Mind The Capital Gap: Impediments To The Privatization Of Infrastructure

Author:Mr Tuan Pham
Profession:Goodwin Procter LLP

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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