Will private investment save U.S. infrastructure?

In the hope it can build faster, cheaper than government

By CEZARY PODKUL Washington Post Published:

When the city of Chesapeake, Va., considered closing a crumbling, 80-year-old bridge over the Elizabeth River in 2008, local officials knew that neither the state nor the federal government would pay for a replacement. Just tearing down the old one would cost millions of dollars. So they sold it.

"We paid them $10," said Bob Hellman, one of the investors, but "what we gave them wasn't just $10."

Hellman's investors group, American Bridge Partners, agreed to remove the old bridge -- and to build a brand-new one, solely with private money. Tolls of about $2 a trip, up from the old 75-cent fee, will pay back the company's $130 million investment in the new South Norfolk Jordan Bridge, due to open in the spring.

"This is a Christmas gift for the city," said Chesapeake Mayor Alan Krasnoff.

It's a gift cities and states are asking for more than ever.

The goal is not to raise cash by selling public infrastructure but to tap into the private sector for money to build bridges, roads or tunnels -- possibly faster and cheaper than the government otherwise could.

There are at least 70 privately funded and managed infrastructure projects across the United States in various stages of development, according to a list compiled by the law firm Allen & Overy. These are part of a vast network of roads, bridges and tunnels -- to say nothing of the subways, ports, airports and water systems -- crying out for attention.

Consider this: Over the past 60 years, the United States has built a 46,876-mile federal highway system that is now in dire need of repair. As a result, states have had to pour more of their transportation dollars into fixing aging highways and even in good times have little or nothing left over for new construction.

The Great Recession made that harder. In many cases, financially strapped states and cities have little choice but to turn to the private sector, even if it means giving up revenue and selling off an asset normally seen as belonging to the public.

In Chesapeake, "they were looking at our bridge versus no bridge," said Hellman, who previously invested in pipelines, coal, landfills and even cemeteries. "That's ultimately what you're looking at in many of these circumstances."

"States are facing a transportation funding crisis," said Jaime Rall, transportation policy specialist at the National Conference of State Legislatures (NCSL). But she does not pin the blame for the crisis on the recession alone. She also points to the "political reluctance to raise the gas tax," she said.

The gasoline tax, which feeds into the National Highway Trust Fund for highway projects, has stood at 18.4 cents a gallon since 1993. Adjusted for inflation, it would need to be 29 cents a gallon just to buy what it did then, according to the Bureau of Labor Statistics. But Congress and the White House oppose any increase.

As a result, federal transportation finances are in even worse shape than many states'. The highway trust fund ran out of cash and had to be rescued in 2008, 2009 and 2010 at a total cost to taxpayers of $34.5 billion. It is expected run out of cash again next year.

"There is no public money," said D.J. Gribbin, a former chief counsel to the Federal Highway Administration who works at Macquarie Capital, a large Australian investment bank.

While public coffers have been running dry, a cottage industry has been built around the concept of investing private money in infrastructure. It has grown exponentially over the past decade, thanks largely to the world's largest pensions, which have come to view infrastructure as a separate investment category, much like a stock or a bond.

Precise estimates are hard to pin down, but in the past five years, the 30 biggest investors in infrastructure have channeled as much as $180 billion into these types of investments, according to Infrastructure Investor magazine. These investors include Macquarie, as well as some of the largest pension plans in Europe, Australia and Canada.

More capital is on the way. There are 100 private funds seeking to raise $95 billion for infrastructure investments globally, according to a tally by San Francisco-based fund adviser Probitas Partners, though not all of them will succeed. Of that, about $11.5 billion would be targeted for the United States, with fund sizes ranging from $100 million to $3 billion.

"In 2003, nobody in the U.S. talked about infrastructure," said Kelly DePonte, a partner at Probitas. "We really have seen a sea change in interest."

The main draw for investors, DePonte said, is the steady, predictable income that infrastructure assets can provide. People need to get to work, use electricity and flush toilets, so a toll road, an electric utility or a water utility tends to deliver cash no matter what happens in the stock market on any given day. Recent research by Macquarie shows infrastructure has outperformed the global stock market by an average of about 0.5 percent per month in the past 10 years.

"Traffic on the road is highly insensitive to stock market levels," said Chris Camarsh, head of investment process at Australian fund manager CP2. That makes infrastructure a good way to save for one's nest egg, since "there is good predictability that the cash will be there when you're older," he said.

Camarsh, for example, holds shares in Transurban, an Australian toll road developer that owns an 85-year contract to build and operate an expansion of the Capital Beltway in Fairfax.

"It's my retirement," he said.

That has helped lure Canada's $52 billion Ontario Municipal Employees Retirement System, which provides retirement benefits to more than 400,000 members. It has devoted about $8.25 billion of its portfolio to infrastructure because it "matches the long-term returns that we need for the pension plan," said Michael Nobrega, chief executive of OMERS.

The pension fund bid -- unsuccessfully -- for the Chicago Skyway and the Pennsylvania Turnpike.

Nobrega is putting together the $20 billion Global Strategic Investment Alliance with other large pensions around the world, including as much as $5 billion from U.S. pension funds, to jointly buy some of the largest assets in the world.

"Any pension that does not have allocation to large-scale infrastructure assets . . . I think is missing a real opportunity," he said.

In the United States, he sees a $1 trillion shortfall for infrastructure investment.

"But," Nobrega said, "I think the government framework has to be there to encourage us to be there."

States are increasingly rolling out the red carpet to attract big investors to their infrastructure projects. Thirty-one states and Puerto Rico have laws on their books authorizing private investment in infrastructure, according to the NCSL's Rall.

But the laws vary so much from state to state that investors often refer to the United States as a patchwork of 50 separate countries. Nevada, for example, has approved private investment in one toll road, while Puerto Rico's 2009 law created a menu of opportunities across water, energy, transportation and education sectors, as well as a separate office to administer them.

Some municipalities and states -- such as Ohio, which is mulling over whether to lease its turnpike -- have come back to the private market with deals on existing infrastructure.

But plans for new-construction projects are moving along, mostly at the state level.

Even when governments embrace deals, the math does not always add up for private investors. The classic example: a short California toll road called the South Bay Expressway.

The road made history in 2003 when it became the first privately backed toll road to secure a loan from a Transportation Department program designed to provide financing for innovation. The $140 million loan helped kick-start construction on the 9.2-mile road.

But when the $658 million project opened to traffic in November 2007, things did not go as planned. The subprime-mortgage crisis roiled Southern California. Expected housing developments were canceled. Traffic was about half of what investors had expected, said Greg Hulsizer, the toll road's chief executive.

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