Private capital and toll revenue financing will play a major role in funding future transportation infrastructure. That is the overall conclusion my colleagues and I have drawn from conversations and interviews conducted over the past two months with a large and diverse group of individuals of varying political persuasions.
The survey was undertaken in support of a background paper for Infocast’s Conference on Transportation Infrastructure in Washington, DC on May 15-16, 2008. Infocast produces conferences and other events for clients in various industries including transportation, real estate, pharmaceuticals, and energy.
Among the individuals who shared their views with us have been U.S. Department of Transportation (DOT) officials, state legislators, congressional staffers, members of the two congressionally chartered commissions, state and local transportation officials, executives of trade and professional associations, members of the financial and investment community, and analysts in think tanks, academia, and private consulting firms.
Our inquiry also has benefitted from participation in several conferences and private briefings organized by corporate entities and financial organizations. By common request, all conversations, briefings, and interviews were held off the record to allow for the freest possible expression of views.
Partnerships Coming of Age
The great majority of participants in our survey believe total reliance on public resources and the fuel tax to fund investments in transportation infrastructure is no longer a realistic option.
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 DOTs are obliged to commit a major part of their tax-supported transportation budgets to preserving and modernizing existing infrastructure, leaving little money for new construction.
As one senior state official told us, “since Congress is not likely to come up with adequate resources to help us meet our future infrastructure needs, we have no option but to move on our own and find new ways of funding our capital needs.”
Influential political leaders in state capitals, on Capitol Hill, and in the Bush administration are coming to the same conclusion. Texas Gov. Rick Perry (R), in a keynote speech at the annual meeting of the Texas Transportation Forum on April 22, said, “I am convinced that private dollars, administered through public-private partnerships, are a significant part of the answer to our transportation infrastructure challenge.”
Pelosi Sees Continued Expansion
House Speaker Nancy Pelosi (D-CA) agrees. “Private investment is playing an increasingly larger role in public infrastructure,” she observed in an address before a Regional Plan Association luncheon on April 18. “Innovative public-private partnerships are appearing around the country, bringing much-needed capital to the table.
“It is important to ensure that the public interest is well-served in public-private partnerships, since they are here to stay and likely to grow in importance,” Pelosi continued. “User fees will continue to play a major role in financing many types of infrastructure. Reliance on tolls for transportation funding is likely to continue and expand..”
U.S. Secretary of Transportation Mary Peters also has been a longstanding advocate of public-private partnerships. “Unleashing the investment locked in the private sector by partnering with business is the most efficient path to the transportation future this country needs and deserves,” she told an audience of Arizona contractors in February. It’s a message she and her senior staff have conveyed many times before and since.
Using the leverage of private capital to supplement public funding also lies behind the proposal by Senators Christopher Dodd (D-CT) and Chuck Hagel (R-NE) for a National Infrastructure Bank (S.1926)
The proposal would establish “a unique and powerful public-private partnership,” Dodd said in his opening statement at a March 11 hearing on the bill, held by the Senate Committee on Banking, Housing and Urban Affairs. “Using limited federal resources, it would leverage the significant resources and innovation of the private sector. It would tap the private sector’s financial and intellectual power to meet our nation’s critical structural needs.”
Numerous States Mull Tolls
By our count, a total of 22 states are contemplating the use of tolls to support road capacity expansion.
Some of them, such as California, Florida, Pennsylvania, and Texas, may resort to private tolling concessions, while others will choose the more traditional route of municipal bond financing and public operation.
Our survey participants thought public-private partnerships and private concessions will play a significant role in the nation’s efforts to expand infrastructure capacity.
Engaging the private sector in the task of modernizing the nation’s roads, bridges, ports, transit systems, and intermodal facilities may be the best way to ensure the continued growth of the nation’s transportation capacity without imposing an unacceptable fiscal burden on the American taxpayer or burdening future generations with further debt.
Private Investors Lining Up
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 no doubt. Our inquiry revealed an impressive number of private equity funds–72 by one count–dedicated to investments in infrastructure.
In the aggregate, those funds are estimated to have raised in excess of $120 billion. After leveraging the estimated capital pool through bank loans and capital markets, the infrastructure funds could support investments in the range of $340 billion to $600 billion.
Most of the infrastructure funds have a global reach, but many focus on mature markets in the developed countries where political risks and legal and regulatory uncertainties are less severe. The United States has lately become a favorite investment target because of the perception that a large percentage of its existing transportation infrastructure needs rehabilitation, modernization, and expansion.
Toll Road Investments Favored
Many of the infrastructure funds tend to favor investments in toll roads. That’s because roads generate strong demand even in times of slower economic growth and produce steady and predictable cash flow relatively unaffected by economic downturns.
Toll road-related investments appeal especially to long-term investors such as pension funds and insurance companies, which require stable, income-oriented investments to match their long-term liabilities and payout obligations.
Ports also have come to be recognized as a sound investment by global capital markets. Institutional investors with long-term investment horizons see container port facilities as safe investments offering returns comparable to those from fixed income and real estate.
The growing scarcity of deep water port capacity, environmental obstacles to building new “greenfield” ports, and the prospect of Panama Canal expansion have enhanced the value of existing port facilities on the eastern seaboard and raised expectations of higher earning potential.
Experts Express Concerns
Participants in our survey, while generally sympathetic to public-private partnerships, were careful to note several potential caveats. First, in the face of the spreading credit crisis, banks may be less willing to lend the high cash multiples that have made past infrastructure deals profitable.
Second, the multiplicity of new entrants into the field of public infrastructure investments has created an intensely competitive environment. 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 compared to investments in other, more traditional asset classes.
Third, private capital is generally available only for income-producing assets, not for maintaining existing infrastructure.
Fourth, it is not yet clear how strong or widespread interest will be at the state and local level in long-term private concessions of the Indiana Toll Road and Chicago Skyway variety. Public support for such initiatives varies from jurisdiction to jurisdiction.
For example, New Jersey Gov. Jon Corzine (D) has abandoned his plans for “monetizing” the New Jersey Turnpike in the face of widespread public opposition and lack of legislative support. Instead he has proposed creating a new public agency that would issue bonds backed by higher tolls on New Jersey toll roads.
On the other hand, Chicago, Florida, and Pennsylvania are proceeding with plans to lease existing infrastructure assets.
Pennsylvania Gov. Ed Rendell (D) intends to seek bids on a concession of the Pennsylvania Turnpike, the Florida Department of Transportation is considering a long-term private concession for the Alligator Alley toll road (I-75), and the City of Chicago is in the process of negotiating a long-term lease of Midway Airport.
Should these projects come to fruition, “the floodgates will open,” speculated one senior investment bank official.
C. Kenneth Orksi ([email protected]) is editor and publisher of Innovation Briefs (http://www.innobriefs.com), a transportation newsletter, where an earlier version of this article and sidebar appeared. Used with permission.