By Eric Petersen, Hawkins Delafield & Wood and Steve Howard, Barclays

It is the public works financing reality that P3 advocates in the U.S. know all too well: tax-exempt bonds (the Ex-Factor).  Both of us have deep roots in the conventional municipal bond business. We have watched through the years as proposed P3 projects have encountered the regulatory thicket of “private activity bond” (PAB) rules. These rules, established by the Internal Revenue Code and IRS regulations (collectively, the “Code”), seek to limit the volume of tax-exempt debt in the market, and consequent revenue loss to the Treasury. Achieving tax-exempt status for PAB bonds has proven to be crucial to P3 project economics. In fact, P3 activity in any particular infrastructure sector turns out to be largely correlative to the degree of flexibility that public agencies have to sponsor P3 projects in that sector on a tax-exempt PAB basis.