Ports and Infrastructure
Private vs. Public

An argument for privatizing infrastructure

If you travel to London, you’re likely to find that your airport, your rail service and even your tap water are owned by private-sector operators. That kind of privatization has not been adopted as readily in America. Why not?

That’s the question Brad Gordon of RREEF Infrastructure Investment asked the audience at the NW Intermodal Conference recently. Gordon, who locates investments for his clients, says private investing in infrastructure just makes sense.

What private investors need

“What we’re investing in largely fits within two buckets, which we generally call transportation and utilities,” says Gordon. And those investments produce returns in the 10 to 12 percent range.

For an asset or business to be considered an infrastructure investment, it must:

• be essential to the operation of a local, regional or national economy
• benefit from a monopolistic position or near monopolistic position
• be a scarce resource
• have a predictable and sustainable cash flow source
• involve a lot of steel and concrete

Private sector kept at bay

Although the United States has a long history of private-sector involvement in freight rail, electricity generation, electricity transmission and distribution, that’s not the case in other areas, such as airports and toll roads.
Gordon says there are many reasons behind this. A large factor is that the municipal bond market has made financing pretty affordable. “Also, there’s the patronage that goes along with politicians delivering projects to their local hometowns and states,” says Gordon.

Then there are the hoops. Gordon says, imagine hypothetically privatizing the Newark Airport in New Jersey. The authorities who would need to sign off might include the city, port authority, state assembly, state senate, the governor, the state and federal Departments of Transportation, and the Department of Labor. And if the buyer were foreign, the list would double in size.

This is quite different from the U.K., where privatization of the London Underground took just the signature of Tony Blair, says Gordon.

More road blocks

There are other, more psychological, roadblocks that would need to be addressed before Americans embrace privatization of infrastructure. Gordon addresses each:

• Civic pride and tradition — People take pride in their city’s management of power, utilities, docklands, etc.

Gordon’s response — Governments are necessarily best suited to operate a short line railroad or purify water. A private investor can be more efficient and, more importantly, by doing so it would result in a very large check to the municipality.
 
• Control — Worry that investors won’t meet certain standards.

Gordon’s response — Service standards are set out in the sales contract. If the private sector operator does not meet those standards, the city and/or utility takes back its asset.

• Xenophobia — Security concerns around non-Americans owning U.S. assets.

Gordon’s response — The city has the ability to impose controls, and it can have regulations that govern how those assets must be operated.

• Debt — A worry that a private investor borrowing money may collapse from debt.

Gordon’s response — The asset hasn’t gone anywhere. If the private sector party defaults, the city gets the check they were paid when they sold it, as well as their asset back.

• Job losses — A drive to reduce overhead would eliminate jobs.

Gordon’s response — There will probably be some job cuts. However, as in the case of Chicago’s Skyway, the mayor guaranteed jobs elsewhere in the city.

New roles

Despite the opposition, Gordon believes that there is a huge and compelling rationale to move forward in privatizing a lot of our infrastructure.

“I think that there is a clear role for government, but it’s probably more in expansion and development,” says Gordon. “But for mature infrastructure, I wonder what it’s going to take in the United States to get their act together and realize that there may be a better way.”

Despite this kind of uphill battle, there still have been a few recent successes, like the Indiana Toll Road, says Gordon. Gov. Mitch Daniels drove through the privatization for a sale price of $3.8 billion. He’s now using those funds for other transportation projects in other parts of Indiana.

In the meantime, Gordon says, there’s a lot of money tied up in concrete and steel that could be turned into a very large upfront check for a city or utility.