Friday, August 08, 2008

Up to Speed

Two years after the Fly Under the Bridge Academy first began to instruct some of the economics profession's dimmer bulbs on the economics of private infrastructure, Steven Malanga takes note of the trends in transportation:
With America already underspending on infrastructure by about $130 billion a year, the country will require new financing sources in the era of high gas prices, especially when one-quarter of our bridges are deemed in poor shape, and one out of every seven miles of road pavement is considered “unacceptable.”

Here’s an area where the U.S. can learn from the many other countries around the world which for years now have been tapping huge pools of private capital to help build, maintain and operate roads, bridges, tunnels and mass transit systems. Some 3,400 miles of toll highways linking cities in France have been built with money from private investors. The United Kingdom has used so-called build-to-operate agreements with private companies and capital for 20 years to finance new roads, tunnels and bridges. Developing countries as different as Mexico, Thailand, Malaysia, and Indonesia have followed suit to one degree or another. China is using private capital for a massive road building effort which involves linking its major cities with super highways.

One reason such efforts have been successful is that there is plenty of capital out there looking for the kind of solid, predictable long-term returns that this investing brings. Huge global pension funds with very long investing horizons have targeted this area, which is considerably less volatile than investing in equities (or mortgage-backed securities, it seems). In a typical deal, a bank or investment house managing pension money partners with a company that is experienced in operating roads or bridges, and the pair either build or take over an existing road with tolls on it, then contract to operate it for many years in exchange for the toll revenues. In return, government typically gets an upfront payment, which in the case of existing roads that don’t have to be constructed, can be enormous.

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