Privatized infrastructure is a relatively young business in the U.S., its growth stymied by politics, bureaucratic inertia or financing markets that have turned skittish.
It's one reason why seasoned investors from more mature markets -- Europe, Canada and Australia -- cut laggards like the U.S. some slack. When it comes to public-private partnerships, or P3s, the U.S. moves at its own pace. Add another "P" to P3 for patience.
Given the severity of federal and state budget gaps, P3 investors appear unperturbed. Progress, they say, is in evidence in Virginia, Texas, Florida and several other states where a political consensus is building around the concept, a sign the market is still evolving.
In December, Virginia awarded a $2.1 billion concession for a midtown tunnel in Hampton Roads to Macquarie Group Ltd. and Skanska Infrastructure Development. The sponsors are putting in $1.3 billion in equity, debt and revenue from operations. A P3 is also under way in California to replace a 75-year-old access road to the iconic Golden Gate Bridge.
For every successful program, however, there's one that failed. Georgia recently canceled its West by Northwest toll road P3 for reasons that weren't altogether transparent. Texas also backtracked on a $1.4 billion P3 Grand Parkway expansion, opting for a public sector-funded design-build structure.
Then again Alaska's Knik Arm Crossing P3 effort is moving ahead, as is Puerto Rico's San Juan airport. And so it goes.
Alec Montgomery, head of infrastructure in North America for Australia's Industry Funds Management Pty. Ltd., for one, says he doesn't worry when the political logjam will break. "I won't pretend to know when municipalities will decide when they'll start monetizing assets. I don't think anyone wants to see them forced sellers," he says.
His Melbourne-based firm, managing A$30.2 billion ($32.2 billion) of capital primarily from Aussie pension funds, has reason to be sanguine. IFM recently garnered a $500 million commitment from the California State Teachers' Retirement System. The firm, now with $10 billion of assets in infrastructure, has been in the business since 1995. CalSTRS's capital will go to its open-ended, $3.6 billion global infrastructure fund, which has racked up annual gains of 10% over the six years since inception.
CalSTRS's outlay is said to be the single-largest U.S. commitment to an infrastructure pool. It's the latest sign that at least a few U.S. pension funds are emulating their more experienced peers.
The California Public Employees' Retirement System late last year earmarked up to $800 million to spend directly in public and private projects in the state over the next three years. The New York pension funds, nudged by Gov. Andrew Cuomo, are said to be exploring ways to participate in a range of construction projects, including two aging bridges across New York waterways. These include the Tappan Zee Bridge in the north and the Goethals Bridge linking Staten Island to New Jersey.
Infrastructure assets, say experts, are a perfect match for pension funds whose actuarial return goals lend themselves to the long-term, stable, quasi-monopoly investment profile of infrastructure assets. Proponents cite savings attributed to the fact that risk of cost overruns falls on those who'd benefit the most from preventing them. Private capital, they say, is a conduit for cost efficiencies in the long run, even though private financing is more expensive to pay for up front.
Practitioners do cite capital constraints to the extent that traditional finance sources, namely, European banks, are pressured by restrictions imposed by Basel III rules and exposure to the region's macroeconomic challenges."We're starting to see that flow through the banks' appetite," says Nicholas Gole, managing director at Macquarie Capital (USA). "You can't rely on banks for as much balance sheet as you used to."
But for Macquarie, which advises and participates in P3 projects, Gole says it hasn't been a limitation because the assets it targets have a "solid risk profile" and aren't overleveraged. While terms and pricing are shifting, he believes well-structured deals will get done through bank or bond markets: "At this stage, there's still capacity to do the deals."
Tim Bath, who heads RBC Capital Markets' infrastructure group and P3 practice, says he expects to see a significant increase in infrastructure bonds over the next five years, as bank-financed deals are refinanced into long-term capital structures. But creativity is a must. "If you want to be successful," Bath says, "you have to be innovative as with any emerging market."
Vyvyan Tenorio writes about private equity for The Deal magazine.