Infrastructure Investing: Nowhere To Go But Up

Thomas Friedman has pointed out that “the world is flat”—but not so flat as to obviate the need for bridges, roads and ports, among other things. Global demand for infrastructure projects (including bridges, roads and ports, but also energy and power projects and telecommunications systems) is growing dynamically, providing substantial opportunities for investors. The ongoing increase in the number and scale of projects, the number of participants, and the amount of capital dedicated to this sector has resulted in a vibrant market. Opportunities to invest capital in projects that meet traditional investment criteria (such as predictable returns, stable political environments, static regulatory frameworks and limited project risks) have remained strong despite the uncertain financial conditions in the credit markets.


Both developing and industrialized regions of the world are experiencing an increased demand for infrastructure.

While the emphasis in developing nations is on system building, industrialized markets need updates and replacements of aging infrastructure and increased capacity. Globally, the World Bank estimates that over $30 trillion will be needed for infrastructure development and maintenance through 2030, with a majority designated for electricity, roads and communications infrastructure. The American Society of Civil Engineers estimates an infrastructure investment need of over $1.6 trillion during the next five years in the United States. In Africa, a multilateral study estimates that the annual infrastructure investment need is approximately $38 billion for each year over the next decade. The Asia Development Bank estimates an annual investment need of approximately $250 billion for infrastructure development and maintenance in Asia and the Pacific through 2010 and up to $6.4 trillion dollars for energy infrastructure by 2030. The Inter-American Development bank predicts that $1.4 trillion will be needed over the next 20 years for energy infrastructure in Latin America and the Caribbean.

Although the needs in all markets include traditional infrastructure investments such as power (generation and transmission), energy (LNG facilities and pipelines), transportation (roads, rail, bridges, airports and sea ports) and resources (water, waste management and telecom), power generation and transmission needs have risen to extraordinary levels. For example, in the United States power industry, the U.S. Federal Energy Information Administration estimates that by the year 2030, 292,000 megawatts of additional capacity will be necessary to meet demand.

Outside the energy and power sector, the largest infrastructure projects typically have involved toll roads and pipelines, usually financed through public-private partnerships (PPPs). These are contractual arrangements between a public agency and a private sector entity where the private developer/investor generally provides services for or on behalf of the public agency. While PPPs can be structured in many different ways, PPPs are often structured as a joint venture using a special purpose vehicle or through a contract (concession, franchise or lease) between a private developer/investor and the public entity. In essence, governments turn to the private sector to provide “off-balance sheet” financing to upgrade or build new infrastructure, providing the necessary capital without having to increase taxes or the level of public debt. The PPP model has been developing in Western Europe for many years, with a substantial network of players having grown with it. This model is now being extended to other parts of the world, including Eastern Europe and the United States.

In the United States, many states have turned to, or are beginning to consider, PPPs as a means to meet the increased demand for investments related to aging infrastructure and new construction. The emerging trend toward PPPs in the United States is based in part on strained state and municipal budgets and the often-related decrease in infrastructure-related expenditures. The forms of these PPPs vary depending upon whether, and to what extent, the public or private sectors retain responsibility for financing, operating and maintaining the infrastructure.

Over the past several years, there have been several notable PPP developments regarding the leasing of state-owned roads and bridges in the United States. With respect to toll roads, the investor typically pays an upfront concession fee and, in exchange, the public agency leases the toll road to the investor, which operates the toll road, collects the tolls, maintains the road, and may be obligated to make improvements to the road. However, the lease may also impose certain limitations on investors’ “ownership” rights, including their ability to raise toll rates, and caps may be placed on their rate of return. Typically, upon expiration of the lease, the public agency/government will regain possession and use of the project.

In January 2005, a partnership of Cintra from Spain and the Macquarie Infrastructure Group from Australia leased the 7.8 mile Chicago Skyway for 99 years for a fee of $1.8 billion. The same investors also leased the 157-mile Indiana Toll Road, which connects to the Chicago Skyway, for 75 years for a fee of $3.85 billion beginning in July 2006. In June 2006, an Australian investment consortium known as Transurban Group leased the 8.8-mile Pocahontas Parkway in Richmond, Va., for 99 years for a fee of $548 million. In May 2008, a team led by Citi and Albertis Infraestructuras, a Spanish toll-road operator, successfully bid $12.8 billion for a 75-year lease of the Pennsylvania Turnpike; the bid may decrease if interest rates rise and must still be approved by the Pennsylvania General Assembly. The city of Chicago is currently exploring entering into a long-term lease for the Chicago Midway Airport. Meanwhile, government officials in various states, including California, Florida, Mississippi and New Jersey, are considering long- term leases of roads or bridges.

