The US reaches maturity

In 2005, private investment in public infrastructure was something of a novelty in America. That’s not the case in 2012.

Following the Chicago toll road concession – a $1.8 billion pact between Concesiones de Infraestructuras de Transporte (Cintra) and Macquarie Group in what came to be acknowledged as the first-ever US public-private partnership (P3) – the US has become a critical market for infrastructure investment. America in 2012 is a market teeming with promise. Not to mention disappointment also.

“On one hand, the US is a developed nation,” explains Joel Moser.

But Moser, an attorney with law firm Kaye Scholer, points out, America, in an infrastructure context, is a laggard.

“People tend to forget that, in infrastructure, it is an immature market,” he says.

This year, the US has made not-insubstantial progress, both as a P3 adopter and in terms of institutional investment in the asset class.

“Twenty-twelve and 2013 are important for the US,” says Manny Hontoria, a partner with consultant Oliver Wyman. “The momentum is coming together”.

2012 alone has seen: the Ohio State University (OSU) parking concession; CalSTRS’ investment in Industry Funds Management (IFM); the Downtown Tunnel/Midtown Tunnel/Martin Luther King (MLK) extension; the Global Infrastructure Partners II (GIP II) fundraising; the Chicago Infrastructure Trust; and developments in Puerto Rico – all serving to demonstrate the US is taking significant steps in its maturation as a serious infrastructure market.

Below, we briefly examine each of these.

OSU: The power to act unilaterally 

When Ohio State University (OSU) agreed to a 50-year lease of its on-campus parking, accepting $483 million from fund manager Queensland Investment Corporation (QIC) and parking operator LAZ in June, the school opened a fresh vista for the asset class.

Above all, the deal loosened the albatross fastened around the neck of privatised parking in the US, which has treated the concept of leased parking with sentiment ranging from suspicion to vehement dislike.  

As infrastructure, parking may at best be described as ‘non-core’. Unlike tolling a road, a parking concession agreement is not a gambit to charge for what used to be free.

Parking marked an inroad into privatisation for the US. But the now illustrious 2008 deal to lease on-street parking in Chicago resulted in lingering ill-will, while political wrangling killed a similar, subsequent effort to hawk parking in Los Angeles—as well as Pittsburgh.

But a US school, like Ohio State, is self-governing and therefore able to negate political will to lease what is, at bottom, a US asset with a monopolistic character.

“Even though it is still a political environment, a university can make a decision unilaterally,” explains Mark Williamson, a managing director with advisory firm Evercore Group. 

Taking its cue from OSU, Indiana State University in September began investigating a possible parking deal.  

CalSTRS: In the forefront 

A month into 2012, CalSTRS, the California State Teachers’ Retirement System, punctuated a growing movement towards infrastructure by US retirement plans with a $500 million commitment to IFM.

With that, CalSTRS made the single largest pension commitment to infrastructure, and illustrated what a top-flight US investor, like the $145 billion CalSTRS, is apt to excel at: manager selection.

Unlike in Australia and Canada, where direct and co-investing in infrastructure is a proven practice, US investors, being relative newcomers to infrastructure, will – for now at least – funnel most of their capital through managers.

“We want to get to know [infrastructure] well before we venture beyond the fund structure,” says Chris Ailman, CalSTRS chief investment officer.

On the back of the IFM commitment, institutional inflow has been consistent and sizeable.

Virginia Retirement System (VRS) committed $450 million, investing $300 million with IFM and $150 million with Global Infrastructure Partners’ GIP II. Maine Public Employees Retirement System (MainePERS) put $75 million with GIP II, while the Washington State Investment Board (WSIB) allocated $250 million each to GIP II and Stonepeak Infrastructure Fund, which in April obtained a $40 million commitment from the New Mexico Education Retirement Board (NMERB).

Virginia Tunnel: Despite the Crisis…

The Downtown Tunnel/Midtown Tunnel/MLK Extension project in Virginia dated back to 2008, when the sub-prime mortgage crisis was triggering what would be the global financial crisis (GFC). In April, a consortium teaming Macquarie and developer Skanska reached financial close on the $2.1 billion P3.

The Downtown Tunnel/Midtown Tunnel/MLK Extension P3 preceded Virginia’s $940 million Interstate 95 (I-95) High Occupancy Vehicle (HOV)/High Occupancy Toll Lanes (HOT) project and $1.7 billion US Route 460 road extension.

While Virginia is expected to post $5 billion in deal flow in 2012, California finalized the $1.1 billion Presidio Parkway P3, a design, build, finance, operate and maintain (DBFOM) mandate also conceived amid the GFC.

GIP II: Largest infra fund ever

If successful fundraising is a measure of successful asset class, GIP II in 2012 has effectively propped up infrastructure. 

In mid-summer, New York-based Global Infrastructure Partners (GIP) disclosed its second offering, GIP II, had amassed $7.5 billion, surpassing Goldman Sachs Infrastructure Partners I (GSIP I) – which collected $6.5 billion in 2006 – as the largest infrastructure fund.

GIP II first had a target of $5 billion but, by second close, on $5.5 billion, the hard cap had reportedly been upped to $7.5 billion, then more than $8 billion. According to placement agent Probitas, GIP II hauled in $2.5 billion in a single quarter. The fund has also taken in US pension capital from VRS and MainePERS.

GIP II, plus North America vehicles from Meridiam Infrastructure and Stonepeak Infrastructure, are all expecting to close in 2012. Kohlberg Kravis Roberts & Company (KKR) in June closed its infrastructure fund on $1 billion.

In 2012, a rough estimate of $10 billion in US deal flow is expected to close, driving infrastructure stateside after a less-than-robust 2011.  

Chicago Infrastructure Trust: A city funding initiative

In 2011, the term “infrastructure bank” became part of the national discussion. By March, the Windy City had formed the Chicago Infrastructure Trust (CIT), a first-of-its-kind undertaking in the US, enlisting Citibank, Citi Infrastructure Investors (CII), Macquarie and JP Morgan Asset Management to channel $1 billion to improve and build infrastructure in Chicago, location of the maiden US P3.

Via its CIT initiative, Chicago is representative of a larger issue gripping America: with funding for infrastructure on a federal and even state level unavailable, local government is tasked with finding alternative financing in order to create and maintain the infrastructure to achieve or maintain economic wellbeing.

Puerto Rico: clear, well defined

The September 2012 announcement that San Juan had embarked on a light rail transit (LRT) P3 was characteristic of an infrastructure project in Puerto Rico: a brisk, tight timeline; a clear procurement schedule, and; a well-defined goal. The $473 million undertaking is set to begin in October, conceived to accommodate tourism and abet business growth.

With P3-enabling legislation and the 2009 founding of the Puerto Rico Public-Private Partnership Authority (PPPA), the Caribbean island is a pioneering and unique infrastructure state. In 2012, Puerto Rico announced a lease of its Luis Munoz Marin International Airport and initiated its first ever social infrastructure project—a juvenile detention centre.