If it sounds too good…

It always sounded just a bit too good to be true. Debt markets are a mess, so Citi said it would simply fund its $2.5 billion Midway airport deal with equity. Of course that made financial sense, it said, and it could always refinance later on. Now the deal has collapsed because Citi couldn’t raise the cash.

It is another sign that the infrastructure market has all but dried up at the moment. Largely, that’s because even the safest government-backed projects can’t get funded. And Midway suggests not only that the debt vacuum can’t be filled with equity but also that financial problems are starting to clobber the equity base itself. Sources close to the deal say that Citi’s problem wasn’t finding debt, but equity, after all.

In fact, there are plenty of signs that equity is in short supply. Some infra investors are sitting on cash, but many won’t spend it until the market calms down. And fundraising has dried up completely. It’s down to $1.3 billion in the first quarter of this year, a collapse of 80 percent.

So equity is tight, and the only reason that’s not more widely discussed is that so many deals are being scuppered by lack of debt at the moment. That’s why governments are being forced to step into the breach. Generally, their help can be split into two parts. Some, notably the UK,  say they will simply lend to projects directly, a move that could be echoed in other countries in Europe and the US. And most say they’ll spend more on infrastructure to create jobs during the recession.

Both of these moves must be taken with a pinch or ten of salt. Governments can’t afford to fund many of these projects by themselves – that’s why they decided to bring in private money, after all – and judging by the UK’s current experience, direct lending will be restricted to a handful of glamour-puss projects that have been turned down by the banks for months.

As for the government spending sprees, these largely consist of giving existing projects a gentle nudge forward, rather than of anything truly new. The desire is for jobs over the next year, and there’s little point in launching a big new road or power project that won’t even start to be built for years. It’s easy to be cynical about these government initiatives, which largely create headlines out of deals that would have happened anyway.

But there are longer-term implications here, and the question in many ways is what will happen when the dust settles over this financial collapse. Countries from India to France and (to a lesser extent) the US now have long-term infrastructure development plans that rely on private, as well as state, cash. For all the talk of the death of capitalism, this recession will accelerate the drive towards private infrastructure development, simply because the most powerful message is that governments have no choice.

Michael Kapoor