It’s better than you think

Participants at Infrastructure Investor Americas in New York pointed to a high PPP completion rate and the number of projects underway in certain states as evidence that the US infrastructure market is not as bleak as some would paint it.

The pipeline for infrastructure deals in 2012 is filling and – if the stars align – may expand further, according to a group of cautiously optimistic panelists participating in the Infrastructure Investor Americas event held in early December in New York.

Andrew Deye, part of the infrastructure banking group at Greenhill & Co, moderated a panel of four assessing the tipping points for future deal flow. While market participants are confident and appear to be poised to get to work on greenfield and brownfield projects across transportation and other segments, some industry hurdles persist.

Greenhill’s Deye pointed out that, by one measure, there have been 28 announced transportation concessions in the US since January 2005, when the landmark $1.83 billion Chicago Skyway concession lease closed.

“Importantly, 22 of the 28 PPP [public-private partnership] transactions since 2005 have closed,” Deye told Infrastructure Investor. “While six transactions have not reached financial close [after reaching a formal deal announcement], “the implied completion rate of nearly 80 percent is substantially higher than most market participants realise,” he stated.

Panelists appeared united in their optimism about the infrastructure deal flow pipeline for 2012. “In the US, there are 13 long-term greenfield concessions in operation or under construction. As we look ahead, we see states that are aggressive movers in infrastructure, including Texas and Florida,” Joseph Aiello, a partner at Meridiam Infrastructure, stated.

He pointed to one-off projects that remain in the pipeline, such as the sought-after Goethals Bridge rebuilding initiative, which is in what Aiello described as the “final stages of procurement,” as well as the Alaska bridge PPP that is underway in Anchorage.

Although deal activity is limited, those deals that do come to market appear to be readily financed. Alec Montgomery, head of infrastructure North America at Industry Funds Management, referred to the ambiguity of strong bank market demand for high-quality assets despite the current state of the bank sector: “When good deals come to market, it’s all hands on deck. Deals such as the Puerto Rico Interstate-22 [Jose de Diego Expressway] become oversubscribed,” he said.

The risk conundrum

Neglect of vital US infrastructure landmarks is apparent in the lack of investment there has been in transportation and other assets since World War II. Panelists contended that Americans have become accustomed to uncontested access to infrastructure for free. Now, with the clock ticking on the needed revitalisation of US highways, bridges and buildings, citizens are being asked to step up with wallets in hand.

“Where policy is tending to trend is you see that governments are disinclined to raise taxes. That means as you move away from instruments like the gas tax, you end up with more pressure for facilities, whether it’s a new infrastructure bridge or Interstate, to be tolled and to move towards user fees,” said Aiello. “The question becomes ‘who takes the toll risk?’” he added.

There aren’t too many choices. Either the public sector will have to accept the toll risk associated with greenfield projects or the liability needs to be transferred to the private side. That’s the stark conundrum.

Public citizens may be skeptical that private corporations have their best interests in mind. “There’s natural resistance,” pointed out Aiello.

On the other hand, he added, if the balance sheet risk is handed to the private sector, cash returns to equity investors could experience a capital lock-up period for up to a decade amid typical construction delays in addition to another five-year post-construction hold-up before returns stream in.

Aiello’s warning bell, from the perspective of a private equity shop, is to put all the cards on the table before shifting that risk over to private investors.

“I’m raising the caution flag and saying if all these deals end up going revenue risk with little government support, you might not find a huge equity appetite. There is an important discussion that ought to be happening with transparency to make sure each side is testing the other,” Aiello said.

Brownfield influence

While Industry Funds Management focuses on brownfield projects with a history of revenue generation and a suitable risk/return, the process by which transportation assets come to market can be a significant factor for the fund manager in deciding whether to pursue an opportunity.

Montgomery pointed to the highly anticipated Ohio State University (OSU) parking concession, for which Industry Funds Management and several other consortia have been short-listed. “For transactions with high certainty, the time and effort spent is well worthwhile,” Montgomery noted.

Upon completion, this trailblazing PPP could serve as a catalyst for new types of relationship between public and private parties. When offering predictions for deal activity in 2012, Greenhill’s Deye reminded the room of the high stakes for this closely watched proposal: “The OSU parking concession is positioned for success. If the transaction closes and the community benefits, other universities are likely to follow.”