Download Cities Debate Privatizing Public Infrastructure

Cities Debate Privatizing Public Infrastructure
By JENNY ANDERSON
New York Times
August 27, 2008
Cleaning up road kill and maintaining runways may not sound like cutting-edge
investments. But banks and funds with big money seem to think so.
Most public facilities, including the Chicago Skyway,
pictured, were built and maintained with public funds.
But with many highways in poor condition, private
funding has been considered by some public officials as a
quick way to pay for repairs. Two foreign funds with
large portfolios of international investments have gained
control of the Chicago Skyway.
Peter Wynn Thompson for The New York Times
With politicians like Gov. Arnold Schwarzenegger of
California warning of a national infrastructure crisis,
public resistance to private financing may start to ease.
Reeling from more exotic investments that imploded
during the credit crisis, Kohlberg Kravis Roberts, the
Carlyle Group, Goldman Sachs, Morgan Stanley and Credit Suisse are among the
investors who have amassed an estimated $250 billion war chest — much of it raised in
the last two years — to finance a tidal wave of infrastructure projects in the United States
and overseas.
Their strategy is gaining steam in the United States as federal, state and local
governments previously wary of private funds struggle under mounting deficits that have
curbed their ability to improve crumbling roads, bridges and even airports with taxpayer
money.
“Budget gaps are starting to increase the viability of public-private partnerships,” said
Norman Y. Mineta, a former secretary of transportation who was recently hired by Credit
Suisse as a senior adviser to such deals.
This fall, Midway Airport of Chicago could become the first to pass into the hands of
private investors. Just outside the nation’s capital, a $1.9 billion public-private
partnership will finance new high-occupancy toll lanes around Washington. This week,
Florida gave the green light to six groups that included JPMorgan, Lehman Brothers and
the Carlyle Group to bid for a 50- to 75 -year lease on Alligator Alley, a toll road known
for sightings of sleeping alligators that stretches 78 miles down I-75 in South Florida.
Until recently, the use of private funds to build and manage large-scale American
infrastructure assets was slow to take root. States and towns could raise taxes and user
fees or turn to the municipal bond market.
Americans have also been wary of foreign investors, who were among the first to this
market, taking over their prized roads and bridges. When Macquarie of Australia and
Cintra of Spain, two foreign funds with large portfolios of international investments,
snapped up leases to the Chicago Skyway and the Indiana Toll Road, “people said ‘hold
it, we don’t want our infrastructure owned by foreigners,’ ” Mr. Mineta said.
And then there is the odd romance between Americans and their roads: they do not want
anyone other than the government owning them. The specter of investors reaping huge
fees by financing assets like the Pennsylvania Turnpike also touches a raw nerve among
taxpayers, who already feel they are paying top dollar for the government to maintain
roads and bridges.
And with good reason: Private investors recoup their money by maximizing revenue —
either making the infrastructure better to allow for more cars, for example, or by raising
tolls. (Concession agreements dictate everything from toll increases to the amount of time
dead animals can remain on the road before being cleared.)
Politicians have often supported the civic outcry: in the spring of 2007, James L. Oberstar
of Minnesota, chairman of the House Committees on Transportation and Infrastructure,
warned that his panel would “work to undo” any public-private partnership deals that
failed to protect the public interest.
And labor unions have been quick to point out that investment funds stand to reap
handsome fees from the crisis in infrastructure. “Our concern is that some sources of
financing see this as a quick opportunity to make money,” Stephen Abrecht, director of
the Capital Stewardship Program at the Service Employees International Union, said.
But in a world in which governments view infrastructure as a way to manage growth and
raise productivity through the efficient movement of goods and people, an eroding
economy has forced politicians to take another look.
“There’s a huge opportunity that the U.S. public sector is in danger of losing,” says
Markus J. Pressdee, head of infrastructure investment banking at Credit Suisse. “It thinks
there is a boatload of capital and when it is politically convenient it will be able to take
advantage of it. But the capital is going into infrastructure assets available today around
the world, and not waiting for projects the U.S., the public sector, may sponsor in the
future.”
Traditionally, the federal government played a major role in developing the nation’s
transportation backbone: Thomas Jefferson built canals and roads in the 1800s, Theodore
Roosevelt expanded power generation in the early 1900s. In the 1950s Dwight
Eisenhower oversaw the building of the interstate highway system.
But since the early 1990s, the United States has had no comprehensive transportation
development, and responsibilities were pushed off to states, municipalities and
metropolitan planning organizations. “Look at the physical neglect — crumbling bridges,
the issue of energy security, environmental concerns,” said Robert Puentes of the
Brookings Institution. “It’s more relevant than ever and we have no vision.”
