The Benefits of Private Investment in Infrastructure

Note: All dollar figures are measured in today’s terms

Note: Updated as of April 2013

For More Information Contact Addison Smith at (202) 862-5520 or addisons@sphereconsulting.com

This Summary of Information was Compiled by

* This report was done in coordination with several private sector infrastructure colleagues and is based on the original report released in 2011.

Private Capital in Infrastructure Works

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Jointly public and private investment in infrastructure can create millions of jobs. The private sector is already largely responsible for designing, building, and financing our nation’s infrastructure and can do more.

Over $214 bn of private capital has been raised, and some additional legislative and administrative changes could accelerate infrastructure projects and enhance funding.

Private investment in infrastructure frees government dollars for allocation to other troubled areas of the economy and transfers risk away from the public partner to the private entity.

Private investment has been proven worldwide to generate positive economic growth and can act as a stimulus by providing investment grade projects to invest in.

Private capital allows U.S. workers through their pension funds to invest in the growth of our national economy, generate jobs, and enhance our global competitiveness.

Private Capital is Ready to Create Jobs

Private investment in infrastructure could generate nearly 1 million sustained jobs in the U.S. market...

National UnemploymentSource: Bureau of Labor Statistics, US Department of Labor, March 2013

Private investment could

help to reduce unemployment by

approx. 8%

National Unemployment:

12 million or 7.7 %

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Note:1. Actual figure is 963,000 projected private jobs given $214 bn of private capital invested over 10 years at 60 percent leverage.

“Tonight, I propose a “Fix-It-First” program to put people to work as soon as possible on our most urgent repairs, like the nearly 70,000 structurally deficient bridges across the country. And to make sure taxpayers don’t shoulder the whole burden, I’m also proposing a Partnership to Rebuild America that attracts private capital to upgrade what our businesses need most: modern ports to move our goods; modern pipelines to withstand a storm; modern schools worthy of our children. Let’s prove that there is no better place to do business than the United States of America. And let’s start right away."”

~ President Obama, February 12th, 2013

...Incentives to invest private capital must be taken into account in President Obama’s “Partnership to Rebuild America” proposal.

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Construction Sector Hit Harder

Construction unemployment remains significantly higher than the national average ...

Source: Bureau of Labor Statistics, US Department of Labor, January Construction Workforce Statistics

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... “Unfortunately, construction employment in many metro areas appears to be suffering from declining public-sector demand and a private-sector market that is still well below peak levels.”~AGC Chief Economist Ken Simonson, January 30th, 2013

Feb 2013 Construction Sector Unemployment:

15.7%

Over 1.7 million construction sector jobs

(seasonally adjusted) have been lost since

January 2008. [1]

[1]: Bureau of Labor and Statistics. February, 2013. “Employment, Hours, and Earnings from the Current Employment Statistics survey (National),” http://data.bls.gov/timeseries/CES2000000001?data_tool=XGtable.

Growing Public Pension Fund and Investor Interest

Dedicated funds available for infrastructure have more than tripled from 2006 to 2013 and such private investor interest remains strong.

In ad d i t ion t o comp anie s t hat inve st in infrastructure, there are over 60 infrastructure funds ready to invest in the U.S. market with a levered purchasing power of ~$535 billion.

An important and growing source of private capital for transportation investment in the United States comes from quasi-public, tax-exempt institutions such as public pension funds, university endowments and charitable foundations, which are in essence sub-national sovereign wealth funds of the United States.

The total equity capital available to invest in U.S. infrastructure is likely to substantially grow in the coming years assuming our nation taps into the current pool of equity capital.

The total equity capital committed to infrastructure is in excess of $214 billion.

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2006 2013Private Infrastructure Fund Growth

~$214 Bn

~$60 Bn

Source: Preqin

$Bn

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•According to data recently compiled by the research firm Preqin, there are now 49 pension funds interested in infrastructure with approximately $38 billion of funds available for investment in such projects.

•Some of the larger U.S. public pension funds are now forming their own internal teams to pursue direct investment in transportation projects.

•Dallas Police and Fire Pension System acquired a 10% ownership stake in the $2.7 billion Texas LBJ Freeway PPP project. Additional funds considering direct infrastructure investments include California Public Employee Retirement System and the San Diego Country Employees’ Retirement Association.

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Leveraging Private CapitalThe Amount of Available Capital Grows From Approximately $214 bn to over $530 bn with Leverage

Actual Capital 40% Leveraged 60% Leveraged20% Leveraged

$ 214 Bn

$ 356 Bn

$ 535 Bn• Leveraging private capital creates a larger pool of funding for state and local governments to address infrastructure needs while driving economic growth and creating jobs.

• When leveraged at a 60:40 debt-to-equity ratio, approximately $214 Bn in private capital could generate as much as $535 bn for infrastructure investment in the United States.

