As the nation's—and the world's—bridges, roads, and airports age, public private partnerships may be the most viable way to save them
From Standard & Poor's Equity Research"Plastics!" is what Walter Brooke famously recommended to Dustin Hoffman as the one sure thing in the 1967 film The Graduate. If that hoary boomer comedy were remade today, the one sure thing could very well be infrastructure.
In the U.S., levees break, steam pipes explode, and bridges collapse. Much of our national physical plant—roads and transit systems, airports, bridges and tunnels, drinking-water and waste-water facilities, and inland waterways—was built before Elvis joined the Army. The American Society of Civil Engineers, in a 2005 report, said $1.6 trillion would be required over a five-year period to bring all this infrastructure up to snuff.
Now consider this: The U.N. expects the world's population to expand from its current level of 6.6 billion to 8.3 billion by 2030. In 2030, fully 60% of that 8.3 billion will, by the U.N.'s forecasts, be living in urban areas, compared with 13% in 1900.
Last but not least, the world's economies are increasingly functioning as one—the process known as globalization. Consumers in developing markets are growing wealthier; companies compete with peers a continent, ocean, or hemisphere away.
Building the Global Economy
All of this will require clean water, reliable energy, efficient public transportation, and dependable communications networks, and the means to move products and services efficiently and seamlessly from point A to point B—and much more of all of these than currently available. Macquarie Bank (MBL.AX), a global financial-services company based in Australia, estimates global infrastructure demand for transportation, energy, water, and communications will cost $30 trillion through 2030.
"Infrastructure is the backbone of the global economy," says Aaron Visse, co-manager of the Kensington Investment Group's Global Infrastructure Fund (KGIAX). "The great challenge for governments today is discovering methods of financing the maintenance and development of infrastructure networks."
Public Private Partnerships
Financing is, of course, the problem, particularly in the developed world. The budgets of these governments increasingly are devoted to entitlements, social services, and pensions. And in the U.S., the political class often seems more inclined to pour money into projects that would embarrass Boss Tweed—like the "bridge to nowhere" in Alaska, intended to connect the town of Ketchikan in the Alexander Archipelago (population 8,900, according to the Heritage Foundation) to its airport on Gravina Island (population less than 50).
Given the gap between demand and available funds, Visse says, partnerships between the public and private sectors (PPPs) may very well be the most viable solution. European experience tends to support the PPP model. In the mid-1950s, private investors participated in the construction and operation of more than 3,000 miles of auto routes in France. Britain's Margaret Thatcher sold off numerous state-owned assets in the 1980s. The collapse of the Soviet Union created numerous PPP opportunities in Eastern Europe.
And the model is gaining traction closer to home. In 2004, the city of Chicago auctioned off the Skyway Toll Road (BusinessWeek, 5/7/07) to a group comprising Spain's Cintra and Macquarie. Chicago got $1.83 billion, while Cintra/Macquarie got a 99-year operating lease for the Skyway. Cintra/Macquarie is responsible for all operating and maintenance costs, but has the right to all toll and concession revenues. Cintra/Macquarie increased tolls by some 25%, but a formula to prevent price gouging will govern further hikes.
And, as Steven Malanga of the Manhattan Institute noted in a City Journal article, "within three months of closing the deal, [Cintra/Macquarie] had installed an electronic toll-collection system to help zoom traffic along and assigned additional collectors during rush hour to help gather cash more quickly. The result: reduced wait times, increased Skyway use, and more money coming in. Chicago didn't bother with any of these reforms when it managed the road, a Macquarie managing director testified before Congress last year. Unlike the city, he said, Macquarie was heavily incentivized to run the road efficiently."
As Visse points out, a singular benefit of PPPs for consumers is the management expertise and operational efficiencies the private sector brings to the table. PPPs currently underway include the Indiana Toll Road, the Pocahontas Parkway in Virginia, and Texas State Highways 130 and 121. Pennsylvania is considering the privatization of the Pennsylvania Turnpike.
For investors, the infrastructure thesis is compelling. According to Visse, infrastructure assets are long-lived, with bond-like characteristics—namely, stable cash flows linked to inflation. Competition is not really an issue; infrastructure assets offer essential, nonsubstitutable services. And perhaps most important—particularly in an investment environment in which the performance of all assets seems to converge—infrastructure has a very low correlation to other asset classes.
How to play infrastructure? Visse, whose Kensington Global Infrastructure Fund is the sole U.S. mutual fund targeting infrastructure, favors transportation, particularly toll roads and airports. Some favorite toll roads include Jiangsu Expressway (JEXYF), Shenzhen Expressway (SZHXF), and Zhejiang Expressway (ZHEXF). Airport stocks include Airports of Thailand and Macquarie Airports, which operates facilities in England, Australia, and Italy.
Australia's Macquarie, which has emerged as a huge player in the global infrastructure space, is available on U.S. exchanges via Macquarie Infrastructure (MIC), which owns, operates, and invests in a diversified group of infrastructure companies in the U.S. and other developed countries, and via the Macquarie Global Infrastructure Total Return Fund (MGU), a closed-end fund that invests in financial assets issued by infrastructure owners, operators, and managers in the U.S. and abroad.
Exchange-traded funds to consider include the SPDR FTSE Macquarie Global Infrastructure 100 (GII) and the PowerShares Global Water Portfolio (PIO).