Mere hours after the our 2013 US roundtable had concluded, procurement for a public-private partnership (PPP; P3) to operate Chicago Midway International Airport was halted. For the asset class, the aborted deal – a purported 40-year lease valued near $2 billion – was a remarkable upset: Midway Airport was a distinctly attractive asset and a potential ‘game-changer’ for airfield P3s as well as privatisation as a whole in the US.
For the four men who participated in our roundtable, however, the cancelled Midway tender was not only a bitter pill to swallow – another unwelcome reminder of the soul-crushing vagaries that come with the territory when investing private capital in public infrastructure in the US — but also, in a word, awkward.
For what amounted to a good hour-and-a-half, John Dionisio, Rob Keough, Luis Sanchez Salmeron and Rick West, had by and large waxed positive on the US and its second coming as a hypothetically bottomless PPP market, citing Midway (not to mention Chicago) as proof of a newly acquired Stateside awareness about privatisation while referring to Midway as “a great example”, “extremely transparent”, and “a positive sign”.
Now, “passé,” seemed a more apt description.
“I think we jinxed it,” joked roundtable participant West, managing member for parking consultant West-FSI, the following day.
But West, Meridiam Infrastructure managing director Dionisio, Balfour Beatty Infrastructure Partners (BBIP) principal Keogh, and Spanish native Sanchez Salmeron, who in 2011 joined Globalvia Infraestructuras as managing director, agree the US has turned a corner in public-private infrastructure and, by extension, will invest vast wealth in it, following a retrenchment in the immediate wake of the global financial crisis (GFC).
“Everybody, everybody,” stresses Globalvia executive Sanchez Salmeron, “is hoping these assets here – unique assets – come to market. The US is the great opportunity. Every state here is almost like a country in Europe. But, as of now, it has taken quite a long time.”
Sanchez Salmeron is able to lend a unique perspective to the roundtable based simply on the fact that, to him, infrastructure privatisation is nothing new. A 25-year infrastructure veteran, he spent a good portion of his career with Ferrovial where, in 2006, he led the acquisition of the British Airport Authority (BAA), later becoming deputy chief executive of the firm. While Globalvia is the second-largest infrastructure company in the world, and a stalwart in Spain and the European Union (EU), the US market has proved elusive.
Sanchez Salmeron is here to change that, spearheading Globalvia in the US, a country he describes as rife with opportunity in rail and road infrastructure.
“The impression of America from the standpoint of the international investment community is that the US is a very long-term market,” Sanchez Salmeron explains. “The reality is that the US market is unlimited in its potential. But I think another vital impression of the US market is that it’s also immature.”
For Dionisio, the secret to overcoming the “immature market” label might well be a matter of nomenclature.
A shift in sentiment towards investing private capital in infrastructure in the US means Dionisio is optimistic. Ask him what prompted the perceived shift and the Meridiam investment director, and one of the firm’s initial members, has a basic but profound answer.
“I think that has much to do with moving away from privatisation to a real public-private partnership model where public realm interests are protected and the focus is on the merits of long-term risk transfer associated with newly developed greenfield P3s,” he says.
Dionisio, whose Meridiam hosted the roundtable at its New York office, notes that the public reaction to – and timing of – the first generation of brownfield privatisation of operational assets centered in metropolitan areas formed the initial impression of the P3 asset class in America.
“While the initial privatisations here added value to the municipalities served — and certainly benefitted the mayors who backed them — they did serve as targets for negative connotation , fueled by those who were opposed or did not understand the benefits to all involved,” he opines.
West, who closely followed the Chicago parking mater lease, supports Dionisio.
“I do think branding is an issue,” West agrees. “I also think that what happened early on in Chicago left the impression that there is only one way to do privatisation and here is what that is. Many of the early concessions weren’t necessarily done as well as they could have been.”
West contrasts the maligned Chicago parking deal, a 99-year lease for $1.8 billion, with what he calls a “hybrid” Indianapolis parking P3 in 2010 involving a $400 million revenue stream, rather than the upfront lump sum in Chicago.
“Whenever I meet with a public official, I tell them, ‘There’s a door No. 1, door No. 2, or door No. 3,” West says, “and, I tell them, ‘Make sure the “p” in partnership is capitalised’.”
Labeling a P3 as different from privatization will prove hollow, however, unless the fundamental project is in fact different.
Meridiam is a ‘greenfield’ investor dedicated to procuring and monetising entirely newly created infrastructure. Recently, the Long Beach Courthouse P3 in California, a Meridiam asset as well as the first-ever social infrastructure P3 for the US, opened to the public.
To Dionisio, greenfield infrastructure, as opposed to ‘brownfield’ P3s, or as he puts it, “selling already existing operational assets to a private conglomerate”, has helped in reshaping private investment in infrastructure Stateside.
“Even in recent press, it is striking that people really still look at it as a sort of ‘Wall Street capitalism,’” he muses. “That said, I’m confident that the public have witnessed the movement from a pure brownfield privatisation to more focused, long-term ‘greenfield’ P3s, mostly in transportation.”
Sanchez Salmeron notes that brownfield can have a negative connotation simply due to a perceived ‘before and after’ difference.
“People tend to react to privatisation in a way that they feel they now have to pay for something that they never had to pay for before,” he explains.
