Infrastructure – Next Wave – Future Bubble?

Investment Banks, Pension Funds, Sovereign Funds have discovered the new investment asset class – public infrastructure. The need for massive infrastructure repair, upgrading and new construction – in the U.S. and in developing countries – is driving governments to turn to private investors to fund public infrastructure projects. But Macquaries and Babcock & Brown’s troubles show that the asset class is not quite as stable as some investment banks are touting – a little review of 19th century railroad bonds might be of interest here. But where bankers smell profits, money rushes in, froth forms, and bubbles can grow.

Public-Private Partnerships at the Crossroads -  Planetizen – Kenneth Orski – 27 August 08

This year, the future of public-private partnerships is expected to receive heightened attention amid speculations that Congress may attempt to assert oversight over public-private partnerships and place conditions on private toll road concession agreements as part of next year’s transportation program reauthorization. Some interest groups, notably the trucking industry and public employe labor unions, are expected to vigorously support efforts to regulate PPPs at the federal level. Meanwhile, PPP proponents believe that the case for greater private sector involvement in infrastructure funding has never been stronger. They want to see this involvement mature free of congressional oversight or federal regulatory controls. They believe the states are perfectly competent to negotiate concession agreements with private parties that will protect the public interest. Adding to the speculations is the prospect of a new Administration and a new team at the U.S. Department of Transportation next year, whose position on PPPs cannot be known at this time…

Total reliance on public resources and the fuel tax to fund future investments in transportation infrastructure is no longer a realistic option. Such, in essence, is the considered judgment of a great majority of participants in our survey. State officials tell us they are embracing private sector financing and tolling not because of any ideological commitment to “privatization” or a philosophic attachment to market-driven solutions but out of sheer fiscal necessity. Increasingly, state departments of transportation are obliged to commit a major part of their tax-supported transportation budgets to preserving, modernizing and replacing existing infrastructure, leaving little money for new construction…Sen. Chuck Hagel (R-NE) at a recent congressional hearing. “The Federal Government,” he said, “does not and will not have the resources to meet our future national infrastructure needs.”…Reflecting the state legislatures’ heightened interest in private infrastructure financing, the NCSL Foundation, an arm of the National Conference of State Legislatures, has undertaken an 18-month project to develop “nonpartisan, balanced and useful materials” on public-private partnerships to aid state legislators in their decision-making…Not all of our survey participants were convinced that future infrastructure investments will require private capital. Some of those we consulted suggested that the nation’s future transportation needs could be met by raising the federal fuel tax or through new federal financing initiatives. The former option, they said, has never been taken off the table and will almost certainly figure in Rep. Jim Oberstar’s transportation reauthorization proposal. The latter option includes the National Infrastructure Bank (NIB)(S. 1926 and HR 3401) championed by Sens. Dodd (D-CT) and Hagel (R-NE), and the “Build America Bonds” program (S. 2021) proposed by Sens. Thune (R-SD) and Wyden (D-OR). Both initiatives would create a de facto national capital budget that could be used to fund “qualified public works projects of regional or national significance.” The NIB proposal has gained political traction by receiving the support of House Majority Leader Nancy Pelosi and presidential candidate Barack Obama as part of his “urban agenda.”…hardly suffice to make up for decades of underinvestment. These bills could only fund a small fraction of the infrastructure deficit—deficit that the American Society of Civil Engineers estimates at $1.6 trillion. “A federal-centric approach does not offer an adequate long- term solution to closing the huge infrastructure funding gap,” summed up one respected think tank analyst…

The viability of the partnership model depends, of course, on the willingness of the private sector to invest in public infrastructure assets. On that score there appears to be little doubt. Our inquiry has revealed an impressive number of private equity funds (72 by one count) dedicated to investments in infrastructure. In the aggregate, they are estimated to have raised in excess of $120 billion. After leveraging the estimated equity capital pool through bank loans and the capital markets, the infrastructure funds could support investments in the range of $340 to $600 billion…

New deals coming to market have not kept up with the growth in the supply of investment capital, resulting in vigorous bidding for existing assets and new assets under development. This is driving up their prices, reducing yields and lowering the attractiveness of investments in public infrastructure as compared to investments in other, more traditional asset classes…

There are well founded speculations that Congress may attempt to assert oversight over public-private partnerships and place conditions on long-term toll road concession agreements, ostensibly “to protect the public interest.” The House Transportation and Infrastructure Committee is rumored to consider establishing a regulatory commission to oversee public private partnerships. An influential member of the Senate Finance Committee has raised the possibility of amending the federal tax code to prohibit “excessively long” concession lease terms. Some interest groups in the trucking industry and public employee unions may be expected to vigorously applaud congressional moves to assert oversight and impose regulatory restraints on PPPs. There are indications that the National Transportation Infrastructure Finance Commission also will recommend certain legislative restrictions on private toll road concessions…

