S&P Sees Growing Role for Private Sector in Infrastructure

Standard & Poor’s sees a growing role for the private sector in helping build and refurbish basic infrastructure during a time of declining tax revenues. Faced with a lack of funds to repair and construct transportation infrastructure, countries around the globe are increasingly turning to privatization as a solution, S&P says in a new report.

The idea has been around for a while, particularly in Europe. France, for example, has relied on private funding for more than 3,000 miles of intercity highways since World War II. Now, following Europe’s lead, the U.S. and countries in Asia and Latin America are also looking to investors to help rebuild and refurbish transportation grids that simply can’t meet the needs of growing populations.

With a crumbling transportation infrastructure built largely in the mid-20th century, the U.S. alone faces a funding shortfall of more than $1.5 trillion for repairs in the next half-decade, according to the American Society of Civil Engineers.

In Standard & Poor’s Ratings Services’ view, this has led states and municipalities to increasingly look at privatization of roads, bridges, and airports as the only viable option.

The U.S. model for PPPs generally allows the private-sector entity to control a public asset over an extended period of time, typically ranging from 75 to 99 years – much longer than the 25 to 35 years elsewhere in the world. At the end of the concession, the municipality would either reclaim the asset or look for another privatization deal.

The true PPP pioneer continues to be Chicago. In 2005, the city leased the 7.8-mile Chicago Skyway to a foreign group for $1.8 billion. And after Chicago last year sold a number of municipal parking lots to Morgan Stanley (MS) for $563 million, it now plans to privatize Midway Airport in what would be the first deal of its kind in the U.S.

This, of course, comes two decades after the U.K. began the trend by privatizing the British Airports Authority (BAA Ltd.), the government agency that owns the country’s biggest airports. In 1987, the British government sold 1.4 billion shares of stock to more than 2 million Britons in the landmark deal.

“Whether or not infrastructure becomes a desirable asset class for investors in the U.S. remains to be seen, especially in these times of economic and financial turmoil, ” S&P says.

With Wall Street suffering dizzying volatility, investors of all sorts becoming increasingly risk-averse–or, worse, strapped for cash–and the U.S. likely in a recession that could be long and deep, buyers for PPP projects may not be as enthusiastic as governments need them to be. On top of this, because there have only been a few such transactions in the U.S., uncertainty about long-term ramifications may make politicians and the public wary of jumping in.

But Standard & Poor’s expects PPPs to grow as local governments face the need to build and refurbish basic infrastructure as tax revenues decline.