Certain comings-and-goings send a message to the market. And this week’s news of George Miller joining law firm Mayer Brown is no exception.
The former Simpson Thatcher partner is a veteran of the complex I-595 financing in Florida – the first deal in the US to use availability payments to compensate investors. Given his breadth of experience, Mayer Brown will undoubtedly find many uses for Miller’s talents. But one can’t help but think that the law firm is bullish on the use of availability payments in the US going forward.
There are indeed reasons to be bullish: this kind of financing mechanism has the potential to hugely increase the quality of infrastructure services in the US – but not without first overcoming some steep challenges.
First things first: availability payments are simply an alternate way of compensating private investors in infrastructure projects. In the case of the I-595, rather than collecting tolls from the users of the highway, the investor, ACS Infrastructure Development, will instead receive periodic payments from the government counterparty, the Florida Department of Transportation, which will collect the tolls.
Such payments are usually tied to a certain level of service, essentially making them a fee-for-a-service whose biggest risk is the government’s creditworthiness, or the ability to pay the investor. So instead of taking on the risk of fluctuating revenues from users, investors take on government appropriation risk.
The scheme has been widely used in the UK for many years for non-revenue generating assets because it marries two concepts that are of critical importance to successful infrastructure investing: lower risk to the investor and – as numerous studies have shown – better service provision to the general public.
In the US, though, a 200-year-old municipal bond finance market has traditionally given governments access to a lower cost of capital to finance their projects, making it difficult for many government officials to see the benefit of partnering with the private sector to deliver their projects.
A side effect of the muni bond market is a massive sea of tax-exempt government bonds which, as early as 2006, totaled $2 trillion in debt outstanding. Then, of course, the credit crisis hit and issuances plummeted. But if the more than $14.4 billion in issuances of Build America Bonds – taxable municipal bonds for which the Federal government helps pay interest – is any indication, government-issued debt will continue to be a popular way for the public sector to finance infrastructure in this country.
Which, of course, means that investors have many choices when it comes to taking on the risk of government credit-worthiness. They could invest in a project in which they are remunerated with availability payments, but they can also buy Build America Bonds or municipal bonds.
And herein lies the big question: infrastructure projects are expensive – I-595 alone is a $1.6 billion endeavor – and capital is scarce, so will there be adequate institutional investor appetite, debt and equity, for projects that use availability payments?
Some institutional investors dismiss them altogether. One seasoned infrastructure asset manager from Australia recently told this publication he has always stayed away from the UK private finance initiative deals because he views them essentially as a form of government debt and he does not want government creditworthiness risk in his portfolio. He wants project-specific risk.
What about US pensions? One pension’s minutes give a flavor of what some board members are thinking. At a 21 May meeting of the New Jersey State Investment Council, James Marketti, a member of the pension board appointed by the state’s governor from a list of AFL-CIO labour union nominees, presented the council with alternatives to alternative investments. Chief among them were Build America Bonds.
Of course there are plenty of European infrastructure developers who like availability payments and would have no reason to stay away from them in the US. But, there are limits on the supply side as well: at the end of the day, governments have to finance their availability payments somehow. Whether that means tapping into gas taxes, budget appropriations, federal grants or general or revenue bond issuances, state and local government budgets are in worse shape than ever. So even if they see their benefits, not all governments may be able to afford availability payments.
The challenge, then, will be to find the right deals for which this payment structure can work and to collaborate with the public sector to bring those opportunities to market. Availability payments didn’t work on the Oakland Connector project in California, but they did on I-595; they may work for the Long Beach Courthouse. It all depends on how the deal is structured, how risks are mitigated and stakeholders’ interests protected.
All of which means, of course, that there are busy days ahead for lawyers in the world of infrastructure.