Transportation Infrastructure Finance 2012

Subsection of Annual Privatization Report 2013: Surface Transportation

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I. Background

During 2011 investors worldwide put $20.8 billion into infrastructure investment funds, according to Probitas Partners’ report, Investing in Infrastructure 2012. Infrastructure finance continued to recover from the credit-markets crunch of 2008-09. In the peak year of 2007, such funds raised $39.7 billion, but the following year investors added only $24.7 billion. This market bottomed out in 2009, when only $10.7 billion was raised. A recovery began in 2010, with $19 billion raised, followed by the $20.8 billion raised in 2011. Pension funds expanded their participation in infrastructure funds, seeing a good match between infrastructure assets that provide reasonably steady long-term income flows and the funds’ long-term liabilities.

II. Infrastructure Investment Funds

As of 2012, at the end of the third quarter, there were 141 funds in the market, seeking to raise over $87 billion, according to The Preqin Quarterly, 3Q 2012. One of these, Global Infrastructure Partners, in September 2012 completed fund-raising for its second infrastructure fund, the largest ever at $8.25 billion. Macquarie’s two-year old Macquarie Mexico Infrastructure Fund is aiming to raise $10 billion, while Meridiam completed its second European fund at $1.2 billion and has begun seeking $1 billion for a new 25-year North American fund. Germany’s Bilfinger Berger launched a global fund based on operating revenues from its portfolio of PPP infrastructure assets, appealing to investors wary of taking construction risk.

In its June 2012 issue, Infrastructure Investor released its third annual ranking of global infrastructure funds, the “Infrastructure Investor 30.” Over the most recent five-year period, these 30 large funds alone have raised a total of $171.5 billion (see Table 2). There is no definitive estimate of the total raised by all such funds during this period, but that sum very likely exceeds $200 billion. Equity funds such as these typically provide between 20% and 33% of an infrastructure project’s cost, with the balance raised as various forms of debt (bank loans, revenue bonds, etc.). At a conservative leverage multiple of three times the equity amount, the equity available from the top 30 funds alone would finance $686 billion worth of projects.Infrastructure Investor estimates that over the decade ending in 2012, infrastructure equity funds have raised approximately $291 billion, which could support projects worth $1.16 trillion.

Table 2: The 30 Largest Infrastructure Equity Funds, 2012

Rank Name of Investor Headquarters Five-Year Capital Formed ($B)
1 Macquarie Infrastructure and Real Assets Sydney $23.72
2 Brookfield Asset Management Toronto 11.16
3 Global Infrastructure Partners New York 8.64
4 Canada Pension Plan Investment Board Toronto 8.41
5 APG Asset Management Amsterdam 7.80
6 QIC Brisbane 6.88
7 Ontario Teachers Pension Plan Toronto 6.87
8 Alinda Capital Partners Greenwich, CT 5.90
9 Industry Funds Management Melbourne 5.51
10 ArcLight Capital Partners Boston 5.43
11 OMERS Toronto 5.02
12 Arcus Infrastructure Partners London 4.99
13 Energy Capital Partners Short Hills, NJ 4.79
14 RREEF Infrastructure London 4.35
15 Highstar Capital New York 4.25
16 Future Fund Melbourne 4.20
17 Goldman Sachs New York 4.17
18 La Caisse de Depot Montreal 4.14
19 Morgan Stanley New York 4.00
20 JP Morgan Asset Management New York 3.90
21 AMP Capital Sydney 3.83
22 Universities Superannuation Scheme Liverpool 3.80
23 BC Investment Management Corp. Victoria, BC 3.74
24 SteelRiver Infrastructure Partners San Francisco 3.73
25 Colonial First State Sydney 3.72
26 UBS Global Management London 3.60
27 Citi Infrastructure Investors New York 3.40
28 Energy Investors Funds San Francisco 3.06
29 AXA Private Equity Paris 2.90
30 Alberta Investment Management Corp. Edmonton, AB 2.80
Total $171.50

Source: Infrastructure Investor, June 2012, p. 23

How much of this equity has actually been invested thus far? Comprehensive figures are not readily available, but a bar graph in Infrastructure Investor‘s June 2012 issue provides estimates of annual infrastructure “deal flow” from 2002 through 2011. (These figures include electricity, oil and gas, and water/waste infrastructure in addition to toll roads, airports, seaports and rail.) Here, too, after modest amounts early in that decade, the peak year was 2007, with deal flow in excess of $90 billion. Annual amounts since then have been in the range of $17 billion to $27 billion.

