Need for Infrastructure Finance Talent May Heat Up Along with Push for PPPs
The American Society of Civil Engineers (ASCE) just released its 2009 Report Card for America’s Infrastructure. For the fourth time since 1998, the group assigned a cumulative grade of “D” to the nation’s infrastructure, estimating that $2.2 trillion would be needed to restore it to acceptable levels – that’s up from $1.6 trillion in 2005.
The ASCE’s Report Card is an assessment by professional engineers of the nation’s status in 15 categories of infrastructure, including bridges, dams, drinking water, energy and roads. The group states that “all signs point to an infrastructure that is poorly maintained, unable to meet current and future demands, and in some cases, unsafe.” While the nation’s grades have not improved since the last report card in 2005, deteriorating conditions and inflation have added hundreds of billions to the total cost of repairs and needed upgrades.
ASCE President Wayne Klotz told InfrastructureInvestor, “Obviously, this new number is significantly greater than the rate of inflation and what it reflects is that there is a cost for not taking care of your infrastructure systems.”
Taking inflation into account, the ASCE estimates the U.S. will spend $180.6 billion per year over the next five years on all levels of government, plus an additional $100 billion over the next two years in economic stimulus-related infrastructure spending. That amounts to just $1.1 trillion – far short of the projected $2.2 trillion the ASCE says is needed. Infrastructure Investor quotes Klotz as calling the deficiency a “staggering” $1.1 trillion funding gap. The report adds that Klotz said, “If we’re going to bridge this gap, there has to be a place for private capital.”
Push for PPPs Gains Momentum
One recent example of the push for public-private partnerships, PPPs or P3s, is seen in Texas. The Texas Transportation Commission, on January 29th, unanimously approved a contract with a private development company to build parts of the North Tarrant Express project. NTE Mobility Partners will plan, design, construct, operate and maintain 13 miles of highway along the North Tarrant Express corridor – the Northeast Loop 820 beginning at Interstate 35-W and ending at the Highway 121 split. NTE Mobility is a consortium led by Madrid-based Cintra and Meridiam Infrastructure, according to the Texas Department of Transportation (TxDOT).
The TxDOT adds that NTE Mobility Partners will provide financial and development plans to improve the rest of the corridor. The project will rebuild the existing I-820 and SH 121/ 183 highways, add two toll-managed “express” lanes in each direction, improve frontage roads and add auxiliary lanes along the corridor. The PPP will also nearly double the capacity of the highways. Construction on the highways would begin in 2010 after financial close on the contract later this year. TxDOT will retain ownership of the state roadways and will conduct regular audits to ensure a quality project and operations.
“This public-private partnership is a tool that the region and TxDOT have supported to put the long-awaited North Tarrant Express improvements on a fast track. Not only will the project bring thousands of jobs to the region, the reliable mobility will keep the North Texas economy viable and attractive to businesses staying here and relocating here, “said Tarrant County Judge Glen Whitley.
Texas Transportation Commissioner Bill Meadows adds, the “announcement is an important signal that local leaders, the private sector and TxDOT can find opportunities to work together to meet our state’s transportation challenges.”
Meanwhile, an effort to privatize the Minneapolis-St. Paul International Airport is set to hit the floor of the state legislature, according to the Minnesota Independent. The report states that in the new session, lawmakers will take up schemes to make money through airport privatization inspired by the lucrative, 99-year deal at Chicago’s Midway Airport. A separate report by InfrastructureInvestor adds that Republican State Senator Geoff Michel and Republican Representative Laura Brod are authoring a bill in their respective chambers that would put both the airport and the state lottery in private hands, as well as create a catalog of other state-owned assets so that lawmakers can determine what else can be monetized.
Texas and Minnesota aren’t alone. Facing a slowing economy, at least 41 states are expected to face budget shortfalls this year. As a result, a growing number of lawmakers are now pressing for new approaches to filling the funding gap. InfrastructureInvestor quotes Pennsylvania Gov. Ed Rendell, who has called called infrastructure “the sexiest word in the English language,” as saying, “We have to be innovative. We have to find ways – whether it’s by creating an infrastructure bank or changing and amending TIFIA – to use private capital to be a part of the solution to coming up with the necessary funding.”
The Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA) established a tax-exempt Federal credit program for eligible transportation projects. The U.S. Department of Transportation (DOT) is authorized to provide three forms of credit assistance – secured (direct) loans, loan guarantees, and standby lines of credit. According to the DOT, the program’s fundamental goal is to leverage Federal funds by attracting substantial private and other non-Federal co-investment in critical improvements to the nation’s surface transportation system.
The ASCE also warns that continued neglect of U.S. infrastructure needs could have a devastating effect on the economy. “A healthy infrastructure is the backbone of a healthy economy. In these challenging times, infrastructure is essential to reviving the nation’s fortunes, and in maintaining our high quality of life.”
Investors Still “Like” Infrastructure
Private Investment into infrastructure will continue on a growth path as the infrastructure funding gap continues to widen, according to Standard & Poor’s (S&P).
Fund placement agents active in infrastructure also say LPs are likely to stick with…or even up…their commitments to the asset class despite the economic downturn, according to InfrastructureInvestor. According to the report, fund placement agents interviewed by InfrastructureInvestor say the slowdown in fundraising that started in the fourth quarter of 2008 is not as severe in infrastructure as it is in other asset classes. Moreover, InfrastructureInvestor reports that looking ahead LPs may be eyeing more infrastructure and energy as a way to weather the economic downturn. The report quotes Kelly DePonte, Partner at Probitas, as saying, “If you look at the underlying trends in surveys and in conversation with investors, forecasting 2009, I think there is still a lot of interest in infrastructure.”
Recent Probitas data estimates that $94 billion in infrastructure funds are coming to the market in the next 12 months. Probitas counted 63 funds worldwide, more than half of which are targeting upwards of $1 billion and expecting annual returns of between 10% and 12%. The group says most of the funds will focus on developed countries with much of the capital being directed at North America and Europe.
Still, there remain concerns among LPs about investors unsuccessfully copying the “Macquarie model” of highly leveraging existing infrastructure assets to derive higher returns for investors, states InfrastructureInvestor. The report adds however, that investors understand that not everyone in the infrastructure space was following the Macquarie model, so a fair amount of interest in the asset class remains for 2009.
In short, despite economic uncertainty, investors around the world continue to see opportunity in infrastructure thanks to the asset class’s predictable long-term return profile, and the fact that budgetary constraints across the globe are encouraging governments to seek private-sector financing.
The trend may soon open doors for professionals with experience in project and infrastructure finance. Executive search firm, A.E. Feldman, says infrastructure finance jobs are likely to open up for candidates with backgrounds in investment banking as well as experience in analyzing and executing structured financings. Experience in infrastructure transactions and civic engineering will also be highly desirable. Additionally, legal jobs may open up for attorneys with expertise in global project development and complex financial transactions.
Are you working in Project & Infrastructure Finance? If you want to grow your career or discuss your company’s talent needs, contact A.E. Feldman’s President, Mitch Feldman, now.