7Note: Scenario assumes the approx. $214 bn in available capital is distributed evenly over a 10-year period and does not take into account fluctuations in funds’ size.

$ 267 Bn

Equity: ~ $214 bn

10% Leveraged

$ 237 Bn

30% Leveraged

$ 305 Bn

50% Leveraged

$ 428 Bn

Total Investment

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Equity: ~ $214 bn

428,000 Jobs

550,000 Jobs

963,000 Jobs

770,000 Jobs

642,000 Jobs

481,000 Jobs

•The President’s Council of Economic Advisors report on infrastructure investment finds that 80% of direct jobs created through infrastructure spending would be middle class jobs. [2]

Private Investment Creates Middle Class Jobs

Total Investment

•When used alongside federal dollars, private investment in infrastructure will greatly increase the amount of jobs that can be created. At the same time, existing public sector collective bargaining agreements are honored and union representation respected.

•A Political Economy Research Institute study finds that for every $1 billion in infrastructure investment, 18,000 direct and indirect jobs are created. [1]

Actual Capital 40% Leveraged 60% Leveraged20% Leveraged10% Leveraged 30% Leveraged 50% Leveraged

Annual Sustained Job Creation with the Sole Use of Private Capital Over a 10-year Period

385,000 Jobs

[1]: Heintz, James, Robert Pollin, and Heidi Garrett-Peltier. 2009. “How Infrastructure Investments Supports the U.S Economy: Employment, Productivity, and Growth,”http://www.peri.umass.edu/fileadmin/pdf/other_publication_types/green_economics/PERI_Infrastructure_Investments

8[2]: Department of Treasury with the Council of Economic Advisors. 2010. “An Economic Analysis of Infrastructure Investment,”http://www.treasury.gov/resource-center/economic-policy/Documents/infrastructure_investment_report.pdf

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Private Capital is Available to States Facing Deficits

Federal dollars are expected to decrease for state transportation budgets

The Highway Trust Fund is primarily financed through the 18.4 cent per gallon federal tax on gasoline. Both inflation and rising fuel economy standards threaten the long-term viability of the gas tax as a reliable funding source for transportation.

The CBO projects the Highway Trust Fund will reach insolvency by 2015 and a study from the College of William & Mary projects a $365.5 billion shortfall over the next 23 years. [1] [2]

Absent significant increases in the gas tax or other reforms, states should expect to see a shrinking pool of federal dollars available for infrastructure.

Private funds can serve as a supplemental or alternative source of capital for cash strapped states as they look to meet their transportation needs.

Total State Budget Shortfall in each fiscal year, in billions [3]

-250

-200

-150

-100

-50

0

2009 2010 2011 2012 2013

Estimate

-$110 -$45

-$55

[3]: Center on Budget and Policy Priorities, as of June 2012

-$191

-$191 -$130 -$107

[1]: CBO. February 2013 Baseline. http://www.cbo.gov/sites/default/files/cbofiles/attachments/43884_HighwayTrustFundAccounts_0.pdf

[2]: William and Mary Thomas Jefferson Program in Public Policy. January 2013 Baseline. http://movecolorado.org/wp-content/uploads/2013/02/WM-HTF-Report.pdf

0

12.5

25

37.5

50

2015 2016 2017 2018 2019

CBO Highway Account Shortfall Projection (-$billion)

Source: CBO February 2013 Baseline Projections

Private Infrastructure Investment Growing

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source: Greenhill & Co

1

Private Infrastructure Investment is Growing

Port of Portland – Terminal 6 $68; 25 years

Notes: Locations are not exact Gray shading represents transactions that are either pending close or have been withdrawn

Legend Parking Toll Roads Airports Ports Water/Utilities Other

Port of Oakland – Outer Harbor $686; 50 years

Port of Baltimore – Seagirt $334; 50 years

Presidio Parkway $929; 30 years

Northwest Parkway $603; 99 years

SH 130 (5&6) – Trans Texas Corridor $1,380; 50 years

Chicago Skyway $1,830; 99 years

Pennsylvania Turnpike $18,301; 75 years

Pocahontas Parkway $611; 99 years

I-595 Express $1,909; 35 years

Port of Miami Tunnel $903; 30 years

Chicago Metered Parking $1,157; 75 years

Chicago Downtown Public Parking $563; 99 years

Indiana Toll Road $3,850; 75 years

Pittsburg Parking $452; 50 years

Harrisburg Parking ~$200; 50 years CT Service Stations

$178; 35 years

Chicago Midway Airport $2,521; 99 years

LMM – San Juan Airport $615; 40 years

PR-22/PR-5 $1,136; 40 years

Bayonne Water & Wastewater $150; 40 years

I-95 HOT Lanes $925; 76 years

OSU Parking $483; 50 years

DTT / MLK / MLK Extension $2,041; 58 years

I-95 Travel Plazas $56; 35 years

Denver FasTracks $1,637; 46 years

North Tarrant Expressway $2,050; 52 years

Capital Beltway HOT Lanes $1,933; 80 years

I-635 / LBJ $2,700; 52 years

SH 121 $3,463; 50 years

36 U.S. P3 transactions announced totaling ~$56bn since 2005

($ millions)

