|
More
than a decade ago a Congressional commission made
the case for new approaches to infrastructure
finance. The commission was charged specifically
with identifying a new type of infrastructure
security that could permit pension funds and other
institutional investors to participate in
infrastructure finance with market rates of
return. State and municipal tax-free bond finance,
the norm for most types of airport, transit, road,
bridge and water projects, didn’t have any
appeal for such entities that already operate free
of taxes. It still doesn’t.
But
public and private pension funds hold trillions of
dollars in assets. They can make or break certain
categories of investment. What if big
infrastructure projects with long-term,
predictable rates of return could be made market
worthy? Wouldn’t every pension fund jump at the
chance to stabilize its volatile equity-heavy
portfolios?
If
infrastructure projects could attract even a small
percentage of the trillions of dollars held in
pension funds, government could help put to work a
substantial amount of capital not now available through
traditional means. News in late July that a group
of private investors have bid to take over the
Dulles Toll Road and its revenue stream in return
for an $1 billion-plus in cash and improvements
brings those 1990s discussions back into focus.
Those
private investors see a market opportunity. As the
Congressional commission concluded even then,
“general tax revenues of a magnitude sufficient
to meet forecasted infrastructure demands” are
unlikely to be forthcoming from government sources
for a number of reasons. Tax-exempt bonds backed
by state and local revenues face federal scrutiny
when private activity is involved. Credit rating
procedures can be difficult. And here is the
killer: Pension funds, which control trillions of
dollars in capital, have no reason to invest in
tax-free bonds.
The
name of the 1990s commission was appropriately
high-minded -- the Commission to Promote
Investment in America’s Infrastructure -- and it
included representatives from industry, labor and
the financial and legal communities. Then
Treasurer of Texas, now United States Senator Kay
Bailey Hutchison, for example, was a member. So
was the late Ralph Stanley of Bechtel, who had
served as CEO of the Toll Road Corporation of
Virginia when it expanded the Dulles Toll Road 15
years ago.
The
commission heard the suggestion that the United
States build on the successful track record of its
companies abroad in implementing project-based
finance. Project finance marries multiple
investors, each with a separate level of
investment, varying rates of return and different
timelines for realizing those returns.
In the end, the commission identified three ways
that institutional investors might increase their
participation in infrastructure investments.
First, they might take an
equity position in an infrastructure insurance
company that evaluates and insures project senior
debt up to investment grade. Such insurance companies could
help bring taxable-rate deals to the marketplace
by demanding that project deals meet credit,
management and financial criteria more stringent
that low-bid tax-free bond deals allow. Pension
fund investment would increase company capacity to
do so.
Second, institutional investors
could more easily participate directly in project
finance by purchasing the long-term, taxable-rate
debt instruments that such insurance companies
evaluate and insure. Once a project reaches
investment grade, pension funds would find them
attractive. And third, institutional investors,
including pension funds, could invest directly in
long-term, taxable-rate securities that might be
issued by a new national infrastructure
corporation that could pool project risks and
returns. The corporation was never formed.
These
kinds of investments could be a welcome part of
what pension funds call “alternate
investments” or “economically-targeted
investments.” A market-rate security that could
pass tax-free to 401(k) and individual retirement
account holders was another commission idea.
For all who are not experts on project finance, of
course, it all still sounds much more complicated
than low rate, tax-free bonds backed by tax
revenues. But looking at an infrastructure project
as a market venture with a market rate of return
and profit potential is the exact rationale behind
the so-called “Dulles Corridor Mobility
Initiative,” a joint venture of Italy’s
Autostrade, the largest toll road operator in the
world, and John Laing, a leading British
infrastructure investment company. Autostrade
already operates the 14-mile Dulles Greenway
from Dulles to Leesburg that was financed by
private capital. The Initiative also has former Gov.
Gerald Baliles and the Yoda of Virginia
transportation, J. Kenneth Klinge, on the
team.
The first hurdle, of course, is
the evaluation of the initiative by the
Commonwealth under the Public-Private
Transportation Act (PPTA). Estimates of just what
the value of toll payments and expenses on the
Dulles Toll Road might be over the next 50 years
range widely. And because other teams will have 90
days to submit proposals of their own, there will
be multiple answers to that question. Intuitively
,veteran observers know that the way a private
entity interested in a profit would manage and
maintain the road will not be the way the public
sector now does it.
A second challenge
for the public is the question of why motorists' toll
money should flow into profits for a private
company. That was a big question in the 1990s,
too, and the simple answer remains that the
private companies will be making the investment
and taking the risk. But what took the edge off
the question of infrastructure profits for
commission members was the change in public
attitudes if a public pension fund was the
investor taking the profits.
A greater return on
investment by pension fund managers, most people
understood, potentially could translate into
smaller appropriations of taxpayer monies to the
pension fund at budget time. Public pension funds
in Virginia with a piece of the action also could
help lower the political heat that the Autostrade/John
Laing or any other private sector team may face on
the profits question and do it faster than the
right political connections.
So,
is it possible that the private sector initiative now on
the table for the Dulles Toll Road could encourage
the Virginia Retirement System, the Fairfax County
Employees Retirement System or other public
pension funds in Virginia to take a new look at
investment-grade deals in infrastructure?
Infrastructure investments with a 30-year to 50-year term
made on a voluntary and prudent basis could bring
further diversification to portfolios dominated by
equity, bonds, real estate and hedge fund
investments. And pension fund participants would
benefit, too, from the transportation options,
clean water and other improvements that result.
More than what we eat, we are what we finance.
--
August 8, 2005
|
