All parties with an interest in any facet of the public infrastructure market should take heed and prepare for an active period characterized by significant opportunity.
On December 3, 2008, the Joint Transportation Committee of the Massachusetts Legislature held a three-hour informal hearing on the potential of Public-Private Partnerships (PPPs) to fund transportation infrastructure projects in Massachusetts. A potential lease of the Massachusetts Turnpike (the Pike), the state's only major toll road, received the most attention from participants. Panelists included Leonard Gilroy of the Reason Foundation; John Schmidt, who served as counsel to the City of Chicago in the recent Chicago Skyway PPP; and representatives from Macquarie Capital Advisors and Cintra, Concesiones de Infraestructuras de Transporte SA, two major international entities that have been active in U.S. infrastructure PPPs, including the Chicago Skyway and the Indiana Toll Road.
The timing of the Massachusetts hearing and the renewed public sector interest in infrastructure PPPs that it indicates are in some ways ironic. For several years prior to the current economic downturn, private sector interest in public infrastructure investments boomed. Massive U.S. and international funds were raised, representing hundreds of billions of dollars in search of viable infrastructure deals. Unfortunately, "viability" in this context requires political acceptance of the notion of private sector operation of public infrastructure. A lack of such political acceptance resulted in relatively few consummated deals, and enormous sums of money left on the table even as state and local governments—along with the rest of the economy—moved inexorably towards a time of greater need and fewer resources.
The Pennsylvania Turnpike lease, which was pushed hard by Governor Ed Rendell and garnered a $12.8 billion winning bid, is a prime example of recent willingness of U.S. politicians to forego significant sums of money in order to retain control of failing public assets. The Pennsylvania Legislature this year refused to take action on the winning bid, effectively killing the initiative. In 2007, the North Texas Tollway Authority exercised a right of first refusal to trump Cintra's winning bid for a new toll road north of Dallas. The Texas legislature also enacted new restrictions on toll road PPPs.
A Changing Paradigm
Massachusetts has long been a hostile forum for private sector investment in public assets. In the 1990s, the Massachusetts legislature responded to efforts by the governor to privatize some state assets by passing legislation known as the Pacheco Law, which set high hurdles to privatization and is widely seen as among the most restrictive anti-privatization statutes in the United States. The mere fact of the recent Transportation Committee hearing, which drew a packed room and lasted over three hours, supports the proposition that the current economic downturn may be softening resistance to PPPs at the state and local level.
Massachusetts faces not only a large budget deficit (estimated at well over $1 billion), but also significant debt obligations tied specifically to its transportation system. The Turnpike Authority is currently struggling with financial viability as it sinks under the weight of more than $2 billion in debt incurred to fund the Central Artery Project (the Big Dig). That debt, which devours a large part of Pike toll revenues, recently caused a downgrade of the Pike's bond rating to just above junk status and prompted Governor Deval Patrick to support a massive proposed toll increase. These developments, and the resulting public outcry, convinced Senate Transportation Committee Chairman Steven Baddour (D-Methuen) to organize the recent hearing on potential Pike privatization.
Other states across the country are in similarly dire financial straits, facing a collective budget deficit of approximately $97 billion according to a recent report by the National Conference of State Legislatures (NCSL). Arizona's deficit exceeds 24 percent of its entire budget. Other states face shortfalls of similar magnitude: New York (20 percent), California (18 percent) and Minnesota (14.7 percent). Political and public resistance to tax and fee increases is forcing state legislatures and local governments to look more closely than ever at alternatives, including infrastructure PPPs. In Minnesota, which is facing a historic deficit of more than $5 billion, a Republican State Representative has proposed privatizing Minneapolis-St. Paul Airport, the state lottery, and various highways and parking facilities. The City of Chicago is arguably ahead of the curve, having already leased operation of the Chicago Skyway, downtown parking garages, Midway Airport and, most recently, operation of parking meters in the city—reaping a total of more than $6 billion for city coffers. These deals in Chicago, along with Indiana's 75-year, $3.8 billion lease of the Indiana Toll Road, were frequent subjects of discussion at the recent Massachusetts hearing. The Reason Foundation's Leonard Gilroy and Christopher Voyce, managing director of Macquarie Capital Advisors (one of the principal investors in both the Chicago Skyway and the Indiana Toll Road), both noted that the Indiana lease allowed that state to fully fund its 10-year transportation infrastructure plan, a step that no other state has been financially equipped to take.
"This Is a Strong Market"
The apparent surge in "public-side" interest in infrastructure PPPs might be viewed as an ironic case of poor timing, coming as it does in the midst of an historic economic downturn that has featured an unprecedented freeze on the credit markets and a virtual halt to large-scale financings. Several panelists at the recent Massachusetts Transportation hearing delivered precisely the opposite message, however. "This is a strong market," said John Schmidt, Chicago's counsel in the Skyway lease. At a time when there are seemingly few safe investments, he said, "infrastructure is a stable, valuable long-term asset." As evidence for the proposition that the market remains highly viable for infrastructure PPPs, he noted that the winning bid for Chicago's Midway Airport, consummated in September 2008 as the downturn was well underway, netted $2.5 billion, an amount that was considerably higher than expectations.
Macquarie's Christopher Voyce echoed Schmidt's assessment of the market, testifying that "demand remains strong" for these "long-term, inflation-linked investments." And the Reason Foundation's Gilroy noted that $100 billion in assets amassed for the purpose of public infrastructure investment remains unexpended.
In addition to this apparent market strength, state and local governments are also taking note of President-Elect Obama's recent proposal to fund the largest public transportation infrastructure investment since the interstate road system was built under President Eisenhower, including new construction and repair of existing facilities.
Between heightened interest in infrastructure PPPs from cash-starved state and local governments; the continued appeal to the private sector of stable, long-term infrastructure investments; and an anticipated infusion of federal infrastructure funds, it is likely that large-scale investment in public infrastructure projects will proceed apace in 2009, downturn notwithstanding. All parties with an interest in any facet of the public infrastructure market should take heed and prepare for an active period characterized by significant opportunity. Interested parties will also want to guard against the insertion of anti-PPP provisions in proposed legislation at both the federal and state levels.
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