Infrastructure Boom: Potholes Ahead

Before you start making infrastructure investments on the strength of Obama's stimulus program, consider these potential obstacles to a building boom

By David Bogoslaw

OLIVER LANG/AFP/Getty Images

The incoming Obama Administration has made clear that investing in infrastructure will be a cornerstone of its program to spur a U.S. economic recovery. But before investors rush into all kinds of infrastructure plays—from single stocks like power-gear giant Emerson Electric (EMR) to mutual funds that specialize in toll roads, bridges, and airports—they need to be aware of some things that could derail, or at least significantly delay, any bonanza from public works projects.

Here, BusinessWeek looks at six factors that could keep these projects in a holding pattern—an unpleasant prospect for those who wish to see the rebuilding boom begin immediately.

Hobbled Capital Markets

President-elect Barack Obama has said he wants to invest in renewable energy sources to reduce this country's dependence on foreign oil imports and vulnerability to the kinds of price spikes in gasoline seen last summer. But many projects have been funded through project finance, a market that has shrunk dramatically as a result of the financial crisis as banks that were major players in this area such as the Royal Bank of Scotland (RBS) have been taken over by government or have otherwise suffered, says George Bilicic, chairman of Power, Utilities & Infrastructure at Lazard (LAZ), the investment bank.

Infrastructure is viewed as a relatively defensive asset class—safer, with more stable cash flows, even if returns aren't as high as leveraged buyout vehicles—and tends to benefit more from a flight to quality during more challenged market environments, says John Veech, managing director of private equity at Neuberger Berman. Veech says he expects to see project finance for infrastructure rebound this year but thinks banks will be less aggressive. They may be willing to put up 60% to 70% of the high-grade debt needed to cover the cost of such projects rather than the 80% to 90% they provided in the past. That will translate into lower prices and bigger equity checks from investors in infrastructure, as well as a rise in collaborative partnering deals.

"I believe you're going to see project and infrastructure-type debt [deals] return significantly quicker than you'll see high-yield or LBO-type debt come back," which is consistent with prior economic cycles, he adds.

But the amount of private capital that's either been raised to date or contemplated is quite small relative to the overall investment in North American infrastructure that is needed and, in terms of fundamental impact on the economy, wouldn't make a difference without further government stimulus, says Lazard's Bilicic. Private capital is certainly a tool that stimulus programs at the state and local levels should tap into in order to make some projects more viable, however. For example, a city mayor could get a lot of mileage for filling his budget gap by selling off assets like parking garages, which could then provide resources that the city needs for more basic social services, he says.

The government has a good chance of getting a fair price for such assets and securing private capital at a fair price to build an infrastructure asset from scratch, which currently isn't true of other industry sectors across the world, he says. There is, however, some political resistance to local governments going after private capital for infrastructure projects, Lazard learned from the results of a survey it sponsored in mid-2008. Even so, Chicago recently sold its Midway Airport and its street-metering system to private interests, he adds.