“The future demand for infrastructure
capital will outstrip the supply
available from public sources.”
Mind The
Capital Gap:
Impediments to
the Privatization of
Infrastructure
by Tuan A. Pham and Valerie J. Washburn
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 once and several hurdles remain. Its failure
