Published on February 26, 2014
The Beneﬁts of Private Investment in Infrastructure Note: Updated as of April 2013 Note: All dollar ﬁgures are measured in today’s terms
This Summary of Information was Compiled by For More Information Contact Addison Smith at (202) 862-5520 or email@example.com * This report was done in coordination with several private sector infrastructure colleagues and is based on the original report released in 2011.
Private Capital in Infrastructure Works Jointly public and private investment in infrastructure can create millions of jobs. The private sector is already largely responsible for designing, building, and financing our nation’s infrastructure and can do more. Over $214 bn of private capital has been raised, and some additional legislative and administrative changes could accelerate infrastructure projects and enhance funding. Private investment in infrastructure frees government dollars for allocation to other troubled areas of the economy and transfers risk away from the public partner to the private entity. Private investment has been proven worldwide to generate positive economic growth and can act as a stimulus by providing investment grade projects to invest in. Private capital allows U.S. workers through their pension funds to invest in the growth of our national economy, generate jobs, and enhance our global competitiveness. 3
Private Capital is Ready to Create Jobs Private investment in infrastructure could generate nearly 1 million sustained jobs in the U.S. market... Private investment could help to reduce unemployment by approx. 8% National Unemployment: 12 million or 7.7 % “Tonight, I propose a “Fix-It-First” program to put people to work as soon as possible on our most urgent repairs, like the nearly 70,000 structurally deficient bridges across the country. And to make sure taxpayers don’t shoulder the whole burden, I’m also proposing a Partnership to Rebuild America that attracts private capital to upgrade what our businesses need most: modern ports to move our goods; modern pipelines to withstand a storm; modern schools worthy of our children. Let’s prove that there is no better place to do business than the United States of America. And let’s start right away."” ~ President Obama, February 12th, 2013 National Unemployment Source: Bureau of Labor Statistics, US Department of Labor, March 2013 ...Incentives to invest private capital must be taken into account in President Obama’s “Partnership to Rebuild America” proposal. Note: 1. Actual ﬁgure is 963,000 projected private jobs given $214 bn of private capital invested over 10 years at 60 percent leverage. 4
Construction Sector Hit Harder Construction unemployment remains significantly higher than the national average ... &!" %#" Feb 2013 Construction Sector Unemployment: 15.7% %!" Over 1.7 million construction sector jobs (seasonally adjusted) have been lost since January 2008.  $#" $!" #" !" 2003 %!!&" 2004 2005 2006 2007 '()*+(,"-+./0,*1/.+2"3" 2008 2009 2010 2011 2012 2013 4*+52678)*+"-+./0,*1/.+2"3" Source: Bureau of Labor Statistics, US Department of Labor, January Construction Workforce Statistics ... “Unfortunately, construction employment in many metro areas appears to be suffering from declining public-sector demand and a private-sector market that is still well below peak levels.”~AGC Chief Economist Ken Simonson, January 30th, 2013 : Bureau of Labor and Statistics. February, 2013. “Employment, Hours, and Earnings from the Current Employment Statistics survey (National),” http://data.bls.gov/timeseries/ CES2000000001?data_tool=XGtable. 5
Growing Public Pension Fund and Investor Interest The total equity capital committed to infrastructure is in excess of $214 billion. $Bn $300 $225 $150 ~$214 Bn $75 $0 ~$60 Bn 2006 2013 Private Infrastructure Fund Growth Source: Preqin Growing US Pension Fund Interest •According to data recently compiled by the research ﬁrm Preqin, there are now 49 pension funds interested in infrastructure with approximately $38 billion of funds available for investment in such projects. •Some of the larger U.S. public pension funds are now forming their own internal teams to pursue direct investment in transportation projects. •Dallas Police and Fire Pension System acquired a 10% ownership stake in the $2.7 billion Texas LBJ Freeway PPP project. Additional funds considering direct infrastructure investments include California Public Employee Retirement System and the San Diego Country Employees’ Retirement Association. } 6 Dedicated funds available for infrastructure have more than tripled from 2006 to 2013 and such private investor interest remains strong. In addition to companies that invest in infrastructure, there are over 60 infrastructure funds ready to invest in the U.S. market with a levered purchasing power of ~$535 billion. An important and growing source of private capital for transportation investment in the United States comes from quasi-public, tax-exempt institutions such as public pension funds, university endowments and charitable foundations, which are in essence sub-national sovereign wealth funds of the United States. The total equity capital available to invest in U.S. infrastructure is likely to substantially grow in the coming years assuming our nation taps into the current pool of equity capital.
