer weather in some seasons and localities are never mentioned by climate changers. A 13-country study involving 74 million deaths from 1985-2012 found cold weather caused 17 times as many deaths as heat.
Even if temperatures have gone up, Americans have adapted. In a study of 105 U.S. cities, the average number of excess deaths attributable to each 10-degree (F.) rise in the same day’s summer temperature declined from 51 (per 1,000 deaths) in 1987 to 19 in 2005.
Hot weather accounts for few deaths: about two each year for each million Americans. About the same number die of tuberculosis or meningitis; there is no widespread campaign against either of these.
The numbers of heat-related deaths, meanwhile, are ambiguous because of their complicated diagnosis and definitions. Of the 3,332 “heat-related deaths” from 2006-2010 (666 per year) only 34 had “exposure to excessive natural heat” given as the only “underlying cause of death.” The others had either a modified underlying cause of death, or a contributing cause (“heat stroke and sunstroke,” “heat cramp,” “heat exhaustion,” or “other effects of heat and light”). A death in a hot automobile, for example, could occur even before the climate changes.
In data collected since 1999, the Centers for Disease Control and Prevention explains, “the inclusion of hyperthermia as a contributing cause of death increased by 54 percent the total number of heat-related deaths.” compared to those with a heat-related underlying cause alone.
How can heat-caused death trends be attributed to global warming when diagnoses are imprecise and definitions change?
The consortium’s next calamities: “increases in the frequency and severity of some extreme weather events such as heavy downpours, floods, droughts, and major storms.”
So it is raining harder, flooding more, getting drier and storms are packing more punch? Hardly!  Consider the most destructive storms, hurricanes: In the respective half-century periods, 1861-1910, 1911-1960, and 1961-2010, the U.S. mainland was hit by 25, 39 and 26 major hurricanes (categories 3, 4 and 5).
Except for Katrina, hurricanes have become less deadly. The 10 most deadly hurricanes to strike the country since 1900 resulted in 17,046 deaths; 89 percent of those before 1960.
The record flood in Baton Rouge, La., in August 2016, was taken as evidence of a trend toward more flooding. A Baton Rouge doctor writing on the “Medical Alert” page predicted “continued suffering from the physical and mental damage of extreme weather – which is happening more often and with greater strength due to climate change.” Yet, of the top 10 months for rainfall in Baton Rouge, six occurred before 1930; the second highest was in 1907.
Third on the list: “Climate change reduces air quality because heat increases smog, wildfires and pollen production.” This belies the use of the pseudo-synonym “climate change” for “global warming.” Not all climate changes increase pollution.
If warming is changing air pollution, it is decreasing it. All of the EPA’s six “criteria pollutants” have been reduced in the country since 2000. If global warming is causing health problems by increasing pollution, what about the decline in pollutants?
This consortium is obviously not intended to help protect citizens from health problems of global warming but to advocate for change in climate and energy policies. Their “medical alert” highlights the Northeastern states’ Regional Greenhouse Gas Initiative, which limits the amount of carbon dioxide that power plants can emit. Their final declaration on their web page: “We are sounding the alarm that climate change poses a risk to the health of every American.”
“Poses a risk” seems tentative for health harm allegedly already happening. In this “Medical Meteorology” specialty, standards are sketchy, the diagnosis is atrocious and a scientific second opinion is sorely needed.

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