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from Breakingviews:

Hot infrastructure auctions drive down returns

By Quentin Webb

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The market for infrastructure assets is heating up. Yield-hungry investors are keen on large, predictable businesses in the less rickety bits of Europe. So auctions like E.ON’s sale of its German gas pipes run pretty hot. Even if the bets are less extravagant than during the credit boom, returns will suffer.

The 3.2 billion euro price tag for E.ON’s “Open Grid Europe” doesn’t look hair-raising: it’s in line with book value, and about 10 times EBITDA. Low-cost debt helps: Macquarie’s infrastructure fund, which teamed up with a Canadian money manager, Abu Dhabi’s sovereign fund, and a German insurer, got banks to stump up 2.2 billion euros or so of cheap loans, ahead of a likely bond sale.

Nonetheless, robust auctions tend to mean higher prices. To win, Macquarie had to fight off three other serious consortia. Rivals and sector-watchers reckon the Macquarie group paid at least 200 million euros more than the next bidder, and question how it will achieve its target 10-percent plus internal rate of return from the investment.

Of course, business plans differ, although regulators probably limit a buyer’s wiggle room. Macquarie may also be more optimistic about an eventual exit price. And today’s low-yield world is undoubtedly compressing return expectations for all investors, not just in infrastructure.

Still, lower anticipated returns also reduce the margin for error. Like Vattenfall’s sale of its Finnish assets late last year, the E.ON disposal is a reminder of how much cash is chasing assets. That appetite comes both from infrastructure funds and from other enthusiasts for long-term investments, such as stewards of pensions and petrodollars.

from MuniLand:

President Obama, the Ricketts family and Wrigley Field

Is the Ricketts family of Chicago bipolar? The patriarch, billionaire and Chicago Cubs owner Joe Ricketts, blasted onto the national stage yesterday, when the New York Times reported that his super PAC considered running an ad campaign entitled “The Defeat of Barack Hussein Obama: The Ricketts Plan to End His Spending for Good.” His super PAC, the Ending Spending Action Fund, also lobbies against excessive federal spending and special-interest earmarks.

Meanwhile Ricketts's son Tom, the general chairman of the Cubs, has been lobbying Rahm Emanuel, the mayor of Chicago and President Obama's former chief of staff, for $150 million in tax revenues to renovate Wrigley Field, the home of his family's Major League Baseball team. The irony of Joe Ricketts blasting the president for special-interest spending while his son grovels for taxpayer support to renovate his baseball stadium is enormous. The Ricketts family needs to meet around their kitchen table and get this matter worked out, because it makes both the father and son look clueless.

Greg Hinz of Crain's Chicago Business has the local scoop:

Did the Ricketts family just knee-cap its own plan to rebuild Wrigley Field with a healthy dose of Chicago taxpayer cash?

My phone has been ringing with just that question this morning in the wake of a stunning New York Times story about how a new super PAC headed by Joe Ricketts, patriarch of the Chicago Cubs' owning family, is pondering a big, especially nasty ad campaign against President Barack Obama this fall.

[...]

The Chicago angle on this is that Mayor Rahm Emanuel, Mr. Obama's former chief of staff, has been trying to put together a deal for the city to put $100 million or more in tax incentives into a Wrigley [stadium] rebuild.

The Wall Street Journal discussed the proposed renovation of Wrigley Field, for which Tom Ricketts wants taxpayer money:

Proposals include more premium seating near the field; a Jumbotron; a new building along Clark Street that could contain a restaurant, parking, and hall of fame; and game-day street fests open only to ticket-holders.

The father's advocacy group, Ending Spending, describes itself like this:

from MuniLand:

Infrastructure financing and the federal government

There is a general consensus that America needs both new infrastructure and more jobs. Where there's disagreement is over what role the federal government should play in providing the necessary funding to jump-start new projects. In a recent webinar, Standard & Poor's laid out the current types of financing available for surface transporation projects (page 3):

• General Obligation Bonds (Appropriation debt) • Sales Tax Revenue Bonds • Gas Tax Revenue Bonds • Toll Revenue Bonds • Federal Grant-Secured Obligations (GANs/GARVEEs) • Transportation Infrastructure Finance and Innovation Act (TIFIA) loans • Public Private Partnerships (P3)

The top five categories in the list above are types of municipal bonds, meaning that they require a local or state government to take on debt to fund infrastructure. At the level of federal financing, the U.S. Department of Transportation's Federal Highway Administration gives out TIFIA loans to public-and-private infrastructure projects. For example, the Macquarie-owned public-private partnerships that are building the Midtown Tunnel in the Norfolk and Hampton Bays area of Virginia and the FasTracks rail project in Denver are using federal TIFIA loans in the funding pool.