Leveraging Private Capital The Amount of Available Capital Grows From Approximately $214 bn to over $530 bn with Leverage $650 $ 535 Bn • Leveraging private capital creates a larger pool of funding for state and local governments to address infrastructure needs while driving economic growth and creating jobs. Dedicated Capital (in USD billions) $520 • When leveraged at a 60:40 debt-to-equity ratio, approximately $214 Bn in private $ 428 Bn capital could generate as much as $535 bn for infrastructure investment in the United States. $ 356 Bn $ 305 Bn $390 $ 267 Bn $ 237 Bn Total Investment $ 214 Bn $260 Equity: ~ $214 bn $130 $0 Actual Capital 10% Leveraged 20% Leveraged 30% Leveraged 40% Leveraged 50% Leveraged 60% Leveraged Note: Scenario assumes the approx. $214 bn in available capital is distributed evenly over a 10-year period and does not take into account fluctuations in funds’ size. 7
Private Investment Creates Middle Class Jobs Annual Sustained Job Creation with the Sole Use of Private Capital Over a 10-year Period $650 • When used alongside federal dollars, private investment in infrastructure will greatly 963,000 Jobs increase the amount of jobs that can be created. At the same time, existing public sector collective bargaining agreements are honored and union representation respected. $520 infrastructure investment, 18,000 direct and indirect jobs are created.  • The President’s Council of Economic Advisors report on infrastructure investment Dedicated Capital (in USD billions) 770,000 Jobs • A Political Economy Research Institute study finds that for every $1 billion in finds that 80% of direct jobs created through infrastructure spending would be middle class jobs.  642,000 Jobs 550,000 Jobs $390 481,000 Jobs 428,000 Jobs Total Investment 385,000 Jobs $260 $130 Equity: ~ $214 bn $0 Actual Capital 10% Leveraged 20% Leveraged 30% Leveraged 40% Leveraged 50% Leveraged 60% Leveraged : Heintz, James, Robert Pollin, and Heidi Garrett-Peltier. 2009. “How Infrastructure Investments Supports the U.S Economy: Employment, Productivity, and Growth,”http://www.peri.umass.edu/ fileadmin/pdf/other_publication_types/green_economics/PERI_Infrastructure_Investments : Department of Treasury with the Council of Economic Advisors. 2010. “An Economic Analysis of Infrastructure Investment,”http://www.treasury.gov/resource-center/economic-policy/ Documents/infrastructure_investment_report.pdf 8
Private Capital is Available to States Facing Deﬁcits Federal dollars are expected to decrease for state transportation budgets The Highway Trust Fund is primarily financed through the 18.4 cent per gallon federal tax on gasoline. Both inflation and rising fuel economy standards threaten the long-term viability of the gas tax as a reliable funding source for transportation. The CBO projects the Highway Trust Fund will reach insolvency by 2015 and a study from the College of William & Mary projects a $365.5 billion shortfall over the next 23 years.   Absent significant increases in the gas tax or other reforms, states should expect to see a shrinking pool of federal dollars available for infrastructure. Private funds can serve as a supplemental or alternative source of capital for cash strapped states as they look to meet their transportation needs. CBO Highway Account Shortfall Projection (-$billion) 50 37.5 25 12.5 0 2015 2016 2017 2018 Source: CBO February 2013 Baseline Projections Total State Budget Shortfall in each fiscal year, in billions  0 -50 -100 -150 -200 -250 -$110 -$191 -$45 -$130 -$107 -$55 Estimate -$191 2009 2010 2011 2012 : CBO. February 2013 Baseline. http://www.cbo.gov/sites/default/files/cbofiles/attachments/43884_HighwayTrustFundAccounts_0.pdf : William and Mary Thomas Jefferson Program in Public Policy. January 2013 Baseline. http://movecolorado.org/wp-content/uploads/2013/02/WM-HTF-Report.pdf : Center on Budget and Policy Priorities, as of June 2012 9 2013 2019
Private Investment Growing Private Infrastructure Infrastructure Investment is Growing ($ millions) Chicago Downtown Public Parking $563; 99 years Port of Portland – Terminal 6 $68; 25 years Chicago Metered Parking $1,157; 75 years Chicago Midway Airport $2,521; 99 years Pennsylvania Turnpike $18,301; 75 years Chicago Skyway $1,830; 99 years Port of Oakland – Outer Harbor $686; 50 years Northwest Parkway $603; 99 years Harrisburg Parking ~$200; 50 years OSU Parking $483; 50 years Indiana Toll Road $3,850; 75 years Bayonne Water & Wastewater $150; 40 years Port of Baltimore – Seagirt $334; 50 years Indianapolis On-Street Parking $35; 50 years Presidio Parkway $929; 30 years Capital Beltway HOT Lanes $1,933; 80 years East End Crossing $763; 35 years Denver FasTracks $1,637; 46 years Rialto Water & Wastewater $172; 30 years Long Beach Courthouse $490; 35 years CT Service Stations $178; 35 years Cincinnati Parking $206; 30-50 years Pittsburg Parking $452; 50 years I-95 Travel Plazas $56; 35 years I-95 HOT Lanes $925; 76 years I-635 / LBJ $2,700; 52 years DTT / MLK / MLK Extension $2,041; 58 years SH 121 $3,463; 50 years Carlsbad Desalination Project $925; 30 years Pocahontas Parkway $611; 99 years North Tarrant Expressway $2,050; 52 years Legend LMM – San Juan Airport $615; 40 years SH 130 (5&6) – Trans Texas Corridor $1,380; 50 years I-595 Express $1,909; 35 years Parking Toll Roads Airports Ports Water/Utilities Other 36 U.S. P3 transactions announced totaling ~$56bn since 2005 Port of Miami Tunnel $903; 30 years Notes: Locations are not exact Gray shading represents transactions that are either pending close or have been withdrawn source: Greenhill & Co 10 PR-22/PR-5 $1,136; 40 years 1
