U.S. Aging Infrastructure: Which Sectors Are Primed for Private Investing Growth?
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Transcript of U.S. Aging Infrastructure: Which Sectors Are Primed for Private Investing Growth?
U.S. Aging Infrastructure
Which Sectors are Primed for Private Investing Growth?
Date
Ken HerbertV.P./ Partner
Business & Financial Services
Bernice LeeConsultant
Business & Financial Services
June 2, 2009
2
11
22
33
CONTENTS
Market OverviewMarket Overview
Infrastructure Sector Focus
44 Conclusion
Public – Private Partnerships
3
Infrastructure investing has always been a sector of interest for investors for its stable and long-term returns
Recently, a few major factors have combined to push infrastructure investing to the forefront:
PRIVATE CAPITAL
Public-private partnerships are
essential to bridge the gap between government
funding and infrastructure need
PRIVATE CAPITAL
Public-private partnerships are
essential to bridge the gap between government
funding and infrastructure need
CREDIT CRISISIn the midst of a credit crisis,
investors are eyeing infrastructure – a stable source
of return
CREDIT CRISISIn the midst of a credit crisis,
investors are eyeing infrastructure – a stable source
of return
LACK OF GOVERNMENT FUNDING
Obama’s stimulus package allocates $72 billion to
infrastructure
LACK OF GOVERNMENT FUNDING
Obama’s stimulus package allocates $72 billion to
infrastructure
AGING INFRASTRUCTURECurrent ASCE estimation of $2.2 trillion over the next five
years is needed for infrastructure
AGING INFRASTRUCTURECurrent ASCE estimation of $2.2 trillion over the next five
years is needed for infrastructure
Infrastructure Investing At-a-Glance
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Infrastructure Definition
Facilities, systems and equipment required to provide public services and support private sector economic activity
Transportation Infrastructure, Regulated Infrastructure, Communication Infrastructure, Social Infrastructure
Facilities, systems and equipment required to provide public services and support private sector economic activity
Transportation Infrastructure, Regulated Infrastructure, Communication Infrastructure, Social Infrastructure
Transportation Infrastructure
Bridges
Tunnels
Rails
Transit
Airports
Seaports
Transportation Infrastructure
Bridges
Tunnels
Rails
Transit
Airports
Seaports
Regulated Infrastructure
Electricity Transmission and Distribution
Oil and Gas Pipelines
Water
Waste Water
Regulated Infrastructure
Electricity Transmission and Distribution
Oil and Gas Pipelines
Water
Waste Water
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China: • Chinese government stimulus package of $586 billion stimulus (mainly to infrastructure, rural)India: • Plans to spend 8% of GDP a year on infrastructure projects
Australia:• Infrastructure deficit is estimated at A$20 billion• Australia is one of the first countries to embrace PPPs and expanding access to private infrastructure funds
UK & Europe:• For the EU, OECD estimates 4 trillion Euros will be needed with the bulk for the water sector• Estimate of 100 billion Euros of Public-Private Partnerships (PPPs) have been entered into in UK, Italy, Spain, Portugal, France•UK leads the PPP market while Europe continues to develop
Global Infrastructure Opportunity
USA:• ASCE estimates $2.2 trillion needed over five years for infrastructure• Government stimulus package allocate $72 billion for infrastructure•Infrastructure asset privatization is slower compared to other countries
Rest of World:• Latin America will need to invest $100 billion a year for the next 20 years for its infrastructure•South America’s biggest infrastructure needs are roads, bridges, waterways and ports to help lower cost of exporting•Africa’s infrastructure needs are estimated at $75 billion a year with power being the greatest infrastructure challenge
Source: ASCE, World Bank, ReutersSource: ASCE, World Bank, Reuters
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$2.4$5.2
$17.9
$34.3
$24.7
$0.0
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
$35.0
2004 2005 2006 2007 2008
Global Infrastructure Funds Raised
Global Infrastructure Private Equity Growth
$ in billions$ in billions
In the face of the liquidity crisis private
infrastructure funds were able to raise close to $25 billion
In the face of the liquidity crisis private
infrastructure funds were able to raise close to $25 billion
Source: Probitas PartnersSource: Probitas Partners
Currently 77 Infrastructure Funds are Seeking $92 Billion in Committed Capital
Four Out of The Top 10 Funds are U.S. Based – Seeking $19 Billion
Currently 77 Infrastructure Funds are Seeking $92 Billion in Committed Capital
Four Out of The Top 10 Funds are U.S. Based – Seeking $19 Billion
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GS Infrastructure Investment Group
GS Infrastructure Partners II
$7.75 billionRoads, airports, regulated gas, water & electrical utilities
Citi Infrastructure InvestorsCiti Infrastructure
Partners$4 billion
Transport, utilities, energy, social infrastructure
Kohlberg, Kravis Roberts & Co.
