Don’t Count the Private Sector Out in Infrastructure

Infrastructure PPPs remain an attractive investment in the capital "flight to quality"

Last week brought news that the Virginia Department of Transportation’s revenues over the next six years will be between $2.1 billion and $2.6 billion less than anticipated just a few months ago. After cutting $1.1 billion from new construction in June, the Commonwealth Transportation Board will meet in November to cut another $1.1 billion (or more). The implications are obvious: less construction, more congestion, and declining economic competitiveness and quality of life in the Commonwealth.

VDOT will need to do more with less, that’s for sure. But the economic downturn and financial crisis should not dissuade policymakers from pursuing public-private partnerships (PPPs) along the lines of the I-495 Beltway expansion project now underway. The private sector brought $1.3 billion to the table to make that project happen. And though it may sound counterintuitive given today’s economy, there’s no reason that many similar projects can’t be advanced now to keep highway projects 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 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.

Virginia officials should be following suit and aggressively pursuing new opportunities to tap private dollars. It’s true that the Commonwealth has been a state PPP leader, delivering projects like the Beltway expansion, the Dulles Greenway, and the Pocahontas Parkway with private dollars over the last 15 years. But moving forward, a big-ticket project here and there won’t be enough. The Commonwealth should be evaluating all new projects as a potential PPP first. PPPs certainly won’t work for all projects, but only after determining the potential for private financing should there be any consideration of taxes or bonding.

The financial crisis has prompted many pundits to pronounce the “death” of free market capitalism, and it’s become fashionable to lambaste Wall Street banks for “greed” and irresponsible behavior. But the federal Highway Trust Fund approaches insolvency next year, twelve states (including Virginia) currently face $1 billion-plus budget deficits, and most are facing infrastructure funding shortfalls. So it’s clear that governments will need financial help of their own for building needed infrastructure. Ironically, it will be the private sector that governments turn to for help to keep their people and businesses moving with new transportation projects.