Keough in August became principal for BBIP, the mid-market infrastructure investment arm of developer Balfour Beatty, having formerly worked for John Hancock Financial Services Group.
“I think it’s a tough story when the public has seen the transfer of an underperforming public asset to a private party that has made a profit by running it better,” he says. “It can make the public agency that was previously running the asset look bad.”
West interjects, citing his involvement with municipalities with regard to privatising parking.
“In the private sector, an infrastructure investor is only going to be able to pay a city for what it can predict and underwrite’ he says. “A city is dynamic, with government and entertainment and residential, making the long-term value of an asset harder to fully value.”
To Keough, the lingering aftertaste left by the first wave of US P3s has served to reinforce his belief that educating the public as well as government about private investment in public infrastructure is vital.
“I’ve always wanted to have a public campaign to talk about what private investment is and who is doing it,” emphasises Keogh.
That wish, he says, took root from his decade with John Hancock as managing director in charge of infrastructure strategy. Misplaced public skepticism about investing in infrastructure, he explains, can trump the value of infrastructure in a portfolio.
“You look at the capital being raised in a P3 deal, it’s from pension funds and retirement systems,” he points out, “You don’t have a scary monster investing. This is a pension fund. A stake in that has to last multiple generations.
“The pension fund also has to diversify because it has retired people they need to pay out. This is not some nebulous entity from Wall Street — these are people that live near you. I’ve always wished there was a venue to communicate that.”
Dionisio seconds Keough.
“It would be helpful to point out to people that P3 contracts are thoroughly protective of public interest,” he says. “Deviate or underperform, and points accrue that can result in significant economic and reputational loss for the private parties involved. If as a P3 you continuously underperform, the government can take back the asset.”
While Dionisio cites a recent report claiming that 8,000 bridges in the US have been deemed structurally unfit as evidence of a countrywide need for PPPs, Keough bemoans the greater impact infrastructure could be having for public pension plans.
“The thing is, fundamentally infrastructure should have certain performance characteristics like fixed income,” Keough says. “One benefit of infrastructure equity over fixed income is some value protection against rising treasury rates. Infrastructure assets typically have revenue streams with inflation linkage, meaning that top-line revenues should grow in a rising rate environment.
“By the same token, infrastructure is not an asset class to get into for traditional private equity returns. You look to it for stable assets that will be in the ground 30 or 40 years. But I think the main attractiveness of the asset class from an institutional point of view is the stable, long-term nature of these assets.”
LPs, however, are gradually getting better versed in infrastructure, asserts Sanchez Salmeron.
“One of the lessons learned [from the GFC] is the need to have stability,” he says. “Those companies that have the ability to explain the process to investors will attract the most interest. Investors are becoming more sophisticated.”
West subscribes to the same view. “In 2006, the biggest question about infrastructure was, ‘Where does infrastructure fall? What kind of asset class is it? Is it timber, real estate?’” he recalls. “People now have a view. In 2006, they didn’t.”
“Given the relative nascence of the asset class, a lot of investors are discovering it anew,” reasons Dionisio, noting that Meridiam has recently concluded a long fundraising process for Meridiam Infrastructure North American Fund II (MNAFII), needing approximately 18 months to collect approximately $1 billion.
“Pitching infrastructure to an LP can depend on the LP. Generally speaking, the Europeans have invested in infrastructure longer and are more familiar,” he says. “Now more than ever, there’s a good track record of PPP projects globally including several great US successes of recent times.”
Keough finds the contrast between raising an infrastructure fund in 2013 and raising a fund six years ago compelling.
“Imagine starting up a residential real estate fund in 2006 thinking, ‘Well, the housing market is heating up, we should raise money and lever it up’,” he says. “The timing [for infrastructure funds in the GFC] was unfortunate — it led to led to worse-than-projected performance at the time.”
US President Barack Obama has made infrastructure, not to mention partnering with the private sector, a talking point in the national discussion — which the roundtable welcomed.
“It’s always helpful when infrastructure is being spoken about at the national level. You certainly commend the administration for focusing on it,” Dionisio enthuses. “I think the overall plan the President has is interesting: stir capital from the federal government to be used with the private sector to fund infrastructure. You saw that with his idea for the national infrastructure bank.”
In spite of the polarised climate prevalent on Capitol Hill, infrastructure, stresses Sanchez Salmeron, has — unlike no other asset class — always been subject to so-called ‘political will’.
“Infrastructure is a political animal,” he states. “Just look at what can happen with an airport deal. But let me say this: I don’t know of a single place in the world, despite all the failures, or ups and downs, or successes, where the collaboration between public and private hasn’t led to innovation and growth. The truth is that collaboration has been proven to deliver.”
But while the federal government has managed to bolster its lauded TIFIA (Transportation Infrastructure Finance and Innovation Act) programme, seizing the initiative has to take place on a local level.
“Finding a procurement model that’s going to stick is going to take the government a while,” Dionisio says. “But on a state-by-state basis, only Florida or Texas used to get it. Now, Virginia, Ohio, Indiana, Illinois, California and Colorado are also getting it.”
“Many cities around the country have financial issues, such as underfunded pensions, and not maintaining the infrastructure the way it should be,” West says.