KKR Infrastructure Fund
$4 billionNo sector focus given but current and past investments include: energy, waste management
JP Morgan Asset Management
JP Morgan Infrastructure
Investments Fund$3.1 billion
Bridges, tunnels, toll roads; pipelines, energy transmission and distribution; water and waste water systems; airports, seaports; rail; contracted power generation
Alinda Capital Partners LLC
Alinda Infrastructure Fund II
$3 billion
Roads, bridges and tunnels; airports, ports and rail; water supply and wastewater treatment; gas transportation, storage and distribution; power generation and electric transmission; and utility services for residential, commercial and industrial customers
Morgan Stanley Infrastructure Partners
Morgan Stanley Infrastructure Fund
$1.4 billion
Transportation, energy and utilities, communications, social infrastructure
A Sample of U.S. Based Infrastructure Funds
Fund ManagerFund Manager
FundFund
SizeSize
Sector InterestSector Interest
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Growth Opportunity
Growth Opportunity
ProfitabilityProfitability
LowLow
HighHigh
LowLow
HighHigh
Infrastructure Investing Outlook By Sector
Power & Clean Energy
Power & Clean Energy
Rail & Mass Transit
Rail & Mass Transit
WaterWaterWaste
Management
Waste Management
RoadsRoads
AirportsAirports
SeaportsSeaports
Bridges & Tunnels
Bridges & Tunnels
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FACTORS AIDING
Independence of infrastructure assets from
business cycle risk
Independence of infrastructure assets from
business cycle risk
Stimulus package by U.S.
Government
Stimulus package by U.S.
Government
Pension funds ideally matched for infrastructure
investing
Pension funds ideally matched for infrastructure
investing
States are cash-starved -
heightened need for private investment
States are cash-starved -
heightened need for private investment
U.S. PRIVATE EQUITY INFRASTRUCTURE INVESTINGU.S. PRIVATE EQUITY INFRASTRUCTURE INVESTING
Aging U.S. infrastructureAging U.S.
infrastructure
Market Forces Driving Infrastructure Investing
The Strong Market Dynamics Will Push Growth in Infrastructure Investing
A Growth Rate of 14-18% is anticipated
The Strong Market Dynamics Will Push Growth in Infrastructure Investing
A Growth Rate of 14-18% is anticipated
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U.S. Infrastructure Funding Need by Sector
Other includes: Parks & SchoolsOther includes: Parks & Schools
Source: ASCESource: ASCE
$ in billions$ in billions
$1.2 trillion over 5 Years is Needed via Private Capital$1.2 trillion over 5 Years is Needed via Private Capital
Aviation D
Bridges C
Dams D
Drinking Water D-
Energy D+
Hazardous Waste D
Inland Waterways D-
Levees D-
Rail C-
Roads D-
Solid Waste C+
Transit D
Waste Water D-
Overall D
2009 ASCE U.S. Infrastructure Report Card
2009 ASCE U.S. Infrastructure Report Card
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$72 Billion Stimulus Package Designated for Infrastructure$72 Billion Stimulus Package Designated for Infrastructure
U.S. Government Stimulus Package
Source: Committee on Appropriations SummarySource: Committee on Appropriations Summary
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CONTENTS
Public – Private PartnershipsPublic – Private Partnerships
Infrastructure Sector Focus
44 Conclusion
Market Overview
13
Public – Private Partnerships
$2.2 trillion
Estimated Amount Needed For U.S. Infrastructure
Improvements Over Five Years
$2.2 trillion
Estimated Amount Needed For U.S. Infrastructure
Improvements Over Five Years
$975 billion
U.S. Government Funding of Infrastructure Need (Actual
Spend plus Stimulus Package)
$975 billion
U.S. Government Funding of Infrastructure Need (Actual
Spend plus Stimulus Package)
$1.2 trillion
Significant Gap in Funding
$1.2 trillion
Significant Gap in Funding
Public – Private Partnerships (PPP)
Public – Private Partnerships (PPP)
PPPs have the greatest advantage to tap private capital.
PPPs have the greatest advantage to tap private capital.
