Last week I attended the US Infrastructure Investing Summit, which was sponsored by IPQC. There were approximately 60 participants in attendance at the two day conference, including government officials (CFO of Chicago, CFO of Texas Department of Transportation, an official from VDOT, and an official from Partnerships BC in Canada), consultants (two representatives from Moodys, a partner from KPMG, and several independent consultants), and investors (the managing director of Goldman Sachs' infrastructure fund, a fund manager from Manulife, and an investment manager from Caisse de depot et placement du Quebec).

For me, several major themes emerged from the discussions and presentations:

• Infrastructure as a New Asset Class - Infrastructure is being touted as a new, long-term, inflation-linked asset class that sits alongside private equity & real estate and offers hard assets & visible long-term earning streams;

• Current Activity in the US Market - The US states that are currently active in selling infrastructure include Illinois (they are talking about selling a lottery system, a downtown parking system, and a tollway), Virginia, Texas and Indiana. And there has been debate about privatization in the Ohio gubanatorial election; So far, the main investor/operators have included Babcock & Brown, Cintra, Goldman, Macquarie and Transurban.

• Foreign Feeding Frenzy in the US Market - Foreign investors are seeing value in the US market that US investors as of yet have been unable to see and are paying a premium for US infrastructure assets. For example, at $1.8 billion, the Macquarie-Cintra bid for the Chicago Skyway was $800 million higher than the second highest bid. These lofty valuations may be being driven by the following factors: (a) these acquisitions represent a "long-term strategic toe-hold" in the US market, (b) these acquisitions are being treated as "loss-leaders" -- i.e. early investments in order to gain entry into what could unfold to be the world's largest market for private infrastructure investment, (c) the US market is viewed as being extraordinarily secure and thus worthy of a "stability premium", and (d) certain foreign investors may take a longer-term view in the formulation of financial models, which elevates the valuations.

• Fragmentation in the US Market - Public-private partnership arrangements are unfolding in the US on a sector-by-sector, state-by-state basis, with little or no national or even state-level coordination such that every agreement is unique, with one-off terms and conditions. Thus, what we are seeing is ad hoc regulation by contract. This fragmented development trajectory is precisely what happened in the UK, and the experience there suggests that it will lead to many long term problems. Over time, investors start to point fingers and say, "That investor over there, you Mr. Government gave him more favorable treatment," or "Over in this sector, why don't they have this condition in their contracts?" Likewise, if the public catches on that they are paying twice as much for their power as they are in a neighboring county, they will take to the streets and protest against their government. On the flipside, the fragmentation of the US market offers much potential for innovation in public-private partnership arrangements; this is the old "laboratories of states" idea.

• Macquarie's History - The success of Macquarie Bank must not be viewed outside of the context of its historical roots within a very unique institutional milieu and policy environment in Australia that set off, supported and even subsidized its growth and development. As one conference participant remarked, "In the early 1990s the Australian savings rate was next to 0%, and for fear of a retirement crisis, it was mandated by government that people had to save 10% which went into pension funds. Then the government basically went bankrupt and at the same time their infrastructure was failing and in dire need of investment and repair. So, they put into place a special legal system that favors pension fund investments in infrastructure and they effectively induced a centrally regulated pension system to allocate money into the sector. And with this great captive source of capital, Macquarie Bank emerged, they went on a buying binge and bought up all of the assets in their own country, and now they are binging elsewhere."

Posted by rjorr at October 30, 2006 10:50 PM