I don't really understand why the FHA's TIFIA program favors private investment. Here's what the FHA website says (emphasis mine):

The program's fundamental goal is to leverage Federal funds by attracting substantial private and other non-Federal co-investment in critical improvements to the nation's surface transportation system. TIFIA was created because state and local governments that sought to finance large-scale transportation projects with tolls and other forms of user-backed revenue often had difficulty obtaining financing at reasonable rates due to the uncertainties associated with these revenue streams.

I'm sure the FHA folks know about the $230 billion of transportation bonds outstanding (page 13). Many of these securities are repaid with tolls. In fact, the FHA's own website lists public projects that are owned by municipal and state governments and repaid with toll fees. It's no surprise that public toll roads charge users lower fees than do those involving private investors, but that is not an explicit program goal of the FHA, unfortunately.

The webinar highlighted a study S&P conducted about cash flows on publicly and privately owned toll roads (emphasis mine, page 13):

from MuniLand:

How American municipalities can learn from Parisian mistakes

Across the nation cash-strapped municipalities are considering the sale of their public-utility systems. These moves are intended to raise cash and rid the municipalities of expensive liabilities such as debt service and pension obligations. But officials considering this approach might do well to look to France and other nations that are rapidly moving in the opposite direction with a "remunicipalization" of their utility systems. In 2010, Paris, in the best known case of remunicipalization, ended contracts with the world's two biggest water service companies, Suez and Veolia, bringing an end to their 100-year private duopoly. The reversal of a century-old practice in Paris was an acceleration of an international movement away from private control. Per remunicipalisation.org:

In the 1990s many countries privatised their water and sanitation services, particularly in the [hemispheric] South, as a result of strong pressure from neoliberal mindset governments and international financial institutions, to ‘open’ up national services.

The promises that privatisation would improve the provision of drinking and wastewater services soon faltered. Many of the privatised operations quickly began to show weaknesses as they missed targets for expanding and upgrading networks, introduced excessive tariff increases alongside connection fees which were unaffordable for low-income families. Management activities were not transparent and accountable. As a result numerous contracts with private operators were terminated often following popular unrest. Many cities, regions and even countries have chosen to close the book on water privatisation and instead embarked on remunicipalisation or renationalisation of water delivery

It's easy to see how U.S. public officials facing substantial budget issues might consider privatizing their public systems. Reuters' Joan Gralla wrote yesterday about the possible lease of its sewer plant by New York's Nassau County. County officials have been using the system as a piggybank and had raided $200 million of reserves to plug a county budget deficit. Now the system is financially broke, and the officials are pushing to lease it off:

A long-term lease of Nassau's Sewer and Storm Water Finance Authority, outlined in September by Republican County Executive Edward Mangano, has drawn interest from Severn Trent Services, Veolia Environment VE SA and United Water, a unit of Suez Environment Company SA.

However, it is not clear if and when any lease contract might be approved.

State control board officials and Democratic legislators have criticized the proposal. Credit agencies say public assets – from roads to parking garages – should not be leased to private companies if the cash raised from them just papers over deficits.

About $115 million of the money raised by a long-term lease of the sewer system would be spent closing deficits in 2013 and 2014, according to Fitch. It views this strategy "negatively."

Philadelphia is moving ahead with a sale of the Philadelphia Gas Works, one of the nation’s oldest municipally owned utilities. A report prepared for the city by the investment firm Lazard (page 16) says it's likely the city will not see any substantial cash benefit from the sale but will instead be able to repay bonds issued for the utility and discharge the pension obligations of the employees. What Philadelphia will give up in exchange is an opportunity to continue providing low-cost energy to its residents as an enormous supply of natural gas from hydraulic fracking in Pennsylvania's Marcellus Shale region comes online. In a city with a substantial number of people who live below the poverty level, the utility is perfectly positioned to create economic stability by remaining public and a non-profit entity. The economic stability provided by Philadelphia Gas Works could be a vital foundation for long-term urban revitalization for the city. From BusinessReviewUSA.com:

With more than 500,000 commercial, industrial and residential customers and 84 percent saturation of residential heating in the City of Philadelphia, PGW is the nation’s largest municipally owned natural gas utility.

