Lure of P3s Continues Despite Opposition
The United States is headed toward decline, and needs to wake up to the dire state of its infrastructure, according to a report co-published by the Urban Land Institute and Ernst & Young. The study however warns that “political will may only emerge when people face imminent reward or immediate risk–a bridge collapse or a burst levee, and maybe not even then.” The report contends that privatization is the only way to bridge a $170 billion annual funding gap. “It is increasingly clear that the infrastructure funding gap will need to be addressed with public-private partnerships,” says Dale Reiss, Global Director of Real Estate at Ernst & Young in New York City. “If the U.S. fails to embrace this model, it could lead to our economy falling behind more of our global competitors.”
As the lure of public-private partnerships or P3s continues, executive search firm, A.E. Feldman, contends that demand for qualified experts with proven track records and expertise in infrastructure assets’ operations are in growing demand. The firm reports that infrastructure finance jobs are opening up for candidates with backgrounds in investment banking as well as experience in analyzing and executing structured financings. The most sought after candidates are those with experience in infrastructure transactions and environmental engineering.
Politicians on the P3 Bandwagon
Although P3s still face significant opposition, some major players in Washington are feverishly pushing for new methods in which the federal government can finance infrastructure more effectively, with a combination of public and private capital. House Speaker, Nancy Pelosi, says public-private partnerships are not only here to stay, but they are likely to grow in importance, according to Reuters.
Senators Chris Dodd and Chuck Hagel, also introduced The National Infrastructure Bank Act, back in August 2007. The legislation would establish the National Infrastructure Bank - an independent entity of the government tasked with evaluating and financing capacity-building infrastructure projects. The bill would effectively create a public-private partnership agency tasked with expanding the role of the federal government in creating massive public works projects. The bank would encourage local public agencies to “partner” with private for-profit entities to develop projects worth at least $75 million each.
Both democratic presidential contenders, Hillary Clinton and Barack Obama, support the creation of a National Infrastructure Bank. It’s safe to say that total reliance on public funding to support the nation’s infrastructure is increasingly being viewed as an unrealistic option.
An Infocast survey of state and federal legislators, transportation officials, trade associations and members of the financial and investment community, finds that public-private partnerships are coming of age, according to Logistics Management. The report states that some state officials are embracing such private sector financing and tolling not out of any ideological commitment to privatization…but out of necessity.
Logistics Management points out that unlike the federal government, governors cannot legally run deficits. State DOTs are also obliged to commit a major part of their tax-supported transportation budgets to preserving and modernizing existing infrastructure, leaving little money for new construction.
The Indiana Toll Road and Chicago Skyway have already been sold in long-term deals. A consortium led by Spanish infrastructure company Abertis has offered $12.8 billion to lease the Pennsylvania Turnpike for 75 years. If approved by the PA state legislature, it would be the largest U.S. toll road deal in history.
Demand for Talent Escalates
The recent surge in infrastructure investing has led to a number of new players looking to make multibillion-dollar investments in U.S. infrastructure assets. Already there are 72 private equity funds dedicated to infrastructure investments that have raised $120 billion, according to Logistics Management. The report also contends that the United States has emerged as a favorite investment target thanks to perceived pent-up demand for rehabilitation, modernization and expansion of the country’s infrastructure projects.
Infrastructure is considered by most investors to be long-term, inflation proof, and run contrary to business cycles. And right now the rising need for more and updated infrastructure coupled with continuing volatility in other asset classes has led to a number of new players looking to make multibillion-dollar investments in U.S. infrastructure assets. A.E. Feldman says the trend is creating even more demand for qualified investment professionals.
In comments published by Dow Jones Private Equity News, Peter Hofbauer, Global Head of Infrastructure, Babcock & Brown, says, “The degree of interest in competitive bid scenarios has led to an increase in the valuations paid for assets over the last three to five years. As a result, managers and investors need a forensic understanding of the asset’s operations prior to purchase in order to accurately provide a competitive purchase price and ensure the enhancement of the asset once it’s owned.”
Hofbauer adds that, “A flight to quality is underway where quality managers with a demonstrable track record are being sought out by key stakeholders, including investors, lenders and public-sector counterparties…It is clear that the most competitive players and the most compelling investment opportunities in the years to come will be seized by those who have learned the private equity lesson of investing in quality human capital as well as financial capital.”