14
Public – Private Partnerships
The 2010 administration budget provides a National Infrastructure Bank to expand public-private sector spending
• Initial funding expected to be $5 billion and increase to $25 billion by 2019
The federal stimulus package will also give help to pension funds by creating investment opportunities for their infrastructure allocations
• CalPERS• In the past CalPERS grouped its infrastructure investment with other alternative assets
such as private equity• CalPERS has stated it would allocated up to $7.2 billion for infrastructure with a net
target return of 5% over inflation over a period of five years
Successful examples of PPP investing• In 2006, leasing of the 75 year old Indiana Toll Road for $3.8 billion to Statewide
Mobility Partners and Macquarie Infrastructure Partners• In March 2009, Florida closed a $1.6 billion concession to develop toll lanes on I-
595 with Madrid-based ACS Infrastructure Development
15
Over half of U.S. states have legislation authorizing PPPs transactions for
Long-term leasing of existing infrastructure New development of transportation infrastructure
Public – Private Partnership Outlook
Examples of Current Deals in Development
Examples of Current Deals in Development
California’s Port of Oakland: 50 year $700 million transaction to specific port facilities with Ports America Group
California’s Port of Oakland: 50 year $700 million transaction to specific port facilities with Ports America Group
Wisconsin’s Mitchell International Airport: Investigating feasibly of a long-term lease to raise $1 billion for transit system over 50 years
Wisconsin’s Mitchell International Airport: Investigating feasibly of a long-term lease to raise $1 billion for transit system over 50 years
Wisconsin’s Water Works: In an effort to reduce city tax increases and budget cuts, the hope is to raise more than $500 million for leasing of water system
Wisconsin’s Water Works: In an effort to reduce city tax increases and budget cuts, the hope is to raise more than $500 million for leasing of water system
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Potential Risks to U.S. Infrastructure Investing
U.S. Government regulations could hinder private investment in infrastructure projects
U.S. Government regulations could hinder private investment in infrastructure projects
Extent of time to bring a project to fruition could also miss the window of opportunity of viable investors
Extent of time to bring a project to fruition could also miss the window of opportunity of viable investors
The slow evolution of PPPs in the U.S. could see investments moving towards other parts of the world
The slow evolution of PPPs in the U.S. could see investments moving towards other parts of the world
U.S. Government reallocation of infrastructure budget and resources to other higher priority initiatives
U.S. Government reallocation of infrastructure budget and resources to other higher priority initiatives
17
Infrastructure Investing Outlook
Opportunities are available for the savvy and disciplined investors
Increasing ROI due to price moderation
Less leverage available
U.S. Government fiscal budget shortfalls are apparent
Combined with budget shortfalls, the increasing awareness of failing infrastructure leads to more PPP opportunities
President Obama administration is focused on infrastructure and clean energy
Independence of infrastructure assets from business cycle risk – relatively recession resistant
Tangible, real assets are more attractive if global stimulus leads to inflation
Political FactorsPolitical Factors
Economic FactorsEconomic FactorsCredit Crisis Factors
Credit Crisis Factors
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CONTENTS
Infrastructure Sector FocusInfrastructure Sector Focus
44 Conclusion
Market Overview
Public – Private Partnerships
19
Municipal Water and Wastewater
Market Dynamics
EPA estimates and investment of $390
billion for waste water municipalities
Municipalities for safe drinking
water face $11 billion shortfall this
year
Current Size of North American market is $2.74
billion
Market emphasis on water reuse and recycling
Forecasted five-year CAGR is
7.04%
• Strict drinking water and
effluent quality regulations
are forcing utilities to
upgrade current systems.
• Increasing U.S. population
growth is forcing
municipalities to consider
expanding current
facilities.
• Gap between investment
required for infrastructure
development and funds
received by EPA is
constantly increasing.
Current funding is only $6
billion.
Municipal Water and Wastewater Infrastructure
20
Market E
nh
ancers
DriversDrivers
Market In
hib
itors
Expansions Triggered by Population Growth &
Consumption
Expansions Triggered by Population Growth &
Consumption
* Length of arrows indicate impact and relevance of driver / constraint
Municipal Water and Wastewater Infrastructure
Upgrades & Improvements
Needed
Upgrades & Improvements
Needed Sizeable Customers/Scale
Efficiencies
Sizeable Customers/Scale
EfficienciesTechnology
Enhancements
Technology Enhancements
Operational Cost
Operational Cost
Performance Failures
Performance Failures
Budgetary Restraints
Budgetary Restraints
Reliance on Self-
Sufficiency
Reliance on Self-
Sufficiency
21
Power Generation Market Dynamics
Future investment is estimated at $900 billion over next 15
years
60% of circuit breakers are 30+
years old
Current Size of North American
market is in excess of $750
billion
70% of transmission and
power transformers are
25+ years old
Forecasted five-year CAGR is
3.9%
• The U.S. Government fiscal
package allocates $32 billion
to transform energy systems
by allowing for smarter and
improved grid and focusing
investments on renewable
technology.
