Could Financing Infrastructure Be the Next Big Thing?

Taking a page out of John Maynard Keynes, president-elect Barack Obama wants to put together a stimulus package that could create 2.5 million jobs by 2010. One area of focus involves rebuilding the nation's infrastructure, namely its airports, seaports, bridges, highways, electrical power systems and waste water treatment plants.

There's plenty to do in this regard. The American Society of Civil Engineers says the nation should spend $1.6 trillion on infrastructure over the next 20 years, including $39.5 billion on airports, $300 billion for bridges and roads, $10 billion on dams and leveees and $1 trillion for drinking and wastewater improvements.

That's a pretty steep bill, but by many accounts, roads and bridges are crumbling, causing failures with loss of life, such as the design flaw that let years of wear and tear topple the Interstate 35 highway bridge in Minneapolis in 2007, killing 13.

Problem is, with the economic downturns, a sour real estate market and volatie gasoline prices, states are seeing big budget shortfalls.For example, California is $11.2 billion in its budget. Virginia has a $2.5 billion shortfall for a two-year budget and could go over $3 billion. In South Carolina, finances are so short that faculty at some state colleges are being forced to take five-day, unpaid furloughs.

Meanwhile, a new genre of providing private money -- called infrastructure funding -- has arisen to build toll roads or bridges with private equity and relieve the burden on state or federal governments. States can begin such projects and then turn them over to private management, which pays for them through tolls that are assessed over a schedule that stretches well into the future.

Indeed, big financial houses have been throwing money at funding global infrastructure â€" said to be worth trillions of dollars. Earlier this year, Global Infrastructure Partners, a private equity group funded partly by General Electric and Credit Suisse Group, announced that it had raised $5.64 billion. Another fund, Morgan Stanley Infrastructure Partners, proved so popular that it raised $4 billion or $1.5 billion more than the original target.

Older funds include those operated by the Carlyle Group, Lazard and Goldman Sachs. Taking advantage of U.S. public private partnership laws and their experience with similar arrangements in home countries, a number of Australian and Spanish companies, such as Sydney-based Macquarie Group and Madrid-based Cintra Concesiones de Infraestructuras de Transporte S.A., continue to fund new toll highways or lease older ones.

While financial turmoil has adversely affected such funds, some fund managers believe they are needed now more than ever. Matthew Vickerstaff, global head of infrastructure and asset based finance at Societe General in New York, told me that "The current crisis is good for infrastructure funding because there will be increasing pressure on states, cities and provinces to balance their budgets. They will need to spend both for social and transportation infrastructure. They'll need private money and private-public partnerships."

What will be key is how Obama approaches infrastructure. Some good signs: Obama is naming former Fed chief Paul Volcker to head a special advisory board to oversee an economic recovery. One problem, however, is that it takes years of planning and construction to complete projects of any significant size. So any real impact will be far down the road. With all that money involved, however, it's a development worth watching.

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