There is more than $300 billion currently sitting idle as private equity firms search for projects to invest in, according to fund mangers who spoke at forum held by the Atlantic Council last week on the future of infrastructure in the U.S.
Robert Amodeo, head of the municipal investing team at Western Asset Management and Thomas McLoughlin, co-head of UBS’s CIO Fundamental Research team, seemed cautiously optimistic that public-private partnerships or P3s will become more popular mechanisms for financing domestic infrastructure projects.
When asked why private-public partnerships haven’t been widely adopted in the U.S., McLoughlin said municipal bonds were biggest obstacle standing in the way of private equity.
“The global model that’s used, the P3, it doesn’t apply here…because we have this favorable cost of financing called [municipal] bonds,” added Amodeo. “As long as tax exemption stays in place it’s almost impossible to overcome that favorable cost of financing.”
Despite these hurdles, both Amodeo and McLoughlin agreed that the tightening budgets could put the brakes on municipal bonds and force state and local governments to engage the P3 market in order to make infrastructure upgrades feasible.
Rising pension liabilities and post-employment benefit liabilities are “crowding out other expenses,” including infrastructure spending, said McLoughlin. “Some states are worse off than others, but you have a situation where the pension liabilities are increasing much faster than the revenues associated with general government and as a consequence, you’re going to have to identify some projects literally turn over the keys. There is no other choice.”
“As a citizen we are all fearful of privatizing public assets, said Amodeo. “I think it’s important to differentiate between privatizing and using P3s.” A P3 is not the privatization of public assets, but rather the transfer of economic risk to a private operator for a period of time.
McLoughlin added that P3s have developed a bad reputation over the past decade largely because state and local governments have failed to allocate proceeds in an effective manner. “You have to be smart about using the cash for other useful purchases and not to plug a budget hole,” he said.
McLoughlin also touched on the federal gas tax, which has not been raised in almost a quarter century. The current tax of 18.4 cents per gallon of gasoline and 24.4 cents per gallon of diesel was established in 1993 during the Clinton administration.
“I’m struck by the fact that it’s been 25 years since we’ve raised the federal gas tax,” McLoughlin said. “If you inflation adjust [the current] rate we are paying as a society for the federal gas tax [it’s] the same that we paid in roughly 1936. We have the ability to go ahead and pay more for federal gas tax, the question is whether or not we’re willing to do so.”
“There’s an open argument as to whether or not drivers in this country—both commercial and personal vehicles—are actually paying enough for the maintenance of the infrastructure that we have at our disposal,” he later added. “I think as a nation we are still coming to grips with this notion of user fees as a means to go ahead and pay for the infrastructure that is put at our disposal.”