Natural gas is transported to PGW by two direct interstate pipelines, but PGW also operates a liquefied natural gas facility to meet peak day and winter requirements. The facility’s dual 12-story tanks store over four billion cubic feet of natural gas and have remained among the country’s largest since they were constructed in the 1970s. It has saved customers more than $2.5 billion in the last 35 years.

Selling older and irreplaceable public assets does gain short-term cash for cities and counties. But losing control of valuable public assets for decades is not necessarily the best way to serve the public. These deals need to weigh the economic interests of all stakeholders. U.S. public officials might want to jet over to Paris to visit with officials there before they make any final decisions on privatizing public works.

from MuniLand:

Boston funds publicly, while Chicago goes private

Two major American cities are embarking on large capital programs, but in very different ways. Boston Mayor Thomas Menino has a $1.8 billion, five-year plan that he will fund with municipal bonds, while Chicago Mayor Rahm Emanuel is trying to push a $7 billion plan, which will be paid for by private investors, through the city council. It would be hard to find to two more dissimilar approaches to rebuilding America's urban infrastructure or two more different lists of who will reap the monetary benefit of the improvements.

Boston approaches its infrastructure needs with a rolling five-year schedule of projects that is updated on an annual basis. This allows for more controlled expensing and planning. In contrast, Chicago's Emanuel announced his infrastructure privatization plan in January with very few details and buy-in only from the private investors who will benefit from their involvement. The Chicago proposal gives control of infrastructure decisions to a panel of four private citizens and one city council member with no ability for the city council to have oversight on projects and contracts. Chicago has a terrible history of leaving taxpayer money on the table in its privatization efforts. In 2008 the city's parking meters were leased out to private investors for a tiny sum:

Chicago drivers will pay a Morgan Stanley-led partnership at least $11.6 billion to park at city meters over the next 75 years, 10 times what Mayor Richard Daley got when he leased the system to investors in 2008.

Morgan Stanley, Abu Dhabi Investment Authority and Allianz Capital Partners may earn a profit of $9.58 billion before interest, taxes and depreciation, according to documents for a $500 million private note sale by their Chicago Parking Meters LLC venture. That is equivalent to 80 cents per dollar of projected revenue.

Chicago, with a population of 2.7 million, is over four times larger than Boston, with 617,000 residents. But Boston will be spending about $2,900 per resident compared with Chicago's $2,597 without privatizing any of the work. Boston does have lower funding costs because it is viewed more favorably by bond markets, with a rating of Aaa from Moody's, its highest rating. Chicago comes in three notches lower at Aa3, or what Moody's terms "high quality and very low credit risk." Bond markets do make Chicago pay more, and its bond* due 2024 traded at 3.32 percent Thursday, while a comparable Boston bond,** due 2024, traded at 2.28 percent, according to the Municipal Securities Rulemaking Board's EMMA system.

The additional 1.04 percentage points Chicago pays to borrow versus Boston is a much lower cost for Chicago than what it will pay to private investors through Mayor Emanuel's proposed infrastructure trust. America's urban areas need revitalization, but taxpayers should not have to transfer the benefits of their city's rebuilding to private investors. Boston Mayor Menino has the right approach and should be a model for Chicago Mayor Emanuel.

from MuniLand:

The Virginia tunnel goldmine

The battle to privatize America's public assets had a big win when the Newport News Daily Press reported:

The governor of Virginia, Bob McDonnell announced Monday that a deal with private construction consortium Elizabeth River Crossings to build a new Midtown Tunnel tube; refurbish the existing facility along with the Downtown Tunnel; and expand the Martin Luther King Freeway has reached a financial close.

The project, which is now owned by Australian infrastructure company Macquarie, will add another tunnel under the Elizabeth River to relieve congestion in the Norfolk and Hampton Roads area. Getting control of the project will bring in rich rewards for Macquarie and its construction partner Skanska. For an equity investment of $208 million, Macquarie stands to realize over $5 billion in cash flow over the 58-year concession after repayment of bonds, loans and mandated capital expenditures.

