Infrastructure financing in the US

Over the last few years, a popular perception has gained ground in India that the private sector can take over the dominant share of the massive investments required in meeting our infrastructure requirements. The few and scattered examples of successful private particiapation in power generation, minor ports, airport terminals, BOT roads under the Golden Quadrilateral Project, and especially development of commercial and residential real estate, have strengthened this impression. This has also been used to explain away the lower than required Government investments in these critical sectors.

But the experience so far from this reliance on private sector and that from other countries would appear to contradict this belief. Even the aforementioned successful cases of private participation, except maybe in roads, have taken inordinately long times in even achieving financial closure. The example of China in the build up to the recently concluded Olympics, for which spent nearly $43 bn over a seven year period, with very limited private participation, is only another example of the fact that, across the world, governments have been the primary investors in infrastructure. It is true that private sector has played an important role, but mainly in managing O&M concessions on already created assets, and at best being JV partners with the Government.

Contrary to popular perception roads and bridges, airports, ports and most other infrastructure assets in the US had been built, operated and maintained by federal, state or local governments either from taxes, user charges or debt raised from the market. Traditionally, the federal government played a major role in developing American infrastructure: 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. The role of private sector, either by way of ownership or maintenance, has hitherto been minimal.

The collapse of the Minnesota bridge last year focussed attention on the poor state of the American roads and bridges. 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.

The Dulles Greenway, a 12.53 mile highway connecting the Dulles Toll Road to the Leesburg Bypass, constructed in 1995, is one of the first fully privately owned toll roads in the US. It was built by a private consortium, Toll Road Investors Partnership II (TRIP II), owned by the Bryant/Crane family and the private equity group Kellogg, Brown and Root (KBR).

In what has been described as the first instance of privatization of an existing toll road in the US, in early 2005, the City of Chicago entered into a $1.83 billion, 99 year lease concession with a private consortium, the Skyway Concession Company, LLC (SCC) (a joint-venture between the Australian Macquarie Infrastructure Group and Spanish Cintra Concesiones de Infraestructuras de Transporte SA), entrusting the operation and maintenance of the 7.8-mile Chicago Skyway Bridge. SCC will be responsible for all operating and maintenance costs of the Skyway but has the right to all toll and concession revenue.

This was followed by another high-profile case of privatization of major highways when, in June 2006, Indiana received $3.8 billion from the same consortium made up of Cintra and the Macquarie Infrastructure Group (MIG), and in exchange the state ceded operation of the 157-mile Indiana East-West Toll Road for the next 75 years. The consortium would finance their investments by collecting all the tolls.

Another eagerly awaited test case for highway privatization in the US is the Pennsylvania Turnpike. As recently as May 2008, the Spanish firm Abertis Infraestructuras, SA and Citi Infrastructure Investors of New York City submitted a record $12.8 billion proposal to lease the Pennsylvania Turnpike. The proposal is facing approval in the State legislature.

As can be seen, there are very few examples of fully privately constructed toll roads even in the US. It is in this context that the NYT reports that major Wall Street firms and private equity funds like Goldman Sachs, Morgan Stanley, Credit Suisse, Kohlberg Kravis Roberts, and the Carlyle Group 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.

But it cannot be denied that given the relative weakening of many sectors from the ongoing financial turmoil, the emergence of highly versatile structured financial instruments in the recent years, the utility of modern technology in quantifying outcomes and facilitating cost recovery, and the massive infrastructure requirements, both in the developed countries and more importantly the emerging economies, there are plenty of interesting opportunities available for private participation in infrastructure creation. But even in the more developed markets with more depth in their private infrastructure markets, the results so far have been limited.