In Eastern Europe, the Republic of Srpska, Bosnia & Herzegovina is undertaking a €3.5 billion ($5.4 billion) PPP program for the development and financing of the Republic of Srpska Motorways. Similarly, the Republic of Croatia is investigating a refinancing of the existing Zagreb-Macelj Motorway PPP project. Participant companies from the Republic of Bulgaria, the Russian Federation and the Hellenic Republic are jointly developing the Trans-Balkan Crude Oil Pipeline, which will transport Russian and Caspian Sea-sourced oil from the Bulgarian Black Sea port of Burgas to the Greek Aegean port of Alexandroupolis. In addition, the Southstream project, a natural gas pipeline running from Russia to Italy, expected to supply 30 billion cubic meters of gas annually, is being developed by a consortium including GazProm, a Russian gas company; ENI, an Italian oil and gas company; and Bulgargaz, the Bulgarian state-owned natural gas company.

Increasing Capital

It is estimated that at least $1 trillion is invested in infrastructure worldwide. Power deal activity in North America alone totaled nearly $95.2 billion in 2007. Ten years ago, investments in infrastructure were dominated by strategic players (e.g., US Gen/ InterGen) and traditional institutional investors (e.g., GE Capital). In the last few years, many private equity firms and investment banks have raised substantial capital and have been selectively targeting and acquiring premium assets, particularly in the power industry. According to Pricewaterhouse Coopers, infrastructure funds invested $83.4 billion globally in 2007.

Premier private equity funds and investment companies such as ArcLight Capital Partners and LS Power have made substantial investments in the market. ArcLight closed Fund IV in June 2007 with $2.13 billion and has more than $6.8 billion under management. LS Power closed Fund II in May 2007 with $3.09 billion and has approximately $4.3 billion under management. In December 2007, TCW Group announced that it had closed TCW Energy Partners with $194 million and plans to expand its total capitalization to $388 million.

Capital-raising for infrastructure projects has been generally less affected by the credit crunch as investors continue to seek the long-term stable and predictable cash flows that are the hallmark of infrastructure investments. Goldman Sachs’s GS Infrastructure Partners closed its first infrastructure fund in January 2008 with an estimated $6.5 billion and seeks to raise $7.5 billion for GS Infrastructure Partners II. In May 2008, Citigroup raised $500 million to support a $5 billion infrastructure investment fund it formed in India along with The Blackstone Group and two Indian investment companies. In May 2008, Morgan Stanley announced that it has raised $4 billion for an infrastructure fund, surpassing its target of $2.5 billion. Arcapita and Ithmaar Bank, two banks based in Bahrain, are planning a total of $14 billion in new private equity infrastructure projects. In May 2008, Kohlberg Kravis Roberts & Co. announced it was planning to raise $10 billion to 15 billion for a global infrastructure fund. West LB has recently announced an approximately $1 billion infrastructure investment project in Mexico. In March 2008, GE announced that it would invest $5 billion in energy and water infrastructure projects in Latin America, the Middle East and Asia.

Private equity investors plan to invest some $475 million in infrastructure projects within Cambodia. Investment in Korea is also increasing since the inception of various infrastructure funds, including the Macquarie Korea Infrastructure Fund, which raised $964 million for toll roads in Korea, and KB Asset Management, which raised a $1.2 billion infrastructure fund. In Indonesia, a consortium led by Japan’s Marubeni Corp. is financing about $780 million for the construction of a 660-megawatt coal-fired power plant.

Strategic Partnerships

Recent market activity has shown an increased trend among investors to join together in strategic ways to accomplish and maximize the benefits of large deals. In October 2007, in the largest private leveraged buyout in U.S. history, TXU was bought by a group of private equity firms led by KKR and TPG in a transaction valued at $45 billion. Additionally, LS Power acquired many of Duke Energy’s North American natural gas-fired assets when it purchased nine power plants for $1.6 billion. LS Power subsequently entered into a strategic joint venture with Dynegy in April 2007. The LS Power-Dynegy deal involved a $4.1 billion acquisition of LS Power’s generating capacity by Dynegy. One month following the LS Power-Dynegy closing, John Hancock acquired a 50 percent interest in a joint venture with an affiliate of J-Power USA Development Co. The newly formed joint venture company immediately engaged in three investment deals, including the purchase of the Green Country power plant in Jenks, Okla. in September 2007.

As the secondary project markets become increasingly crowded and bidding leads to higher valuations of projects, some investors have turned to development as a way to capitalize on opportunities in the primary market. LS Power is a premier player in this regard and has capitalized on its development experience with the success of its Kendall, Ill. facility and its participation in the construction financing for the development of the Plum Point facility in Osceola, Ark. ArcLight has also turned to development with the financing and construction of the Hobbs Generating Station, in Lea County, N.M.

Private investment in infrastructure continues to increase. New participants and capital continue to enter the market, and investors are contemplating new structures and examining new industries and markets for emerging opportunities.

John Hawkins is a partner and is the chair of the Paul Hastings Global Projects Group. He has represented institutional investors, private equity and hedge funds, commercial lenders and developers in a variety of project and structured finance matters involving, among other things, financing, leasing, development, joint ventures, restructurings and portfolio acquisitions and sales. John Palma is an associate in the Global Projects Group of Paul Hastings in New York.Todd Siegel is an associate in the Global Projects Group of Paul Hastings in New York.