Beneﬁts of Private Capital Government retains asset ownership: The public entity regulates infrastructure assets funded with private capital, much like utilities are regulated, while transferring operating, maintenance, and financing risks to the party best equipped to manage them. Private Capital Complements Public Interest Government receives direct funding (upfront payment / portion of future revenue) and/or investment through project delivery: • Private capital proceeds can be reinvested in infrastructure or other public goods providing long-term economic benefits to the general public. • Proceeds from leasing existing assets or invested in new projects can allow state and local governments to meet federal matching requirements for funding of projects in the absence of available tax revenues. Government sets and enforces standards: The public partner sets and enforces the operating and safety standards of the infrastructure assets while they are improved and operated by the private investors. In many cases the government also sets requirements for Disabled Business and Small Business Enterprises, as well as local employment participation in the arrangement. Greater access to funding: Private investment can provide billions of dollars of new infrastructure funding while supplementing funds provided by state and federal governments. In certain cases, federal and even state dollars may not be necessary for project delivery, depending on the nature of the project. < Greater value for money: Through global best practices, experience and innovation in design, finance, construction, operation and maintenance, private investors can bring greater efficiencies at a lower cost to the procurement of infrastructure assets and services creating disciplines and benchmarks around spending and development. Greater accountability: If the private entity partner fails to meet minimum requirements under the concession agreement then the public entity partner may terminate the agreement at significant financial loss to the private sector partner. This provides a significant incentive for the private sector partner to perform materially above minimum contractual obligations and exceed government-required service levels. Greater long-term efficiencies (life cycle planning): The private sector has incentives to maintain high quality infrastructure assets and thereby provide the end user with a safer and improved quality of service over the useful life of the asset or contract. Under traditional government procurement, the party that builds the facility does not always take into full account the future cost of maintaining what gets built. > Less public debt: The use of private capital allows state and local governments to avoid taking on more debt to fund projects, which either reduces interest payments or allows states and municipalities to use their bonding capacity to finance other needed government services. Less taxes for taxpayers: Taxpayers benefit because the state does not have to rely solely on tax revenues to support infrastructure investment or debt servicing. 11
Conclusion and Recommendations • At a time when public sector resources have never been scarcer and our infrastructure performance has never suffered more in the last 50 years, public private partnerships (P3s) are a powerful policy tool currently available to governments to tackle multiple issues simultaneously and provide an additional project delivery tool for MAP-21 reauthorization. • By taking these incentives into account when authorizing a new transportation bill, the federal government can deploy the private sector to more effectively address employment and infrastructure demands utilizing three key policy levers: - Programmatic Changes: • Reform and expand TIFIA by increasing the total TIFIA authorization and the percentage of each project TIFIA can fund. • Utilize existing discretionary resources to leverage additional private investment. • Create a permanent $3-5 billion dollar/year competitive discretionary grant program that is based on merit rather than earmarks. Conclusion • Require a value-for-money analysis for large projects. • Create a performance pilot to test process streamlining and authorize up to 3 states to participate. - Regulatory Changes: • Expand flexibility for states to implement direct user fees on Federal-aid highways. • Enhance State Infrastructure Bank resources. • Require private investment through PPPs before federal transportation grant money is awarded to states. • Set targets to reduce Pre-Construction approval timelines. - Tax Code Changes: • Reform and expand the use of Private Activity Bonds (PABS) for infrastructure projects. • Permanently remove the Alternative Minimum Tax (AMT) applicability and state and federal cap allocation. • Make a taxable bond option available for PABS or reissue the Build America Bonds (BABs) program and include projects with private sector investment. • Add Infrastructure Assets to existing REIT Rules. • Create a National Infrastructure Bank (NIB) that is authorized to lend at favorable terms to both the public and private sectors for qualified infrastructure projects. - Base structure on the European Investment Bank (EIB) with federal and state guarantees to backstop new NIB debt issuance to provide loans for infrastructure projects. 12
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