East End Crossing $763; 35 years

Indianapolis On-Street Parking $35; 50 years

Rialto Water & Wastewater $172; 30 years

Long Beach Courthouse $490; 35 years

Cincinnati Parking $206; 30-50 years

Carlsbad Desalination Project $925; 30 years

Benefits of Private Capital

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Greater access to funding: Private investment can provide billions of dollars of new infrastructure funding while supplementing funds provided by state and federal governments. In certain cases, federal and even state dollars may not be necessary for project delivery, depending on the nature of the project.

Less public debt: The use of private capital allows state and local governments to avoid taking on more debt to fund projects, which either reduces interest payments or allows states and municipalities to use their bonding capacity to finance other needed government services.

Less taxes for taxpayers: Taxpayers benefit because the state does not have to rely solely on tax revenues to support infrastructure investment or debt servicing.

Greater value for money: Through global best practices, experience and innovation in design, finance, construction, operation and maintenance, private investors can bring greater efficiencies at a lower cost to the procurement of infrastructure assets and services creating disciplines and benchmarks around spending and development.

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Greater long-term efficiencies (life cycle planning): The private sector has incentives to maintain high quality infrastructure assets and thereby provide the end user with a safer and improved quality of service over the useful life of the asset or contract. Under traditional government procurement, the party that builds the facility does not always take into full account the future cost of maintaining what gets built.

Government sets and enforces standards: The public partner sets and enforces the operating and safety standards of the infrastructure assets while they are improved and operated by the private investors. In many cases the government also sets requirements for Disabled Business and Small Business Enterprises, as well as local employment participation in the arrangement.

Government retains asset ownership: The public entity regulates infrastructure assets funded with private capital, much like utilities are regulated, while transferring operating, maintenance, and financing risks to the party best equipped to manage them.

Government receives direct funding (upfront payment / portion of future revenue) and/or investment through project delivery:

•Private capital proceeds can be reinvested in infrastructure or other public goods providing long-term economic benefits to the general public.

•Proceeds from leasing existing assets or invested in new projects can allow state and local governments to meet federal matching requirements for funding of projects in the absence of available tax revenues.

Private Capital Complements Public Interest

Greater accountability: If the private entity partner fails to meet minimum requirements under the concession agreement then the public entity partner may terminate the agreement at significant financial loss to the private sector partner. This provides a significant incentive for the private sector partner to perform materially above minimum contractual obligations and exceed government-required service levels.

Con

clus

ion

Conclusion and Recommendations• At a time when public sector resources have never been scarcer and our infrastructure performance has never suffered more in the

last 50 years, public private partnerships (P3s) are a powerful policy tool currently available to governments to tackle multiple issues simultaneously and provide an additional project delivery tool for MAP-21 reauthorization.

• By taking these incentives into account when authorizing a new transportation bill, the federal government can deploy the private sector to more effectively address employment and infrastructure demands utilizing three key policy levers:

- Programmatic Changes:

• Reform and expand TIFIA by increasing the total TIFIA authorization and the percentage of each project TIFIA can fund.

• Utilize existing discretionary resources to leverage additional private investment.

• Create a permanent $3-5 billion dollar/year competitive discretionary grant program that is based on merit rather than earmarks.

• Require a value-for-money analysis for large projects.

• Create a performance pilot to test process streamlining and authorize up to 3 states to participate.

- Regulatory Changes:

• Expand flexibility for states to implement direct user fees on Federal-aid highways.

• Enhance State Infrastructure Bank resources.

• Require private investment through PPPs before federal transportation grant money is awarded to states.

• Set targets to reduce Pre-Construction approval timelines.

- Tax Code Changes:

• Reform and expand the use of Private Activity Bonds (PABS) for infrastructure projects.

• Permanently remove the Alternative Minimum Tax (AMT) applicability and state and federal cap allocation.

• Make a taxable bond option available for PABS or reissue the Build America Bonds (BABs) program and include projects with private sector investment.

• Add Infrastructure Assets to existing REIT Rules.

• Create a National Infrastructure Bank (NIB) that is authorized to lend at favorable terms to both the public and private sectors for qualified infrastructure projects.

- Base structure on the European Investment Bank (EIB) with federal and state guarantees to backstop new NIB debt issuance to provide loans for infrastructure projects. 12