The US airport sector is still taxiing for take-off

Across the country, increased needs in ageing sectors is providing opportunity for investors – yet questions of funding models and increased politicisation remain.

In the lead up to the 2016 presidential election, infrastructure was a much-discussed policy issue by then candidate Donald Trump.

Even after the victory that placed him in the White House, President Trump continued his rhetoric of $200 billion in federal spending, which, he hoped, would encourage more than $1.5 trillion in overall investment at the local, state, municipal and private sector levels.

Unfortunately for the President (and the economy), an analysis from the Wharton School – Trump’s alma mater – found that most of the incentives would fail to attract anything close to the $1.5 trillion goal. The report said that each new dollar of federal spending could reduce spending by state and local governments because, in many cases, they already qualify for the proposed new grant money within their existing infrastructure programmes.

“Investment across all levels of government would increase between $20 billion to $230 billion, including the $200 billion federal investment,” said the report. As a result, the plan would have “little to no impact” on gross domestic product.

However, there are still areas that are experiencing a renaissance and need institutional investor capital as the country moves past the mid-term elections and into the 2020 election season. One such area is water and wastewater. In October, President Trump signed the America’s Water Infrastructure Act of 2018 authorising funding for water infrastructure projects; expanding the country’s water storage capabilities; upgrading wastewater, drinking and irrigation systems; as well as authorising or reauthorising water infrastructure projects.

The Act approved more than $6 billion in spending over 10 years for projects nationwide. However, it’s still another drop in the investment ocean (pun intended).

Gregory Smith, president and chief executive of InstarAGF Asset Management, a Toronto-based infrastructure investor, says the opportunities for investment in US infrastructure remain robust. “When I look at what’s happening with municipalities and what’s happening at the state level, there is still a lot of activity in energy, and regulated fields including water and wastewater,” he says.

Smith also adds that infrastructure had been growing in the US well before Trump talked about it and, from an investment point of view, there is an interest in a gradual approach as opposed to an immediate surge in projects, “so that we, in the private sector, can determine how to add value and innovate in conjunction with a solid procurement process, and alternative government funding”.

WELCOME ABOARD

Recently, there has been growing activity in another sector of the economy in desperate need of capital, reinvestment and modernisation, given the changing habits and demographics of the population – the airport sector.

The American Society of Civil Engineers says US airports serve more than two million passengers per day. “The aviation industry is marked by technologically advanced and economically efficient aircraft, however, the associated infrastructure of airports and air traffic control systems is not keeping up. Congestion at airports is growing; it is expected that 24 of the top 30 major airports may soon experience ‘Thanksgiving peak-traffic volume’ at least one day every week. With a federally mandated cap on how much airports can charge passengers for facility expansion and renovation, airports struggle to keep up with investment needs, creating a $42 billion funding gap between 2016 and 2025,” says the ASCE. As a result, they have given the aviation sector a grade of “D” on their Infrastructure Report Card.

But changes are being made and investment is taking shape. In New York, for example, Governor Andrew Cuomo unveiled a $13 billion plan that would help increase capacity at JFK Airport by 15 million passengers per year, while at the same time modernising and consolidating airport terminals. A staggering 90 percent of the project is being financed by the private sector – mostly airlines – and tentative plans call for the first gate openings in 2023. Construction is projected to begin in 2020.

Also, the airport sector is still receiving positive outlooks from rating agencies and analysts. In a recent Fitch Ratings report, senior director Seth Lehman noted “GDP growth and general airline health remain the most important revenue gauges for airports, though rising rates could make bor- rowing debt more expensive for airports with a substantial pipeline of investments on the horizon.”

Others in the industry also see the potential for further investment opportunities.

“There is a hope that we will see more transportation assets coming to market,” notes Giulio Leucci, a senior advisor to Partners Group. “There are a few projects that may come to fruition in the next year, mainly St Louis Airport is starting to consider privatisation and Louisville, Kentucky may also be interested in the privatisation process,” he adds.

He notes that most airport redevelopment projects would act as some form of public-private partnership model given that the government is generally the leaseholder and will support construction or, at the very least, be a landholder in the deal. In the case of JFK, he says JetBlue Airways has put in its own money for the construction of Terminal 5 but will also likely tender management of the terminal to outside vendors, again resembling a PPP model for the airport.

Despite immediate projects, Smith, whose firm is also an investor and part-owner of Toronto’s Billy Bishop Airport, one of the only privatised airports in Canada, says air-traffic demand will double in the next 30 years and, “the need to have improvements and grow in aviation infrastructure is becoming very large”, he says.

“When we look at investing in airports, we look at what are the strong value-add for stakeholders, for the government, for the community and for the passengers, as well as what’s generating some of the long-term economic value for that airport,” adds Smith.

So, looking at alternative structures for improvement and redevelopment is key. And because only 40 of the top US airports are either fully or partially privately owned, there is a role for further privatisation of the aviation sector, in Smith’s opinion. “The value that the private investor brings to the sector is not just capital, it does allow the transfer of risk to the private sector, global relationships and different innovations (we are seeing globally) into that airport.”

Infrastructure funding and the debate surrounding it is becoming a more politicised discussion in some states. In California, Colorado, Missouri and Utah, voters, in the mid-term election, faced ballot issues that could affect gas taxes and/or transportation funding. Proponents of infrastructure spending view this as a risky move as voters tend to recoil at the idea of increased gas taxes. This begs the question: Is infrastructure becoming too politicised?

Expect a lot more ‘politicisation’

“Because of the lack of funding at the federal and state level you will see a lot more politicisation of infrastructure issues,” says Giulio Leucci, a senior advisor to Partners Group. “Airport privatisation or toll-road privatisation is one of those issues that will be more a part of the discussion on political agendas.”

He adds that if there is no current mechanism for funding certain infrastructure, decisions will need to be made to change legislation, which will then lead to politicians going back to the public for input. “I can see this being more prevalent since there is not enough ‘dry powder’ in the pockets of government.”

Gregory Smith, president and chief executive of InstarAGF Asset Management, says the old days of building infrastructure meant expropriating land and not involving the public on any meaningful level. “Infrastructure today is embedded in the fabric of our society. The vast majority of what’s important has to be how do we approach communities; how do we get strong public support and strong governmental support. Proper legislation and policies will follow from there. It has to move into community and stakeholder engagement. It’s a paramount starting point and then proper regulation and policies will follow from there. As infrastructure professionals, we are spending a lot more time on the social impact of infrastructure and if we avoid that or we don’t do that, we do so at our own peril.”