China, foreign nations, lead private transport financing

Transportation investments rank among the most important a nation can make when it comes to economic competitiveness. While it doesn’t get the glam and press of tech giants like Google, Microsoft, Apple, Sony, Infosys, or Wipro, all of these companies depend on a well oiled and smoothly functioning network of rails, roads, and runways to keep their businesses growing, their international locations commercially connected, and their economies humming. Researchers are finding that increases in travel speeds of just 5 percent can yield significant productivity gains, and these results are summarized in The Road More Traveled as well as our forthcoming book (Rowman & Littlefield, November 2008) Mobility First: A New Vision for Transportation in a Globally Competitive 21st Century. Researchers at the University of North Carolina-Charlotte estimate that improving traffic flows to free flow levels could generate tens of billions of dollars in new economic growth in cities such as Dallas and Denver, simply be expanding access to labor and destinations that improve productivity. The 800-pound gorilla in the room, however, is finance. That’s where the private sector is stepping in. In 2000, private infrastructure funds amounted to just under $40 billion per year according to Standard and Poor. By 2006, the addition of private equity boosted these deals to more than $100 billion. Now, private equity is capable of leveraging $525 billion in investment capacity worldwide. These funds are simply looking for the right places to invest. Some nation’s are in a better position than others to take advantage of private equity through long-term concessions and other forms of public-private partnerships. France, for example, has virtually its entire interstate highway system under the management of privately-owned firms, including Cofiroute, Autoroutes du Sud de la France (ASF), Autoroutes Paris-Rhine-Rhone (APRR), and Sanef. Australia has been tapping into private capital using companies such as Macquarie and Transurban to build tunnels and tollroads in its major cities since the 1990s. Overall, Italy and the United Kingdom claimed nearly half of the private investment in public infrastructure in OECD nations between 2003 and 2006 according to Standard and Poor. China, however, may be emerging the world’s leader in using private capital to build its transportation infrastructure. The nation is embarking on an epic road building program that will match the size of the US Interstate Highway System by 2020 and be completed in less than half the time. The expressway network is intended to link all provincial capitals, 80 percent of the national population, and 90 percent of the nation’s ports, according to a report prepared by the China Construction Bank Corporation (CCBC). Most of these expressways are financed by tolls and the tollway companies depend on private capital, including substantial investment from Western infrastructure funds, to finance the new roads. The attraction of infrastructure funds is pretty straightforward. CCBC reports that the return on equity for five expressway authorities ranged from 8.4 percent to 17.1 percent in 2008 alone. A rule of thumb is that infrastructure funds can reliably deliver 10 percent to 12 percent annual returns reliably. Unfortunately, the US has been slow to tap into this market. Just a handful of projects have closed in the US for a fraction of the amount of capital available on the global market. The Indiana Toll Road remains the largest long-term concession at $3.8 billion and it was for an existing road. The Chicago Skyway attracted a bid of $1.8 billion, another brownfield (existing) facility, and the nation’s second largest project. In a good sign, three greenfield (new) toll road deals have been signed recently: California’s State Route 125 South Bay Expressway ($800 million), State Highway 130 segments five and six in Texas ($1.3 billion), and the Capital Beltway HOT Lanes (about $1.4 billion in private capital). Also, a consortium of domestic and foreign companies submitted a bid to lease the Pennsylvania Turnpike for $12.8 billion. While the bid is still making its way through Pennsylvania politics, the strong support of Governor Ed Rendell is a good sign. Still, the US has a long way to go to catch up to our international competitors. More on privatization and public private partnerships can be found in the 2008 edition of the Annual Privatization Report published by Reason Foundation.