Total building costs are estimated to be $2.1 billion. Fitch Ratings laid out who will provide the money for the cost of building the tunnel in its Apr. 5 report (page eight):

Funding sources include: equity from Macquarie and Skanska including contingent equity (12% of total sources); Private Activity Bonds (32%); Transportation Infrastructure Finance and Innovation Act (federal government) loan (22%); Virginia Department of Transportation contribution (17%); and toll revenue during construction (17.5%).

from MuniLand:

Denver’s botched FasTracks privatization

Reuters ran a piece yesterday that caught my eye: "Macquarie eyes $2 billion North American infrastructure fund: sources." According to the article, Macquarie, the Australian company active in infrastructure privatization, wanted to leverage its prior American success as it begins to raise funds:

Macquarie has also proved successful in bidding for the few new assets on the market. It was behind the largest U.S. infrastructure deals of the last two years – a $2.1 billion project to build and operate commuter rail lines to Denver International Airport and a $1.7 billion upgrade of a tunnel between the cities of Norfolk and Portsmouth in Virginia.

The privatization of American infrastructure has become a hot topic, despite the lack of notable success stories. The Macquarie project building and operating commuter rail lines to Denver International Airport illustrates the costs associated with this approach. The project is not doing very well: Because of cost overruns, its budget was recently revised upward, to $7.8 billion.

Once construction is completed, Macquarie will have a concession to run the commuter rail system, an expansion of the Denver Regional Transportation District transit system called FasTracks. The company contributed $2 billion toward the cost of the project, of which $54 million was an equity investment (page 25). The remainder of Macquarie's portion came from construction payments from the sponsor, the Regional Transportation District, and issuance of $397 million in private activity bonds in 2010. These bonds received the lowest possible investment grade rating, Baa3 and BBB-, demonstrating the weakness of the financing plan.

In partnership with the construction company Fluor, Macquarie became a leader in the Denver project by bidding $300 million lower than its competitors. The company also promised to complete the project 11 months ahead of the 2016 deadline. Unfortunately, they are running behind on these promises, according their February 2012 MSRB filing (pages 13 and 14). Many of the delays are related to the approval of "right of ways," which could have been encountered even if the project had not been privatized.

The funds that pay for the entire $7.8 billion FasTracks project, beyond the $2 billion portion for which Macquarie is responsible, come mainly from a regional sales tax and federal funds, with a small portion from transit fares. There is some concern among state politicians about the management of the entire project:

from Felix Salmon:

The case of the $400 million bike lane

Everybody's favorite transportation geek, Charles Komanoff, has a fascinating new paper out on the economics of New York's new Tappan Zee Bridge. The old bridge is decrepit, and needs to be replaced -- everybody agrees on that. And the replacement is now in the works, at a cost of $5.2 billion. But does it need to cost that much? Komanoff makes a strong case that it doesn't.

I won't try to summarize Komanoff's paper here. Instead, I'll just point to one fact which is buried there. The new bridge comes with a combined bike/pedestrian lane, 12 feet wide. And the cost of building that lane -- the amount that the cost of the bridge would decrease if you simply built it without that lane -- is an astonishing $400 million.

To put that number in perspective, Komanoff tells me it would cost roughly $40 million, in the same 2015 dollars, to build two bike/pedestrian lanes on the Verrazano Narrows bridge -- lanes which would get vastly more traffic than the one lane on the new Tappan Zee.

As for the cost of the first three years of New York City's ambitious bike program under transportation commissioner Janette Sadik-Khan, that was just $8.8 million, 80% of which was paid by the federal government.

In other words, for the $400 million which governor Andrew Cuomo is planning to spend on a white-elephant bike lane almost nobody is going to use, you could utterly transform the bicycling infrastructure for millions of New Yorkers in all five boroughs.

Oh, and I almost forgot -- it looks as if the old Tappan Zee bridge is going to be converted into a bike/pedestrian walkway anyway, making such a facility on the new bridge even more superfluous.