As for the type of investment, some funds prefer long-established, low-risk acquisitions (“brownfield”) while others prefer higher-risk new projects (“greenfield”), but the largest fraction of funds seeks a mix. Probitas Partners’ Infrastructure Institutional Investor Trends Survey for 2012 yielded the following preferences among the investors responding to its annual survey:

  • Both greenfield and brownfield: 48%
  • Brownfield only: 20%
  • Flexible: 15%
  • Greenfield only: 9%
  • Renewable energy: 7%
  • Debt Only: 1%

This same set of infrastructure investors expressed the greatest interest in energy and power (54% of firms), water and waste (48%), followed by transportation (44%).

While the above tabulation shows only 1% of the firms to be interested in investing in project debt, that fails to reflect the significant increase in infrastructure debt funds as 2011 gave way to 2012. In October 2011, Sequoia Investment Management Company launched a $1.6 billion debt fund, with JP Morgan Asset Management announcing the creation of an infrastructure debt team the following month. By the summer of 2012 Infrastructure Investor headlined a story called “Infrastructure Debt Funds Come of Age.” It cited Probitas Partners’ report that during the first half of 2012, a set of debt funds had raised $884 million, which Probitas estimated as 10% of all infrastructure capital raised during that period. Australia’s Industry Funds Management, which has at least a decade of infrastructure debt experience in that country, has launched a debt fund for Europe and the UK. Others announcing such funds include Allianz Global Investors and BlackRock Alternative Investors. Hadrian’s Wall Capital, one of the pioneer infrastructure debt providers in Europe, is aiming to raise over $15 billion in senior debt for infrastructure projects. Infrastructure Investorsays these funds are now “what the markets need, especially following the 2008 crisis and banks’ retreat from long-term lending.”

In the United States, concerns continue regarding “foreign takeovers” of infrastructure. It is therefore worthwhile to compare the nationality of the funds providing equity for infrastructure projects with the nationality of the concession companies that are implementing the projects. Table 3 is based onInfrastructure Investor‘s latest analysis of the 30 largest investors. As can be seen, 30% of the capital comes from U.S-based institutions, with Australia’s share at 28%. When you add Canada to the U.S. share, the total of North American investors is 55%. European institutions constitute 16% of the capital.

Table 3: Nationality of Top 30 Infrastructure Funds, 2012

Country or Region Percentage of Firms Percentage of Capital
United States 37% 30%
Australia 20% 28%
Canada 23% 25%
Europe 20% 16%

Source: Infrastructure Investor, June 2012.

Statistics on global PPP infrastructure projects have been maintained in a database since 1991 by Public Works Financing (PWF), the newsletter of record in this industry. The PWF database also includes figures on the world’s leading PPP transportation companies as of 2012, ranked by projects under construction or in operation, as well as active proposals. For these data, shown in Table 4, the project types include airports, highways, ports and rail infrastructure.

Table 4: Top PPP Transportation Infrastructure Companies, 2012

Rank Company HQ Country # Projects in Construction or Operation # Active Prospects
1 ACS Group/Hochtief Spain 64 32
2 Global Via/FCC Spain 45 8
3 Abertis Spain 36 10
4 Macquarie Group Australia 36 6
5 Vinci/Cofiroute France 35 12
6 Hutchison Whampoa China 33 0
7 Ferrovial/Cintra Spain 32 15
8 OHL Spain 32 11
9 Sacyr Spain 25 14
10 NWS Holdings China 25 1
11 EGIS Projects France 24 17
12 Bouygues France 22 14
13 John Laing U.K. 19 7
14 IL&FS India 18 10
15 Atlantia Italy 18 1
16 Alstom France 16 4
17 Andrade Gutierrez Brazil 16 3
18 Empresas ICA Mexico 15 2
19 Road King China 15 0
20 Acciona/Necso Spain 14 18
21 Meridiam France 14 9
22 Camarga Correa Brazil 14 3
23 Odebrecht Brazil 13 6
24 Bilfinger Berger Germany 13 4
25 Reliance India 13 1
26 SNC Lavalin Canada 12 6
27 Strabag Austria 11 7
28 Impregilo Italy 10 6
29 Eiffage France 10 4
30 IRB Infrastructure India 10 2
31 Transurban Australia 10 0
32 Balfour Beatty U.K. 9 5
33 Fluor United States 9 4
34 BRISA Portugal 9 0
35 Skanska Sweden 8 8

Source: Public Works Finance 2012 Survey of Public-Private Partnerships, October 2012.

