‘P3’ backers push appeal for higher transport, infrastructure spending—but with higher costs

John D. Schulz, Contributing Editor -- Logistics Management, 5/23/2008

WASHINGTON—As the nation struggles with an aging and outdated transportation infrastructure, private capital and increased reliance on toll revenue financial will play a major role in funding future projects.

That’s the word from experts surveyed in support of a background paper for Infocast’s Conference on Transportation Infrastructure held in Washington, D.C. on May 15-16.

“The issue of our continued underinvestment in infrastructure in the United States is increasingly important,” said David Narefsky, a partner with Mayer Brown, a Chicago law firm which has worked on such privatization projects as the Chicago Skyway and the proposed sale of the Pennsylvania Turnpike. “The current funding mechanism just isn’t working. It isn’t addressing the country’s needs for economic viability.”

The issue is sure to percolate in Washington next year, the final year of the five-year federal highway bill. In light of such high-profile tragedies such as the I-35 bridge collapse in Minneapolis, one thing is certain—more money will be spent. It’s only a question of how much more.

Some major players in Washington already are on the infrastructure bandwagon. U.S. Chamber of Commerce President Thomas J. Donohue recently called higher infrastructure investment “critical” for America’s economic future.

“If we fail to invest in our infrastructure, America’s pre-eminence as an economic superpower will begin to wane,” said Donohue, a former head of the American Trucking Associations. The Chamber has begun a coalition called “Let’s Rebuild America” designed to do exactly that. It is spending millions to get the country to spend billions on highways, bridges and other critical, if not sexy, economic underpinnings.

In a huge privatization deal, Pennsylvania recently announced that a Barcelona-based company, Albertis Infraesctrururas SA, and Citigroup will pay the state $12.8 billion for a 75-year lease on the 524-mile Pennsylvania turnpike. It is the largest U.S. infrastructure deal in history. The deal still requires approval from Pennsylvania legislators, but is expected to pass.

The current highway bill is $286 billion over five years. Rep. James Oberstar, D-Minn., chairman of the House Transportation and Infrastructure Committee, has floated the idea of a $500 billion bill over five years starting next year. Some legislators have talked of a bill as much as $1.5 trillion, which would include $500 billion in “creative financing” and another $500 billion in public private partnerships.

The difference this time around may be where that money comes from. In the past, most federal-aid highway projects were funded by the Highway Trust Fund, which gets the majority of its funds from the federal tax on fuel (18.4 cents on gasoline, 23.4 cents on diesel), which has gone unchanged since 1993. That Highway Trust Fund, which ran a surplus of over $12 billion in the 1990s, is projected to run a deficit next year because of politicians’ distaste for raising the fuel tax.

There are signs in Washington and elsewhere that reliance on the federal government for the lion’s share of highway funding may be ebbing. Total reliance on public funding and the fuel taxes to fund investments in transport infrastructure “is no longer a realistic option,” according to Infocast survey of state and federal legislators, transportation officials, trade associations and members of the financial and investment community.

 The word from these officials is that public-private partnerships—or “P3s,” in the vernacular of the day—are coming of age. Some state officials say they are embracing such private sector financing and tolling not out of any ideological commitment to privatization. Rather, they say, it’s out of necessity.

That’s because most governors cannot legally run deficits, like the federal government can. Increasingly, state DOTs are obliged to commit a major part of their tax-supported transportation budgets to preserving and modernizing existing infrastructure, leaving little money for new construction.

Still, P3s are hardly a slam-dunk politically.

Texas recently enacted a two-year moratorium P3s. The California legislature recently rejected a plan to establish an Office of Public-Private Partnerships to promote P3s in that state.

“I don’t think public-private partnerships are a panacea,” says Jay Gonzalez, undersecretary, executive office for administration and finance in Massachusetts. “There is also a perception problem.”

Certainly, the lame-duck Bush administration is a P3 proponent. Transportation Secretary Mary Peters has been an aggressive backer of such deals. “Unleashing the investment locked in the private sector by partnering with business is the most efficient path to the transportation future this country needs and deserves,” Peters told an audience of Arizona contractors in February.

But it’s not just Republicans who are waving the P3 flag. Sens. Chris Dodd, D-Conn., and Chuck Hagel, R-Neb., recently proposed establishment of a “National Infrastructure Bank” that would establish what Sen. Dodd has called “a unique and powerful public-private partnership.” Hagel is even more pragmatic. He has said the federal government “does not and will not have the resources to meet our future national infrastructure needs.”

The Dodd-Hagel bill would create a bond-financed federal capital budget for infrastructure that would insulate transport funding from the vagaries of the annual appropriation process in Washington. It opens the door for “project-backed infrastructure bonds” to finance income-producing infrastructure assets such as toll roads. The bill has been endorsed by both Sens. Barack Obama and Hillary Clinton and by House Speaker Nancy Pelosi. To date, presumed Republican presidential hopeful Sen. John McCain has not directly addressed the infrastructure issue.

P3 backers claim there is a “tsunami” of money ready to pour into infrastructure. Already there are 72 private equity funds dedicated to infrastructure investments that have raised $120 billion. The infrastructure bonds would raise that figure to between $340 billion and $600 billion.

Most infrastructure funds have a global reach. But the United States lately has become a favorite investment target, experts say, because of the perception of the pent-up demand for rehabilitation, modernization and expansion of projects in the U.S.

And it’s not just highways. There is a growing scarcity of deep water port capacity. The ongoing Panama Canal expansion has raised expectations of similar improvements on the Eastern Seaboard ports. Just recently, Virginia established a commission to consider privatization of the Virginia Port Authority.

Of course, it’s not all seashells and balloons for privatization. Some major trade groups, such as the American Trucking Associations, have been highly vocal in their opposition to P3s and higher tolls, which truckers consider just higher taxes.

Also, in light of the current worldwide credit crisis, banks may be less willing to lend as much money for these projects that in the past would have been profitable on paper. Any rise in long-term interest rates could reduce the attractiveness of these infrastructure investments, which rely on what backers admit is substantial leverage to produce attractive returns. If interest rates rise would mean a higher share of toll revenue would go to service debt, thus reducing yields on invested capital.

Another warning sign is the higher bidding for existing assets. This is driving up prices, reducing yields and lowering the attractiveness of public infrastructure\investments compared to more traditional investments in other areas.

Already, the Indiana Toll Road and Chicago Skyway have been sold in long-term deals. Pennsylvania Gov. Ed Rendell currently is seeking bids on the 543-mile Pennsylvania Turnpike. But P3 appeal is not universal. Recently New Jersey Gov. Jon Corzine dropped plans for “monetizing” the New Jersey Turnpike in the wake of widespread public opposition. Instead, he has proposed sharply higher tolls on Garden State highways.

So the bottom line appears to be this: more money is going to be spent on infrastructure, whether it’s from government or some more innovative funding mechanism. But whether through tolls or other means, users are being counted on to pay more—whether to directly fund those projects or to allow for profits from the investors in those projects.