C. Kenneth Orski is editor and publisher of Innovation NewsBriefs, a transportation newsletter

Investment banks see opportunities in crumbling roads and bridges – International Herald Tribune – Jenny Anderson – 27 August 08

…Reeling from more exotic investments that imploded during the credit crisis, Kohlberg Kravis Roberts, Carlyle Group, Goldman Sachs, Morgan Stanley and Credit Suisse are among the investors who have amassed an estimated $250 billion to finance a wave of infrastructure projects in the United States and overseas…Emerging economies are another target. Morgan Stanley hopes to invest up to a quarter of its $4 billion global infrastructure fund in India, a senior executive at the bank, Gautam Bhandari, told Reuters this week…the strategy is gaining steam in the United States as governments struggle under mounting deficits that have limited their ability to improve crumbling roads, bridges and even airports….This autumn, Midway Airport in Chicago could pass into the hands of private investors. Just outside Washington, a $1.9 billion public-private partnership will finance new high-occupancy toll lanes around the city…This week, Florida gave the green light to six groups that included JPMorgan, Lehman Brothers and Carlyle Group to bid for a 50- to 75-year lease on Alligator Alley, a toll road known for sightings of sleeping alligators that stretches 78 miles, or 125 kilometers, along I-75 in South Florida…Not that there is not still some resistance, especially to overseas funds…Politicians have often supported the civic outcry. In the spring of 2007, Representative James Oberstar, Democrat of Minnesota and chairman of the House Committees on Transportation and Infrastructure, warned that his panel would “work to undo” any public-private partnership deals that failed to protect the public interest…Labor unions have been quick to point out that investment funds stand to reap handsome fees from the crisis in infrastructure…But in a world in which governments view infrastructure as a way to manage sustainable growth and raise productivity through the efficient movement of goods and people, an eroding economy has forced politicians to take another look…”There’s a huge opportunity that the U.S. public sector is in danger of losing,” says Markus Pressdee, head of infrastructure investment banking at Credit Suisse. “It thinks there is a boatload of capital and when it is politically convenient it will be able to take advantage of it. But the capital is going into infrastructure assets available today around the world and not waiting for projects in the U.S. the public sector may sponsor in the future.”…The American Society of Civil Engineers estimates that the United States needs to invest at least $1.6 trillion over the next five years to maintain and expand its infrastructure. Last year, the Federal Highway Administration deemed 72,000 bridges, or more than 12 percent of the total in the United States, “structurally deficient.” But the funds to fix them are melting: By the end of this year, the Highway Trust Fund will have a deficit of several billion dollars…Some American pension funds see an investment opportunity…”Our infrastructure is crumbling, from bridges in Minnesota to our airports and freeways,” said Christopher Ailman, head of the California State Teachers’ Retirement System. His board recently authorized up to about $800 million for infrastructure investment…And some overseas pension funds that jumped into the game early have already reaped rewards: The $52 billion Ontario Municipal Employee Retirement System saw a 12.4 percent return last year on a $5 billion infrastructure investment pool…”People are creating a new asset class,” said Anne Valentine Andrews, head of portfolio strategy at Morgan Stanley Infrastructure. You can see and understand the businesses involved – for example, ships come into the port, unload containers, reload containers and leave. There’s no black box.”…”10 years from now infrastructure could be larger than real estate,” said Mark Weisdorf, head of infrastructure investments at JPMorgan. In 2006 and 2007, more than $500 billion worth of commercial real estate deals were done…Yet if the flow of money is fast, the return on these investments can be a waiting game. The HOT lanes project outside Washington took six years to build after Fluor Enterprises, one of the two private companies financing part of the project, made an unsolicited bid in 2002…The privatization of Midway Airport was part of a pilot program adopted in 1996 to allow five domestic airports to be privatized. Twelve years later only one airport has met that goal – Stewart International Airport in Newburgh, New York – and it was sold back to the Port Authority of New York and New Jersey.

Why Infrastructure Privatization is Moving Slowly – Market Movers at Portfolio.com – Felix Salmon – 27 August 08

Jenny Anderson has an evenhanded overview of US infrastructure privatization today. In a nutshell: it’s necessary, but it’s going to happen very slowly…The good news is that the media is moving away from “OMG the government is selling off our public assets on the cheap” and is giving fair shrift to people (including a few state governors) who point out that there’s simply no way the public sector is going to spend $1.6 trillion over the next five years on necessary infrastructure spending. If the private sector is willing to do it, either alone or in public-private partnerships, then that’s a great way of moving past the current impasse…