As can be seen from a quick perusal of Table 4, the large majority of project experience is European. Of the top 10 companies, seven are from Europe, one from Australia, and two from China. Of the top 20 companies, 13 are from Europe, three from China, and one each from Australia, Brazil, India and Mexico. A U.S. firm does not show up until position 33. Thus, by comparing Tables 3 and 4, we can see that while the large majority of infrastructure development and operational expertise currently resides with European firms, the majority of the capital is coming from North American and Australian investment funds. Those who raise political concerns about foreigners “buying our toll roads” seem to have missed the difference between those who are building and operating these infrastructure projects and those who are financing them. The fact is that more than half of all the equity investment is coming from North American funds.

III. The Growing Role of Pension Funds

Three of the top 10 infrastructure funds in Table 2 are pension funds, accounting for nearly $34 billion of the $171.5 billion raised by the top 30 funds. This trend began with pension funds in Australia and Canada, and some of the largest funds in Table 2 are Canadian public-sector pension funds: Canada Pension Plan Investment Board, Ontario Teachers’ Pension Plan and Ontario Municipal Employees Retirement System (OMERS). These funds have been making global infrastructure investments for a decade or more.

Toronto-based OMERS made news in late 2011 when it opened a 30-person office in New York City. And in spring 2012 it unveiled its Global Strategic Investment Alliance, with a $5 billion commitment, joined by $1.25 billion each from Japan’s Pension Fund Association and a Mitsubishi-led consortium. The Alliance’s target is to raise $20 billion for infrastructure investment. In the UK, a $3.2 billion Pensions Infrastructure Platform was unveiled in 2012, backed by six major UK public and private pension funds.

The first half of 2012 saw a large increase in U.S. pension fund commitments. The California State Teachers’ Retirement System (CalSTRS) committed $500 million to Industry Funds Management (IFM) and another $100 million to Meridiam’s North America fund. The Virginia Retirement System placed $300 million with IFM and $150 million with Global Infrastructure Partners II (GIP II). Washington State Investment Board put $250 million into GIP II and another $250 million into Stonepeak Infrastructure Fund. Florida State Board of Administration put $150 million into GIP II. And giant pension fund Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF) in 2011 purchased half of the equity in ACS Infrastructure’s I-595 project in Florida for some $800 million. This was one of the few cases of U.S. pension funds making direct investments in infrastructure projects (as was California Public Employees’Retirement System’s (CalPERS) 2010 purchase of a part interest in privatized Gatwick International Airport). CalPERS has said it intends to continue with mostly direct investments, rather than investing via infrastructure funds.

Historically, U.S. pension funds, to the extent they invested in infrastructure, generally focused on investor-owned utilities (electricity, gas, water). But with the emergence of public-private partnerships (PPPs) for such traditionally government-run assets as airports and highways, U.S. pension funds gained an additional target for equity investments. Some public employee unions have raised concerns about their pension funds investing in infrastructure, due to their ideological opposition to PPPs. Because these pension funds are tax-exempt, they typically do not buy tax-exempt bonds, such as those typically issued by public-sector airports and toll roads. And since there is no equity in state-owned infrastructure, the only way to invest is with investor-owned infrastructure.

At the InfraAmericas US P3 Forum in June 2012, American Federation of Labor-Congress of Industrial Organizations (AFL-CIO) Director of Policy Damon Silvers said their members are supportive of investing a portion of pension fund assets in U.S. infrastructure-but only if such investment creates jobs. To him that means greenfield (new construction) projects, not brownfield leases. That would rule out investing in privatized airports (such as CalPERS’s 12.7% equity stake in privately owned Gatwick Airport). But even for greenfield projects, Silvers said public employee pension funds should only invest in deals in which the facility is owned and operated by the public sector. That would exclude nearly all toll concessions, such as the LBJ Express and North Tarrant Express (NTE) projects in Dallas and Fort Worth, in which the local police and fire unions’ pension fund has made a direct investment and Florida’s I-595 concession with its major investment by TIAA-CREF. There seems to be a disconnect between the AFL-CIO’s position and the actual decisions being made by public employee pension funds in the best interests of their retirees.

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