Foreign Direct Investment in US Transportation Infrastructure

1
Foreign Direct Investment in US Transportation
Infrastructure

• Eva Lerner-Lam, President
• Palisades Consulting Group, Inc. and Palisades
  China Group, LLC
• Presented at the 2011 ASCE Annual Conference
• Beyond Financial Engineering
• Building, Operating, and Maintaining
  Transportation Infrastructure
• Memphis, TN
• October 22, 2011

2
Outline

• Recent History of Foreign Direct Investment in
  Transportation Infrastructure in the US
• Current Situation Disappointing
• Reasons for Disappointment
• What is the US Public Looking for?
• Who Are Foreign Investors?
• BRIC Sovereign Wealth Funds are the New Global
  Investors
• What Foreign Investors Look For
• Opportunities and Challenges
• Priming the Pump
• In Summary

3
Recent History of Foreign Direct Investment in
the US

• In a 2009 study1, NJ PIRG concluded that
• Toll road privatization is becoming increasingly
  prevalent in the United States
• Between 1994 and early 2006, 21 billion was paid
  for 43 highway facilities in the US
• By the end of 2008, 15 roads had been privatized
  in 10 different states
• Currently, approximately 79 roads in 25 states
  are under consideration for some form of
  privatization.
• 1http//cdn.publicinterestnetwork.org/assets/H5Ql0
  NcoPVeVJwymwlURRw/Private-Roads-Public-Costs.pdf

4
Current Situation Disappointing

• Severe public finance constraints on maintenance
  and upgrading of transportation infrastructure
  made up-front cash payments from private
  investors seem attractive
• However, many privately-funded projects are not
  performing well financially, creating major
  uncertainties for investors, public agencies and
  taxpayers

5
Reasons for Disappointment

• Traffic projections were greatly overestimated
• Compensation and non-compete terms in
  privatization agreements guaranteed returns to
  investors at taxpayer expense
• Agreements distorted public policy
  decision-making for emergency, traffic and
  environmental management

6
What is the US Public Looking For?

• Control over regional decisions about
  transportation planning and management
• Fair value so future toll revenues wont be sold
  off at a discount
• Deals that do not last longer than the uselife of
  an asset
• State-of-the art maintenance and safety standards
  instead of statewide minimums
• Transparency to ensure proper public vetting of
  privatization proposals
• Full accountability in which the legislature must
  approve the terms of a final deal, not just
  approve that a deal be negotiated.
• NJPIRG Education Fund (Spring 2009)

7
What is the US Public Looking For?
Knowledgeable and accountable technical and
political leadership
8
Who Are Foreign Investors?

• Sovereign Wealth Funds from the Middle East,
  Europe and Asia (In 2010, SWFs from the Middle
  East held 44 of all SWF assets under
  management2).
• Today, the BRIC SWEs have rapidly growing
  foreign exchange accounts and foreign asset
  holdingsthey are the new kid on the block
• Taken together, SWFs represent trillions in
  available funds for US infrastructure (foreign
  assets under management of SWFs could reach
  US610 trillion by 20133
• 2Rebuilding America The Role of Foreign Capital
  and Global Public Investors, Brookings Institute,
  March 2011
• 3Sovereign Wealth Fund Institute,
  http//www.swfinstitute.org/research/imfswfreport.
  pdf

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BRIC Sovereign Wealth Funds are the New Global
Investors
10
BRIC Sovereign Wealth Funds are the New Global
Investors
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What Did Foreign Investors Look For?

• Pre-2008, SWFs looked for
• 20-30 returns
• Such high returns required complex, opaque
  agreements involving accelerated depreciation tax
  benefits, taxpayer guarantees of stabilized
  revenues, non-compete restrictions that limit
  public sector management of emergencies, traffic
  and the environment

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What are Foreign Investors Looking for in a
Post-2008 World?

• Todays SWFs are looking for
• In general Long-term investment horizons,
  capital preservation, asset diversification,
  predictable returns, and the mitigation of
  political risk
• For transportation infrastructure projects
  Transparent, project-finance deals (passive
  minority equity and bond investments)

13
What are Foreign Investors Looking for in a
Post-2008 World?

• With global economic crises continuing unabated,
  most SWFs are now seeking more traditional,
  conservative places to put cash
• Private Activity Bonds (PABs) are increasing in
  popularity
• Timing may be right for civil infrastructure
  investments by SWFs

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Our Projects, Their Cash
US Infrastructure Projects
Sovereign Wealth Funds Cash
?
highest and best use
15
Our Projects, Their Cash
highest and best use

Sovereign Wealth Funds Cash
US Infrastructure Projects
16
Our Projects, Their Cash
highest and best use

Sovereign Wealth Funds Cash
US Infrastructure Projects
17
Opportunities and Challenges

• Opportunities New era of infrastructure needs
  and available cash from SWFs
• Challenges Understanding the economic,
  financial and political motivations for foreign
  investment by SWFs

18
Priming the Pump

• Evolve a dynamic twenty-first century policy
  architecture (Brookings Institute, March 2011)
• Encourage a Global Public Investors Roundtable
  (Ibid)

19
Priming the Pump

• Civil Engineers Engage, and demand a seat at
  that Roundtable

20
Priming the Pump
Knowledgeable and accountable technical and
political leadership
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In Summary

• Americas infrastructure funding needs are great
• Post-2008 financial conditions are changing the
  landscape in private sector infrastructure
  investing
• Sovereign Wealth Funds owned by BRICs are growing
  substantially they are new, and want to engage
• We (as a nation, and as a profession) should move
  slowly, but deliberately, toward engagement
  directly with SWFs

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References

• Crumbling Infrastructure, Crumbling Democracy
  Infrastructure Privatization Contracts and Their
  Effects on State and Local Governance, Ellen
  Dannin.
• http//www.law.northwestern.edu/journals/njlsp/v6/
  n1/2/2Dannin.pdf
•  
• BRIC Sovereign Wealth Funds The External Wealth
  of Governments, Deutsche Bank, September 24,
  2010.
• https//www.dws-investments.com/EN/docs/research/B
  RICsovwealthfunds.pdf
•  
• Private Roads, Public Costs The Facts About
  Toll Road Privatization and How to Protect the
  Public, Phineas Baxandall, Ph.D., U.S. PIRG
  Education Fund, Spring 2009.
• http//cdn.publicinterestnetwork.org/assets/H5Ql0N
  coPVeVJwymwlURRw/Private-Roads-Public-Costs.pdf
•  
• Privatization and the Sale of Tax Revenues, Julie
  A. Roin.
• http//www.minnesotalawreview.org/wp-content/uploa
  ds/2011/06/Roin_PDF.pdf
•  
• Rebuilding America The Role of Foreign Capital
  and Global Public Investors, Monday, October 17,
  2011.
• http//www.brookings.edu/papers/2011/0311_sovereig
  n_wealth_funds.aspx

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Thank You!