Mind The Capital Gap: Impediments To The Privatization Of Infrastructure
It doesn't take a Hollywood executive to know that
America's infrastructure is in need of an "extreme
makeover." Built predominantly during the middle of the last
century, U.S. infrastructure has been pushed to and, in some cases,
beyond its limits. The American Recovery and Reinvestment Act of
2009 acknowledged this reality by earmarking over $100 billion of
government funds for infrastructure-related spending — a
level unseen since the days of FDR. While stimulus funds may
provide some relief, a great deal more capital is needed. The
American Society of Civil Engineers recently estimated that
approximately $2.2 trillion dollars is needed to fund
infrastructure over the next five years. Who will bridge the
capital gap?
As traditional funding sources, such as increased taxes and
public bond financing, have become increasingly difficult to
access, private investment has moved to the forefront. Available
equity capital for infrastructure from both U.S. and international
institutions has skyrocketed from $10 billion in 2004 to $180
billion in 2008. Many observers believe that, despite broader
economic uncertainty, investors will continue to flock to the
steady yields and inflationary hedge offered by infrastructure
investment. Previous successful projects such as the Chicago Skyway
and Indiana Toll Road transactions also provide impetus for
privatization. Heightened private interest, however, depends on
private investors' ability to weigh the associated risks
against the potential returns. In the infrastructure arena, the
pitfalls and hurdles of privatization can be significant.
The Obstacle Course
Two of the largest and most visible proposed privatizations
– the Pennsylvania Turnpike and Chicago's Midway
Airport – vividly illustrate the obstacles confronting
private investment in infrastructure. The Penn Turnpike transaction
proposed a 75-year lease of a 537-mile state-owned highway to a
private consortium composed of Citi Infrastructure Investors
("CII"), Abertis Infrastructure, and Criteria CaixaCorp.
The Midway deal involved a 99-year lease of Midway Airport, a
five-runway hub that handles 300 flights daily, to a joint venture
comprised of CII, YVR Airport Services, and John Hancock Life
Insurance Company.
Despite the promise of these two projects, neither has closed.
The Penn Turnpike privatization collapsed in October 2008. The
Midway privatization is now slated to be complete in the first half
of 2009, but it has already been delayed...
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