But this is how big projects always work: it's weirdly easier to raise billions for something huge than it is to add millions to an annual budget somewhere. "Gridlock" Sam Schwartz, for instance, in his clever new congestion-pricing plan, is proposing three new massive bike/pedestrian bridges: one from Jersey City and Hoboken, in New Jersey, would span the Hudson River and land just north of Chelsea Piers. A second would go from Long Island City and Hunter’s Point, in Queens, and would cross the East River to midtown Manhattan. And the third, and most ambitious, would start in Red Hook, in Brooklyn, head over to Governor's Island, and then continue on to the Financial District.

from Breakingviews:

UK would gain from intelligent industrial policy

By Ian Campbell

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Planning? Who needs it! The UK has done without a national industrial policy for years. And just look what it’s done for Britons: insufficient housing, a shrinking manufacturing base, a poor transport system and a boom-bust economy. Vince Cable, the UK business secretary, points this out to his own prime minister in a now leaked letter. Perhaps David Cameron should listen to the painful truths.

Cable will be accused of wanting to ’pick winners’, as if industrial policy can mean nothing more or less than government investment in particular companies or industries. But right now UK policies on new technologies, transport infrastructure, housing, energy, defence, finance, procurement, skills and immigration are all made up on the run and independently of one another. The British, who find planning terribly difficult, have overdone laissez-faire.

The policy incoherence is blatant and costly. In transport, for example, the government has recently committed some 33 billion pounds to high speed rail in the UK’s west coast line – while leaving undecided its plans to address the country’s limited airport capacity. One idea, a brand new estuary airport for London, would be expensive and involve new road and rail links. Big decisions on rail shouldn’t be taken independently of airport plans – or a broad transport policy.

For businesses, the lack of industrial policy and planning is a big problem. In sectors such as energy and defence, the large investments in research and development which are needed to keep up to date are much less likely to be made if the government is considered a fickle partner.

In finance, too, the UK needs a better way. Small and medium-sized companies in the UK lose out from not having the equivalent of the Germany Hausbank system – a long-standing relationship with one main bank which provides steady finance and support in difficult times. Cable’s call to split up Royal Bank of Scotland may not be the best solution but the problem of small business financing must be tackled.

from Global Investing:

Money in containers. Many see big bucks in Russia’s infrastructure push

A lot of things are wrong with Russia, one of them being its rickety infrastructure.

Many see this as an investment opportunity, however, reckoning the planned $1 trillion infrastructure upgrade plan will get going, especially with the 2014 Winter Olympics and 2018 soccer World Cup looming. Bets on infrastructure have also gathered pace as the Kremlin, seeking to placate a mutinous populace, has pledged reforms, privatisations and a general push to reduce Russia's dependence on oil exports.

Takouhi Tchertchian at asset managers Renaissance says one sector -- shipping containers -- reflects the potential for gains from infrastructure improvements. Such containers, usually made of steel, can be loaded and transported over long distances, and transferred easily and cheaply from sea to road to rail.  But Russia has among the lowest levels of containerisation in the world, at around 4 percent compared to the emerging markets average of 15 percent, Tchertchian says. Even in India, almost 3o percent of goods travel by container while in a developed country like Britain, the figure is 40 percent.

Containerisation is a play on people getting richer and demanding more goods. Diversification of the economy will also push the containerisation rate higher. The more consumer demand is part of the economy, the more the demand for containers. If the containerisation rate goes to 6-8 percent, that will give you a doubling of profits. (Tchertchian says)

She favours logistics firms Sesco and Transcontainer. The latter holds 60 percent of the market and last month reported a quadrupling of nine-month profits. True, both companies trade at a premium of 20-25 percent to the broader Russian market but earnings growth is three times higher than the market average, she says.

Russsian stocks have done well since the start of 2012, primarily due to the risk appetite rebound worldwide and high oil prices. All recent data has also been buoyant, indicating the economy likely grew by an above-target 4.5 percent last year. Subdued inflation and strong consumption is buoying industrial production.

Renaissance calculates that poor infrastructure causes a drag of 2 percentage points a year on Russia's economic growth. And it argues that the mass protests following December parliament election are ample proof the government simply cannot afford to put off  investments. Tchertchian notes that Russia's GDP growth has slowed to around 3-4 percent a year from the average 5-6 percent it enjoyed in the years before 2008. She adds: