US: higher political risk than emerging markets

Political risk was cited as a major bugbear by those who gathered last month for an Infrastructure Investor-hosted roundtable on US infrastructure at the Plaza Hotel in New York.

For infrastructure investment and advisory professionals in the US, the risk of projects being stymied by public officials is an ever-present reality. It was a topic frequently referred to during a roundtable discussion hosted by Infrastructure Investor in New York last month.    

“Some of our clients say that if they had $10 million to invest in a project, the place they would be least likely to go is the US due to increasingly high political risk,” said Andrew Fraiser, a partner in the energy & infrastructure practice at law firm Allen & Overy in New York.

“They would rather do ‘true’ emerging markets where the use of private capital is politically benign,” he added.

Some attendees complained of spending millions of dollars on due diligence only for deals to be vetoed by public officials at the 11th hour.

On the other hand, there is a belief that successful precedents – such as the recently closed PR-22 toll road public-private partnership in Puerto Rico – will win people over to the idea that private capital has much to contribute to the renaissance of US infrastructure.

Equally, those gathered said their frustrations were not all to do with politics – but also process.   

There is general agreement that the US has not, as yet, devised a definitive template for private investment in infrastructure that can be used on a repeat basis, country-wide. If such a template could be arrived at, there is a belief that much more private capital would naturally flow.

“There’s not consistent procurement here like there is in the UK or Australia where you have procurement models that assess what the private sector can bring,” says Peter Taylor, executive director of infrastructure at fund manager Hastings Funds Management in San Antonio, Texas. “Here, the private sector differential is not assessed.”

This does not mean that hopes are low of such a template being found. In New York City, for example, Greenhill & Co was recently appointed to look at new ideas and structures for potential PPPs in parking, real estate and water/wastewater treatment. There are hopes that transaction structures may result that can be replicated across the US.

There is acknowledgement that any successful process needs to obtain buy-in from all relevant stakeholders right at the outset. The planned privatisation of Chicago’s Midway Airport is cited as a “terrific case study in generating union concensus”, and hence as a useful precedent, despite ultimately collapsing in 2009 due to a lack of debt finance in the wake of the Crisis.

The US roundtable was held at New York’s Plaza Hotel last month, and featured: Rob Collins (Greenhill & Co); Andrew Fraiser (Allen & Overy); Marc Lipschultz (Kohlberg Kravis Roberts); Alec Montgomery (Industry Funds Management); and Peter Taylor (Hastings Funds Management).

*To read a full-length write-up of the US roundtable, which appears in the November 2011 issue of Infrastructure Investor, please click here.