The American Society of Civil Engineers estimates that the United States needs to invest
at least $1.6 trillion over the next five years to maintain and expand its infrastructure.
Last year, the Federal Highway Administration deemed 72,000 bridges, or more than 12
percent of the country’s total, “structurally deficient.” But the funds to fix them are
shrinking: by the end of this year, the Highway Trust Fund will have a several billion
dollar deficit.
“We are facing an infrastructure crisis in this country that threatens our status as an
economic superpower, and threatens the health and safety of the people we serve,” New
York Mayor Michael R. Bloomberg told Congress this year. In January he joined forces
with Mr. Schwarzenegger and Gov. Edward G. Rendell of Pennsylvania to start a
nonprofit group to raise awareness about the problem.
Some American pension funds see an investment opportunity. “Our infrastructure is
crumbling, from bridges in Minnesota to our airports and freeways,” said Christopher
Ailman, the head of the California State Teachers’ Retirement System. His board recently
authorized up to about $800 million to invest in infrastructure projects. Nearby, the
California Public Employees’ Retirement System, with coffers totaling $234 billion, has
earmarked $7 billion for infrastructure investments through 2010. The Washington State
Investment Board has allocated 5 percent of its fund to such investments.
Some foreign pension funds that jumped into the game early have already reaped
rewards: The $52 billion Ontario Municipal Employee Retirement System saw a 12.4
percent return last year on a $5 billion infrastructure investment pool, above the
benchmark 9.9 percent though down from 14 percent in 2006.
“People are creating a new asset class,” said Anne Valentine Andrews, head of portfolio
strategy at Morgan Stanley Infrastructure. “You can see and understand the businesses
involved — for example, ships come into the port, unload containers, reload containers
and leave,” she said. “There’s no black box.”
The prospect of steady returns has drawn high-flying investors like Kohlberg Kravis and
Morgan Stanley to the table. “Ten to 20 years from now infrastructure could be larger
than real estate,” said Mark Weisdorf, head of infrastructure investments at JPMorgan. In
2006 and 2007, more than $500 billion worth of commercial real estate deals were done.
The pace of recent work is encouraging, says Robert Poole, director of transportation
studies at the Reason Foundation, pointing to projects like the high-occupancy toll, or
HOT, lanes outside Washington. “The fact that the private sector raised $1.4 billion for
the Beltway project shows that even projects like HOT lanes that are considered high risk
can be developed and financed privately and that has huge implications for other large
metro areas,” he said .
Yet if the flow of money is fast, the return on these investments can be a waiting game.
Washington’s HOT lanes project took six years to build after Fluor Enterprises, one of
the two private companies financing part of the project, made an unsolicited bid in 2002.
The privatization of Chicago’s Midway Airport was part of a pilot program adopted by
the Federal Aviation Administration in 1996 to allow five domestic airports to be
privatized. Twelve years later only one airport has met that goal — Stewart International
Airport in Newburgh, N.Y. — and it was sold back to the Port Authority of New York
and New Jersey.
For many politicians, privatization also remains a painful process. Mitch Daniels, the
governor of Indiana, faced a severe backlash when he collected $3.8 billion for a 75- year
lease of the Indiana Toll Road. A popular bumper sticker in Indiana reads “Keep the toll
road, lease Mitch.”
Joe Dear, executive director of the Washington State Investment Board, still wonders
how quickly governments will move. “Will all public agencies think it’s worth the extra
return private capital will demand?” he asked. “That’s unclear.”
This fall, Chicago's Midway airport
could become the nation's first major
airport to pass into private hands. In
recent years, billions of dollars have
been raised by banks and private equity
firms to build, fix and operate roads and
airports in the United States and around
the world.
As many as six bidders are expected
to ante up more than $2 billion for
Chicago's Midway Airport. In
contrast to public facilities in the
United States much of the
infrastructure in Great Britain,
including its airports and railways,
has been privatized.
Chicago has been at the forefront of
putting its infrastructure into private
hands. Apart from the city's planned
sale of Midway Airport, it has placed
the Chicago Skyway, left, under a
long-term lease held by companies
based in Spain and Australia.
New York spends billions of
dollars on public facilities. In
testimony to Congress this year,
Mayor Michael R. Bloomberg
said "we are facing an
infrastructure crisis in this
country that threatens our status
as an economic superpower and
threatens the health and safety
of the people we serve."
The Indiana Toll Road, pictured, has been put in private hands. Indiana decided to lease
the Toll Road in 2006 to a private consortium for 75 years in exchange for $3.8 billion.