Private Investors Can Save Public Infrastructure
Think about this the next time you drive over a bridge: In 2012, a quarter of all U.S. bridges were deemed structurally deficient or functionally obsolete. (On second thought, don't.)
For decades we have paid for our neglected infrastructure in lost productivity and jobs, but the full bill is now coming due. The American Society of Civil Engineers estimates that the U.S. will require almost $2 trillion by 2020, more than twice the amount that appears to be available, to maintain and upgrade decades-old highways, inland waterways, ports, airports, rail and transit systems. And that doesn't include vehicles operating in these systems and the communications infrastructure connecting them.
There is little political will to achieve that goal, and the two main traditional funding sources are increasingly at risk: the gas tax and municipal bonds. The gas tax is stagnating because of increased vehicle efficiency, alternative energy sources and fewer per capita miles driven since a 2004 peak. As for muni bonds, in a low-interest-rate environment with cities increasingly declaring or flirting with bankruptcy, there are questions about whether these once-safe investments can attract enough capital.
What other avenues exist for raising capital?
Selling or leasing public assets to private companies is no panacea. A U.K. company took a 99-year lease on the small Newburgh, New York, airport in 1999, then gave it back to the Port Authority of New York and New Jersey because expansion costs were too large. Chicago has attempted to privatize Midway Airport twice, unsuccessfully; recently the city couldn't get more than one bidder. Chicago's experience with highway privatization has been even worse.
That's not to say the model is hopeless. Private-equity company KKR & Co. closed a $4 billion infrastructure and energy fund to take infrastructure private and earn returns through operational efficiencies. In February 2013, Highstar Capital LP took San Juan, Puerto Rico's Luis Munoz Marin International Airport private in a 40-year, $615 million concession, in collaboration with the Mexican group ASUR. The agreement caps fees charged to airlines, ensuring that profis must instead come from operational efficiencies; incentives for community support are included. It's too soon to know whether funds such as this will make money.
After privatization failed to win widespread support, infrastructure banks came to be seen as a magic bullet. Proponents argue that such banks, used extensively in Europe and China, can finance U.S. projects and ensure disciplined planning and accountability. States are testing the waters; 23 infrastructure banks have been set up, but only a few, such as South Carolina and Florida, are currently active. In June 2012 Chicago Mayor Rahm Emanuel announced that his city would create the world's first metropolitan infrastructure bank, the Chicago Infrastructure Trust, whose board includes business, labor, and public officials. The trust tentatively approved its first project in November 2013, a $25 million energy efficiency retrofit of 75 public buildings, to be repaid over 20-25 years from utility savings at an interest rate between 3.8 percent and 4.7 percent.
Public-private partnerships, familiarly known as PPPs or P3s, are a more promising model, even if highly complex. The Port of Miami Tunnel is a major public-works project financed by private investors, and it's coming to fruition on-time and under budget. Meridiam Infrastructure leads the financing consortium, bringing low-cost senior bank loans from mostly European banks along with a federal loan and equity investments. A French company handles the construction, using an innovative German drill to avoid tearing up the ocean floor and thus minimize environmental damage.
The $1 billion tunnel will divert as many as 16,000 vehicles a day, including 5,000 18-wheeler trucks, away from the heart of downtown Miami directly to the interstate highway, alleviating congestion, pollution, safety concerns for pedestrians and delays for shippers. At the end of the 30-year concession period, the tunnel must be transferred back to public hands in excellent condition.
Big projects like this require strong public-sector leadership; the Miami tunnel would never have happened without the persistent support of then-Governor Jeb Bush's transportation secretary, Jose Abreu; Miami-Dade County officials; and then-Mayor of Miami Manny Diaz. Often, such projects also require collaboration across traditional boundaries, and it is encouraging that such initiatives seem to be on the rise. Eight states, for instance, are working together to establish charging stations for electric vehicles. The presidents of the U.S. Chamber of Commerce and the AFL-CIO have also joined forces to argue for infrastructure investments, and on Wednesday President Barack Obama announced he's seeking a $302 billion transportation bill.
Widespread public support makes long-term projects less risky. That, in turn, could attract more private investors. With more U.S. investors active in the sector, there would be more knowledgeable voices at the table to argue for repairing, renewing and reinventing the infrastructure that supports commerce and quality of life. As difficult as the journey will be, there is still light at the end of the tunnel.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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