Out of Control Policy Blog

Infrastructure and the "Flight to Quality"

In an article released by the Thomas Jefferson Institute today, I make the argument that, despite the current financial crunch, we shouldn't count out the private sector as a partner in delivering the 21st century infrastructure we need to keep our people and economy moving:

Expanding public private partnerships make good economic sense, as traditional revenue sources are not going to come close to closing the gap. Higher taxes are a political and economic non-starter as we stand on the brink of a recession.

What about bonds? A recent New York Times article reported a widely-held view among market analysts that the credit crunch spells the end of cheap borrowing for governments in the municipal bond market. We're probably going to see a shift back to simple, fixed interest rate bonds at higher rates than we've seen in the riskier structured debt instruments so popular until lately. Bonds are limited anyway, as statutory debt limits place caps on how much state and local governments can borrow.

That leaves the private sector and the global capital markets. Skeptics might believe that the turmoil on the financial markets would dampen enthusiasm for PPPs, but they'd be flat wrong. There's a general consensus in the finance community that infrastructure PPPs are a very attractive investment in the "flight to quality" we're seeing in the markets more generally (capital flowing to solid, safe, and tangible investments with steadier returns and relatively lower risk profiles).

Despite economic ups and downs, people are still going to drive, fly and consume goods. That means roads, airports, seaports, and the like remain good investment prospects over the long term. Plus, these are brick and mortar assets that you can see and touch, a far cry from the credit default swaps, mortgage backed securities and other unintelligible paper vehicles that few could really understand and which helped bring our current economic difficulties.

Further, financial firms and public pension funds raised over $150 billion to invest specifically in infrastructure last year, and a recent SmartMoney.com article noted that infrastructure investment funds are trying to raise another $100 billion in 2009.

Chicago is the "proof in the pudding." On September 30th, Mayor Richard Daley announced a landmark agreement with a Citi-led consortium for a 99-year lease of Midway Airport in return for $2.5 billion in cash upfront. The fact that Daley announced a multi-billion dollar bid in the thick of the financial crisis says something extremely relevant–PPP mega-deals are still getting done in this economic climate. New York and South Carolina policymakers have taken notice, having both created state commissions in the last two weeks to mine their balance sheets and identify potential PPP opportunities.

Full article here.

» Reason's Transportation Research and Commentary
» Reason's Annual Privatization Report 2008

Leonard Gilroy is Director of Government Reform


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