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Home | US President Obama’s Infrastructure Announcement

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US President Obama’s Infrastructure Announcement

September 08 2010

Nick Langley, RARE Infrastructure

During his Labor Day speech US President Barack Obama announced a plan for government spending on national infrastructure and a government-run bank to finance innovative transportation projects. RARE Infrastructure has reviewed the proposal and has the following comments:

  • Based on our understanding of what has been released, it is the concept of the infrastructure bank that is most interesting. These entities have been used very successfully in other countries to promote infrastructure spending (Brazil comes to mind immediately).
  • Generally, an infrastructure bank works well where it guarantees debt funding for “approved projects”, generally greenfield or new construction. In Brazil funding is guaranteed for 70% of the cost of the project. It is often the debt financing that is the most difficult and time consuming element of the process to complete these projects. While the debt may be guaranteed, it still requires the private sector to put up the remaining 30% as an equity commitment to the project.
  • As always, the devil is in the detail. In particular, in order to provide a commercial return to the “investors” in the infrastructure bank, the project will need to generate revenue through tolls (for example, on a toll road). The higher the return to the infrastructure bank investors, the higher the tolls must be, and therefore the more risky the traffic forecasts will be, which may result in the project being deemed high risk by the equity investors.
  • Ultimately the equity investors will need to be comfortable that they can earn an appropriate return for the risk assumed. However, there are plenty of multi-national operating companies and infrastructure financial investors that would be interested in these projects.
  • As an aside, in the US, the proportion of infrastructure owned by the Federal government is quite low (some interstate highways and airports). It is likely that funding for these projects will need to compete with the sale of utility and infrastructure by the States, many of which are under a fair degree of financial stress. RARE Infrastructure expects these privatisations to provide attractive investments for the listed infrastructure sector, underpinning a period of substantial market growth (in terms of the number and size of listed companies) and returns.
  • Ultimately, this concept has a fair way to go through the US political process, however, it appears to be gaining momentum.