Will Private Sector Still Invest in Infrastructure?
One of the questions I've been asked repeatedly over the past two months is whether private capital is still interested in investing in infrastructure projects such as toll roads. Broadly speaking, the answer is a definite yes. As the global financial markets go through a massive credit crunch, one of the few categories in which there is increasing interest in investing is revenue-producing infrastructure. Let me give you some supporting information for that statement. First, I have spoken at two invitation-only conferences for infrastructure investors during the past two months. In both cases, the general sentiment was the same: that while debt is going to be more expensive and more conservatively invested, it will definitely be available for good projects. What will change is the leverage in these deals. Instead of debt/equity ratios of, say, 80/20 or 70/30 pre-crisis, going forward we will see much larger percentages of equity, at least in the near term. Second, there is strong evidence that the major providers of equity–infrastructure investment funds, insurance companies, and pension funds–continue to be strongly interested in infrastructure. Probitas Partners, whose 2007 survey of this area I reported on last year, last month released a follow-up survey of institutional investors. They find that over $21 billion was raised for infrastructure funds in the first nine months of 2008, "a pace that falls just short of 2007's record fundraising but an amount already in excess of the 2006 total." Probitas reports a high level of interest in the infrastructure sector, generally considered a separate category by such investors, with stable and increasing allocations to this sector. And 28% of respondents said their allocations are likely to increase, compared with only 5% expecting to decrease. An appendix to the report lists large infrastructure funds already in the market or expected to come to market over the next 12 months. The total in these funds is $93.7 billion, at current exchange rates (some are quoted in Euros or British pounds). So even at a 50/50 debt/equity ratio, these equity funds could support nearly $200 billion worth of infrastructure projects. Also appearing in October was the 18th annual Public Works Financing survey of public-private partnerships in infrastructure, including roads, rail, water, and buildings. Since 1985, according to PWF's database, over $585 billion has been invested in such projects, of which 500 highway projects (mostly toll roads) account for $265 billion. Just over half of these road projects ($136 billion) are in Europe, with a rather paltry $14 billion in the United States thus far. There continues to be great interest in the potential of the U.S. market, given the huge difference between existing highway funding sources and the need for capital investment. Thus, I was hardly surprised by recent headlines such as "UBS Infrastructure Fund is a Hit" (Wall Street Journal, Nov. 3, 2008) and "New York City Comptroller Eyes Infrastructure Funds Investment" (The Bond Buyer, Oct. 22, 2008). The challenge for policymakers going forward is to make sure they craft state and federal policies that welcome this much-needed investment.