VIEWPOINT: Private capital can provide sorely needed funds and energy for infrastructure projects. But there are risks.

by Canadian Shipper

Years of underinvestment in our infrastructure roadways, bridges, ports, etc. — have left us in a sorry state. About 60% of our infrastructure is between 50 and 150 years old, and more than half of the systems have reached 80% of their service life. Estimates of our infrastructure deficit the difference between what is being spent and what actually needs to be spent range from $50 billion to $125 billion.

Its not much better south of the border. The rail network carries more volume today than 30 years ago, despite a 35% reduction in track. Standard & Poors estimates that $92 billion per year is required through 2020 to maintain the average conditions of US highways and bridges.
Canada and the US may be trading superpowers but such shortfalls in infrastructure investments are taking a toll on their respective economies. In the Greater Toronto area alone, the annual loss from congestion and delays of goods shipping has been estimated at $2 billion.

I dont know if its any consolation but these problems are in no way isolated to North America. A couple of years ago I chaired an international conference on infrastructure. We had speakers from the UK, Australia, Germany as well as from the US and Canada. They were all experiencing the same issues of infrastructure underinvestment and resulting gridlock.
A recent report from BMO Capital Markets has me both optimistic that we will begin to seen an improvement to this situation and worried that about the price well have to pay for that.

According to the BMO report the last two years have seen unprecedented activity in infrastructure funds. This trend started a few years ago actually with blue chip banks, pension funds (including our own Ontario Teachers Pension Fund) and insurance companies becoming impressed with the potential for stable and relatively strong long-term yields of infrastructure investments. By 2006 at least 10 private infrastructure funds were raised and another 17 are scheduled to be raised this year, according to Standard & Poors.

Its not just the number of these funds coming into existence thats impressive; their size also warrants attention. BMO says the average size of such funds has grown from around $300 million in 2000 to about $700 million last year. More than 100 infrastructure deals were completed last year globally, worth close to $150 billion, with toll roads being a particularly active segment, according to BMO. North American deals accounted for $62 billion of the total volume.

Standard & Poors estimates that another $100-$150 billion has been raised globally and is waiting investment.

Also driving this of course is increased willingness at both the federal, provincial and state levels to privatize infrastructure assets as a way to fund capital expenditure growth. Torontos 407 Tollway is one of several examples that have come into being since the 90s and include the construction of large projects such as the construction of State Route 91 Tollway in southern California, the Chicago Skyway Toll Bridge, Indiana Toll Road and the recent deal to finish building and maintain Texas State Highway 21.

With government enamored of such public-private partnerships, and finally starting to focus on rebuilding North Americas infrastructure, more such deals can be expected. In fact, BMO points out that the biggest trend in this area in 2006 was the emergence of private equity participation. Private equity exceeded half of all North American infrastructure deals in 2006, a significant increase from the 9% share of such deals it had just two years prior. The fact that private equity is suddenly interested in infrastructure project investments, which are not a traditional choice for such investors, shows how hot the market is getting.

Its true that private investment will bring desperately needed funding and energy to infrastructure projects. Its hard to argue that infrastructure projects cant be built faster and perhaps more cost effectively in the hands of the private sector. But before we fall too quickly in love with such an approach its important to remember that some important questions remain unanswered.

How user fees will be negotiated over the long term is a particularly important question for both purchasers and providers of transportation services. Trucking companies, for example, have not exactly been well treated by our own 407 Tollway. And there are also questions about how good the private owners will prove in reinvesting their toll-generated revenues to keep infrastructure assets in top condition.
When infrastructure assets are publically owned, there are politicians to complain to and (in theory at least) they have to listen. How much control do we lose when those assets fall in private hands?

There is an understanding that we need to be putting in place long term plans and strategies for infrastructure projects on a 20-year basis.
— David OToole, assistant deputy minister, Ontario Ministry of Transport

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