Foreign Direct Investment in US Transportation Infrastructure

							 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


                             Palisades Consulting Group, Inc.
 Palisades China Group
                            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


                             Palisades Consulting Group, Inc.
    Palisades China Group
              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.”

1   http://cdn.publicinterestnetwork.org/assets/H5Ql0NcoPVeVJwymwlURRw/Private-Roads-Public-Costs.pdf


                                                       Palisades Consulting Group, Inc.
            Palisades China Group
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

                           Palisades Consulting Group, Inc.
   Palisades China Group
     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


                           Palisades Consulting Group, Inc.
   Palisades China Group
What is the US Public Looking For?
• Control over regional decisions about transportation
  planning and management
• Fair value so future toll revenues won’t 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)

                            Palisades Consulting Group, Inc.
    Palisades China Group
What is the US Public Looking For?


       Knowledgeable and accountable
       technical and political leadership




                          Palisades Consulting Group, Inc.
  Palisades China Group
              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 SWE’s have rapidly growing foreign
  exchange accounts and foreign asset holdings—they
  are the “new kid on the block”
• Taken together, SWF’s represent trillions in available
  funds for US infrastructure (foreign assets under
  management of SWFs could reach US$6–10 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




                                                                Palisades Consulting Group, Inc.
          Palisades China Group
BRIC Sovereign Wealth Funds are the
       New Global Investors




                         Palisades Consulting Group, Inc.
 Palisades China Group
BRIC Sovereign Wealth Funds are the
       New Global Investors




                         Palisades Consulting Group, Inc.
 Palisades China Group
 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


                           Palisades Consulting Group, Inc.
   Palisades China Group
What are Foreign Investors Looking for
       in a Post-2008 World?
• Today’s 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)


                           Palisades Consulting Group, Inc.
   Palisades China Group
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


                           Palisades Consulting Group, Inc.
   Palisades China Group
       Our Projects, Their Cash



    US Infrastructure          ?       Sovereign Wealth Funds
         Projects                               Cash
                                             “highest and best use”




                        Palisades Consulting Group, Inc.
Palisades China Group
       Our Projects, Their Cash

                        “highest and best use”



    US Infrastructure            $         Sovereign Wealth Funds
         Projects                                   Cash




                            Palisades Consulting Group, Inc.
Palisades China Group
       Our Projects, Their Cash
                                                  “highest and best use”

                                                                           $

    US Infrastructure                  Sovereign Wealth Funds
         Projects                               Cash




                        Palisades Consulting Group, Inc.
Palisades China Group
    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




                           Palisades Consulting Group, Inc.
   Palisades China Group
                 Priming the Pump
• Evolve a “dynamic twenty-first century policy
  architecture” (Brookings Institute, March
  2011)
• Encourage a “Global Public Investors
  Roundtable” (Ibid)




                           Palisades Consulting Group, Inc.
   Palisades China Group
                 Priming the Pump
• Civil Engineers: Engage, and demand a seat at
  that Roundtable




                           Palisades Consulting Group, Inc.
   Palisades China Group
              Priming the Pump


     Knowledgeable and accountable
     technical and political leadership




                        Palisades Consulting Group, Inc.
Palisades China Group
                           In Summary
• America’s 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
                              Palisades Consulting Group, Inc.
   Palisades China Group
                                 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/BRICsovwealthfunds.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/H5Ql0NcoPVeVJwymwlURRw/Private-Roads-Public-
    Costs.pdf

Privatization and the Sale of Tax Revenues, Julie A. Roin.
http://www.minnesotalawreview.org/wp-content/uploads/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_sovereign_wealth_funds.aspx



                                          Palisades Consulting Group, Inc.
       Palisades China Group
                        Thank You!




                           Palisades Consulting Group, Inc.
Palisades China Group