Infrastructure: A Road to Riches?

By Jerry Knight
Monday, March 20, 2006

If somebody asked if you wanted to buy the Brooklyn Bridge, you'd know it was a con. But how about buying the Indiana Toll Road?

Before you snicker, you should know the Indiana highway was auctioned off last week for $3.8 billion.

For the next 75 years, the more than 150 miles of Interstate 80 will be run by a pair of Spanish and Australian companies that will collect the tolls, operate the pit stops, keep up the highway and try to make a profit.

Cintra SA, the Spanish firm, and Macquarie Infrastructure Group, the Aussies, are teaching Americans the business of investing in roads, bridges, water mains and the like.

You may have heard of Macquarie. Last year it bought a controlling interest in the company that operates the Dulles Greenway for $533 million. A year ago, Macquarie and Cintra took over the Chicago Skyway, adding it to a network of toll roads and bridges around the world. And Macquarie is part of one of the rival groups bidding $1 billion to take over the Dulles Toll Road for 50 years, with the money expected to underwrite Metrorail's extension to Dulles.

The Australians launched a sister company in the United States in December 2004. Since the $25-a-share initial public offering, Macquarie Infrastructure Co. Trust (MIC on the New York Stock Exchange) has climbed to $34.45. Counting reinvestment of the hefty $2-a-share dividend, investors have made a 45 percent total return since the company went public 15 months ago.

With that kind of money to be made, Americans are lining up to try their luck at Wall Street's hottest new game -- investing in infrastructure.

Washington's biggest financial firm, the Carlyle Group, just created an eight-member team to get into roads, bridges, etc.

Goldman Sachs & Co., which made $9 million advising Chicago on the Skyway sale and stands to collect about $20 million in fees for putting together the Indiana Toll Road deal, is raising a multibillion-dollar fund to buy infrastructure.

Wall Street is getting into infrastructure because politicians have bailed out on one of the most important issues facing the nation.

Transportation was once one of the things Americans counted on their government to provide. New York Gov. De Witt Clinton built the Erie Canal and opened up the Midwest in the early 1800s. President Dwight D. Eisenhower started the interstate highway system in the 1950s and put America on the road to being the world's most motorized society.

But anybody who's ever been caught in Washington traffic knows our elected officials lack the vision and the political will to deal with transportation issues that require difficult, politically unpopular decisions. Like raising taxes.

Ducking tax increases is what motivated the state of Indiana and the city of Chicago to sell their toll roads. Indiana was facing a $10 billion bill for updating its highway system when Gov. Mitch Daniels, a former federal budget director, came up with an alternative to paying the price -- tapping the toll road. Chicago didn't need roads; it needed money. Monetizing the Skyway brought in $1.8 billion. That was enough to pay off $855 million in debt -- only part of it due on the road itself -- as well as set aside $500 million for a "rainy day fund" and give a few million in home heating assistance to the city's poor.

If that sounds like tossing the family furniture in the fireplace to keep the house warm, you're getting the message.

Neither Chicago nor Indiana actually sold its toll road. Both deals are structured as long-term leases with all the money paid up front. In exchange for the cash, Macquarie and Cintra will take over the roads and take responsibility for upgrading them, a $700 million commitment in Indiana. In return they get to collect all the tolls they can squeeze out of travelers, subject to some regulation.

The theory behind privatizing toll roads is that profit-motivated managers can run them better and more efficiently than government bureaucrats. Given Chicago's ward-healing politicians and notoriously corrupt municipal contracting, it's pretty hard to argue with that premise.

Within six months of taking over the Chicago Skyway, Macquarie and Cintra had installed a complete electronic toll-taking system. Today more than a third of the tolls are being collected in the E-ZPass lanes. In Toronto and Sydney, Macquarie has done away with booths entirely, collecting all the tolls electronically.

High-speed electronic toll lanes, where drivers don't even have to slow down, are the state of the art. Most U.S. toll roads and bridges don't have them, however, because private and public officials view the investment from different perspectives.

To government budget analysts, the issue is how much will it cost. To private operators, it's how much it will return. So, too, with so many operating and management issues. For example, Indiana might have tackled its road problems by simply raising fares on the toll road, but the legislature has refused to raise tolls for 20 years.

The toll road privatization advocates argue that profit generates the motive for providing the best possible service. An army of anti-government academics and think-tankers supply the intellectual infrastructure for that argument.

But behind the private-is-preferable theory is the immediate reality that governments don't have -- or are unwilling to raise -- the billions needed to rebuild the nation's crumbling infrastructure.

The global theme, says Chris Leslie, managing director of Macquarie Securities (USA) Inc., is that "the fiscal constraints that governments find themselves under are driving them to explore new ways of finding money.

"Taxpayers want improved services, better roads, better airports, and yet of course nobody wants to pay higher taxes," he said. The public sector isn't ducking its responsibilities, he argues, "it is delegating to the private sector."

Surprisingly, America, the capital of capitalism, is far behind the rest of the world in privatizing infrastructure. Privately run roads, bridges, airports and ports are common all over Europe -- even in France, where government intervention in the economy is embedded alongside liberty, equality and fraternity.

As Americans have learned in the last month, even in this country most port facilities have been privatized. Foreign companies are the major players in large part because foreign nations went to this system long ago. (One of the arguments made against the Indiana toll road deal was that it would be dangerous for the road to be under foreign ownership.)

Since the idea is so new in America, it's too soon to tell if privatizing infrastructure will prove to be the most economical way of financing those projects. Government entities can almost always borrow money cheaper than private companies can raise capital, so the private sector starts with a handicap. Private toll-takers and maintenance crews will probably make less money than public employees doing similar work, but private managers demand higher salaries than the government pays. And privatization requires profits -- two tiers of profit, actually. Companies such as Macquarie, Carlyle and Goldman Sachs will earn a profit for arranging and managing these transactions, and stock and bond investors who put up the capital will get a second profit.

Nor can anyone know yet how profitable the business will be. Analysts are projecting that infrastructure projects will produce dividends and long-term capital gains that add up to returns in the low teens.

Finally there's the question of how well the public will be served by privatization. It could take several years of private operations before anyone can judge how well it is working.

Facing a multibillion-dollar backlog of road-building needs, governments aren't likely to wait for the facts. Already Pennsylvania is investigating some kind of private deal for the Pennsylvania Turnpike. Other projects are in the works in California and Texas.

Prudence would argue for going slowly, doing what amount to clinical trials of privatization before prescribing it as a cure for the ailments of America's infrastructure. But bridges are crumbling, roads are jammed and the infrastructure privateers are standing at the door, checkbooks in hand.

As the Virginia legislature has demonstrated so far this year, many politicians aren't willing to take the risk of passing tax increases. But lawmakers across the nation are willing to take the risk of passing the buck to the private sector. It'll take so many years to know whether this is the right decision that the politicians who promoted it will be long gone by the time anything can go wrong.

In the meantime, there's money to be made investing in infrastructure.

Jerry Knight's e-mail address isknightj@washpost.com.