1) DAMN THE NAYSAYERS – PPP IS THE FUTURE. In terms of its infrastructure, the US can be classified as an emerging market, and one panellist wryly suggested that foreign investors should demand an emerging market premium for investing there. Public-private partnerships (PPPs) remain difficult to execute but the question of their prevalence in the future may be more a matter of necessity than convenience. Ed Rendell, the Pennsylvania governor, told the audience that PPP was America’s best chance to get the infrastructure job done. His message to US politicians opposed to PPP, the message was this: “Show me the money and I’ll take the three Ps off the table” – the point being that the public sector cannot finance what needs to be built. With states facing a collective $230 billion in budget deficits between 2009-2011 alone, the three Ps are likely to stay on the table.
2) LILLIBABUTIANS. To be sure: PPPs won’t work in all cases. Thanks to Build America Bonds (BABs) – taxable municipal securities that offer issuers a 35 percent subsidy on their interest costs – local governments can issue debt more cheaply than ever to fund infrastructure projects. Bankers gathered at the conference acknowledged that these bonds will remain a formidable force in US infrastructure financing. So investors must focus on understanding where municipal financing makes sense, and where PPPs are in fact the better deal. The municipal financing market, which one panellist compared to the Lilliputians holding down the private investment giant in the US, is not going anywhere.
3) GREEN POWER. Pension fund investment appetites in the US are still thought to overwhelmingly favour brownfields over greenfields. But that could be changing. Our poll of the conference audience found that 86 percent of delegates thought pensions want to invest in brownfields. The textbook example so far, cited more than once at the conference, is the Dallas Police and Fire Pension’s investment in the $2.7 billion New LBJ expressway project in Texas – a greenfield. Several delegates thought there will be more investments like this in the future. So while brownfields may still be the preference among pension funds, don’t be surprised if their portfolios add a tinge of green in the future.
4) RISK CONTROL IS HOT. Reality can bite infrastructure investors, as evidenced by the worst recession since the Great Depression and the volatility it has caused in the performance of toll roads, airports and ports. Where assets have GDP-linked demand risk tied to the assets, many of the value drivers are beyond the asset managers’ control. This suggests that it is better to focus on strong risk management since asset management – a big talking point among the delegates at the forum – can only take you so far.
5) UNDER-UTILISED UTILITIES. Others were asking: if you’re investing in infrastructure, why take on demand risk at all? Though toll roads and parking meters have received much attention from investors recently, another asset class – utilities – can offer less demand risk, steadier returns and the possibility to deal with a private, as opposed to a public, seller. Non-US delegates in particular were scratching their heads wondering why many US managers seem so eager to enter competitive bidding situations for public assets, instead of focusing more on privately negotiated deals in the US utility sector.
These trends aside, one overriding sentiment was very clear: over the long-term, US infrastructure practitioners have very good reason to remain optimistic. As KKR energy and infrastructure head Marc Lipschultz told delegates: “I think we are facing an opportunity set that is large, long and attractive”. Making the most of it will take patience, discipline, clear thinking and the ability to engage the public sector in constructive dialogue. There is a lot of work to do. n
STAND UP AND BE COUNTED
At the conference Pennsylvania Governor Ed Rendell urged courageous action to close America’s $2.2trn infrastructure funding deficit.
In the US, it’s unusual to find someone who can speak with equal gravitas to both the public and private sectors. Political figures tend to curry favour with one or the other, but rarely both.
But there are exceptions. PEI’s Infrastructure Investor: New York provided proof that it is possible to bridge the divide. Delegates were treated to a speech from Pennsylvania Governor Ed Rendell, long-time champion of infrastructure issues and one of the keenest proponents in the US today for upping investment in the nation’s ports, bridges, tunnels, dams and other critical economic assets.
The case for such investment is clear. “The needs for infrastructure investment in this country are staggering. This to me is the un-talked-about, perhaps most serious long-term problem facing our viability as an economic power,” Rendell said.
The solution is less clear. But one thing is beyond doubt: both public and private sectors will have to do their part.
Of the public side, Rendell said: “The politicians have become so lacking in courage in this country they don’t understand the difference between spending and investing”. Funding infrastructure, he said, was the latter, not the former.
A stark illustration of this was politicians’ fear of raising tolls and gas taxes as a way to pay for the nation’s infrastructure – a fear Rendell himself overcame long ago: “My first year in office, the Penn Turnpike Commission came to me and said, ‘we need to raise tolls. We haven’t raised them since 1989. Are you ok with it?’ And I said, ‘Sure. How much do you want to raise them?’ They said, ’42 percent’. ‘Whoa – 42 percent? I’m running for re-election in four years’. They said, ‘Well, that’s what inflation will be from 1989 to 2003’. I said, ‘is that right?’ And I went home, had people check it and it was right and I said, ‘Let’s raise them by 42 percent’,” Rendell said.
Lo and behold, the people of Pennsylvania understood: “We only got seven letters protesting the increase. The people get it. They’re so far ahead of the politicians.” To help close the US’ $2.2 trillion infrastructure investment gap over the next five years, as measured by the American Society of Civil Engineers, more politicians will have to find the same kind of guts.
Decisive action is paramount, Rendell warned: “The gap is so enormous that we have to use every weapon in our arsenal. We have got to unleash the power of private investment in every way possible.”
He urged investors to stay committed – despite potential legislative setbacks such as the proposal for the Office of Public Benefit to oversee public-private partnerships (PPPs) for federal highway projects in the US, a measure backed by House Transportation and Infrastructure Committee chairman Jim Oberstar but opposed by much of the infrastructure industry.
“We must stop the Office of Public Benefit from being created,” Rendell insisted, because it “will have a chilling effect on private investment in infrastructure”.
He also told investors know that, while they had a friend in him, the onus was on them to voice their opposition to the Office of Public Benefit and “get on it now”. Judging by the standing ovation, it’s safe to say that Rendell’s call for action was well received.