Reason Foundation’s latest report on public-private partnership investment in transportation infrastructure had both good news and bad news for the industry. The good news in the United States is two-fold. In 2021, global infrastructure investment funds raised a record total of $136 billion. And worldwide, the largest category of their infrastructure investment (at 58%) was transportation. Unfortunately, the bad news was that of the top 15 greenfield transportation public-private partnerships in 2021, only one of the projects, the smallest, was in the United States. And while long-term P3 leases of existing, brownfield, transportation infrastructure continued worldwide, no such transactions were even being discussed in the land of free enterprise.
Reason Foundation’s Annual Privatization Report cites the ongoing expansion of infrastructure investment by U.S. public-sector pension funds. The best-known large investments of this kind include the Indiana Toll Road concession, the Chicago Skyway concession, and the major investment by the California Public Employees’ Retirement System (CalPERS), this country’s largest public pension fund, in London Gatwick Airport.
The common factor in these investments is that all three facilities were already in existence, with long-standing revenue streams. But this kind of “asset monetization” or “asset recycling” has not yet become popular in the United States.
Between the very limited extent of greenfield transportation public-private partnerships and the unpopularity of brownfield P3 leases, where do U.S. pension fund transportation investments go?
The Annual Privatization Report provides numerous examples. Nearly all the pension funds place allocations of capital with global infrastructure investment funds. And since there are very few U.S. opportunities to invest equity in airports, seaports, or toll roads, the global funds invest in portfolios of infrastructure projects in other regions of the world.
But there is a bit of good news in this otherwise bleak picture. Once greenfield transportation P3s are completed and past their initial traffic and revenue ramp-up period, the risks of construction cost overruns and late completion no longer exist. The initial investors increasingly seek to sell off at least a portion of such concessions to investors such as pension funds and insurance companies that seek lower-risk revenue-generating infrastructure.
One of the earliest examples occurred in South Florida. After the P3 project that rebuilt and expanded the I-595 expressway in Ft. Lauderdale was finished, ACS Infrastructure Development sold half its stake in the 35-year concession to pensions provider Teachers Insurance and Annuity Association of America (TIAA) and College Retirement Equities Fund (CREF).
In 2020, developers Macquarie and Skanska sold the remaining years of their 58-year P3 concession for the Elizabeth River Crossings project in Virginia to Abertis and Manulife Investment Management, an affiliate of John Hancock Insurance). Also that year, Transurban sold a 50% stake in its express toll lanes network in northern Virginia to three public sector pension funds—two Australian and one Canadian. And Ullico, formerly known as the Union Labor Life Insurance Company, purchased a 49.5% stake in the PR-5 and PR-22 toll roads in Puerto Rico from concession-holder Abertis.
This year major public-private partnership investors plan several divestitures of existing P3 transportation assets. One of these is the Goethals Bridge between New Jersey and Staten Island. Macquarie Asset Management plans to sell its 90% interest in this 40-year DBFM concession. Another is the Chicago Skyway, where the Canadian pension fund owners of the concession are seeking to rebalance their portfolios by selling some or all of their shares in the Skyway. IFM Investors, which invests in infrastructure on behalf of pension funds, is making an offer for the privatized Vienna, Austria, airport; it already owns about 40% of the airport’s shares. IFM has recently acquired 15% of Atlas Arteria, which owns toll road concessions in France and Germany, as well as the Dulles Greenway in Virginia.
One problem for U.S. public pension funds is that many do not have the staff expertise to sufficiently examine and weigh all of the pros and cons of acquiring specific public-private partnership facilities. By contrast, the largest Australian and Canadian public pension funds have built dedicated staffs that carry out due diligence that enables the funds to make wise investments in individual airports, toll roads, and seaports. The U.S. pension funds are therefore better off following their current strategy of making such investments by placing allocations with major infrastructure investment funds. The latter build portfolios of public-private partnership projects, analogous to individual investors limiting their risk by investing mostly in mutual funds rather than shares of individual companies.
If U.S. public pension funds were more vocal about their need to invest equity in revenue-generating infrastructure, they might become de-facto allies of the U.S. public-private partnership community. The pension funds could explain that there would be more opportunities for them to invest in infrastructure in the United States if there were more (1) greenfield revenue-risk public-private partnerships and (2) brownfield P3 leases of existing infrastructure.
As I have learned from working with transportation departments across the country, legislative staffers, and the two main organizations for state legislators—the American Legislative Exchange Council (ALEC) and the National Conference of State Legislatures (NCSL)—some legislators don’t have transportation or infrastructure backgrounds and aren’t intricately familiar with public-private partnerships and the latest trends. A surprising number think that P3s are a new funding source. Others may say they oppose adding long-term debt, not seeing that revenue-risk public-private partnerships involve non-recourse debt that shields taxpayers and puts the financial risks of projects on equity investors and bond buyers. They often don’t seem to appreciate the large value that comes from having guaranteed long-term maintenance in long-term P3 infrastructure concessions, which shield the P3 infrastructure facilities from the all-too-common tendency of legislators themselves to favor prioritizing funding for new projects with ribbon-cutting ceremonies at the expense of adequately and fully funding the needed lifetime maintenance of infrastructure.
The public-private partnership community in the United States is relatively small. It needs powerful allies. Public pension funds are a huge industry and could be important allies for the P3 community. If public pension funds started better researching public-private infrastructure investments and informing legislators about the pension systems’ own needs for quality P3s to invest in, the result could be more greenfield and brownfield transportation projects across the United States.
A version of this column first appeared in Public Works Financing.