• There is an existing gap
between production and
consumption of electricity
due to limited capacity—
hence need for new
investments.
• Developments in renewable
energy generation are
expected to drive power
generation infrastructure
investment.
Power Generation Infrastructure
22
Market E
nh
ancers
DriversDrivers
Market In
hib
itors
* Length of arrows indicate impact and relevance of driver / constraint
Power Generation Infrastructure
Aging Power Plants
Aging Power Plants Environmental
Regulations to Reduce Air
Pollution
Environmental Regulations to
Reduce Air Pollution
Increasing Power
Demand
Increasing Power
DemandEPAct 2005 Tax Benefits & Incentives
EPAct 2005 Tax Benefits & Incentives
Increase in Renewable
Energy to Boost Turbine
Development
Increase in Renewable
Energy to Boost Turbine
Development
Increased Raw
Material Costs (Steel,
Copper)
Increased Raw
Material Costs (Steel,
Copper)
Insufficient Capacity
Insufficient Capacity
Lack of Power Project
Financing Due to Long
Payback Period
Lack of Power Project
Financing Due to Long
Payback Period
23
Airport Industry Market Dynamics
FAA estimates $49.7 billion is
required for infrastructure
development in the next five years
U.S. government stimulus package
allocates $1.3 billion in funding
Current size of North American market is $15-20
billion
Over the past 30 years passenger
air traffic has increased seven-
fold
Forecasted five-year CAGR is 5%
• Capacity issues will either
push airports to expand or
new airports to be built – a
clear indication of the
future outlook of the airport
industry.
• U.S. airports will
continually be facing a
fluctuation of demand, and
at the same time receiving
modest funding increase.
• There is a clear
opportunity given the gap
of government funding and
the need for private
investors.
Airport Infrastructure
24
Market E
nh
ancers
DriversDrivers
Market In
hib
itors
Air Traffic Growth
Air Traffic Growth
Asset Management
Asset Management Real Estate
Management
Real Estate Management
CapacityCapacity Operations
Efficiency
Operations Efficiency
Commercial Revenues
Commercial Revenues
Crises & Risk
Crises & Risk
Congestion & Slot
Allocation
Congestion & Slot
Allocation
Safety & Security
Requirements
Safety & Security
RequirementsSunk Costs
Sunk Costs
* Length of arrows indicate impact and relevance of driver / constraint
Airport Infrastructure
25
Road Industry Market Dynamics
ASCE estimates $186 billion per year is needed for road
development
36% of roads in the U.S. are continually congested costing $63 billion in time and wasted fuel
U.S. highway road system is valued at $1.75 trillion
34% of roads are in poor or mediocre condition
Forecasted five-year CAGR is
between 5 - 6%
• Passenger and commercial
travel on U.S. highways
continue to increase every
year.
• The American Recovery and
Reinvestment Act only
allocates $27 billion for
roads. The Highway Trust
Fund has a balance of $16
billion, mostly derived from
user fees. The funding gap
needs to come via private
investment.
• PPP toll road establishment
has been proven in the U.S.
(ex, Chicago’s Skyway,
Orlando Orange County
Expressway)
Roads Infrastructure
26
Market E
nh
ancers
DriversDrivers
Market In
hib
itors
Passenger and
Commercial Travel Growth
Passenger and
Commercial Travel Growth
Road Congestion
Road Congestion
Aging Highway System
Aging Highway System
Increased Population
Growth
Increased Population
Growth
Continual Maintenance
Expense
Continual Maintenance
ExpenseLack of
Prioritization by
Government on Road
Rehabilitation
Lack of Prioritization
by Government
on Road Rehabilitation
Road Safety Requirements
Road Safety Requirements
Increased Fuel Costs
Increased Fuel Costs
* Length of arrows indicate impact and relevance of driver / constraint
Roads Infrastructure
Private Investment via
Toll Roads
Private Investment via
Toll Roads
27
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CONTENTS
ConclusionConclusion44
Market Overview
Public – Private Partnerships
Infrastructure Sector Focus
28
Strong growth is anticipated for private infrastructure investing due to the $1.2 trillion shortfall between:
An estimated $2.2 trillion over 5 years is critical for upgrading/replacing current U.S. infrastructure
$975 billion U.S. Government is spending on infrastructure projects
Priority will be given to projects that are in need of “gap funding”
Public – Private Partnerships have the greatest advantage to penetrate private capital
Over half of states have legislation authorizing PPPs with other states seeking approval of pending legislation
Conclusion
29
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