"What appeared to be a great idea withered under further public scrutiny."
By Joseph A. Giannone - Analysis
NEW YORK -- What Wall Street had thought would be a flood of U.S. infrastructure deals has turned out to be a trickle.
Last year bankers predicted cash-strapped state and city governments would sell or lease airports, toll roads and other public assets to investors with billions of dollars clamoring for stable, long-term returns.
Instead, public resistance against such sales has caused government officials in many states to hesitate, slowing deal traffic to a crawl.
"There's no problem on the demand side," said Dana Levenson, head of Royal Bank of Scotland's North American infrastructure finance and advisory business. "'Robust' would be a vast understatement. It's just not being matched by supply."
The $1.8 billion lease of the Chicago Skyway toll bridge in 2005, last year's $3.8 billion Indiana Toll Road lease and a growing pipeline of proposed deals indicated the United States at last had joined the worldwide privatization wave.
The global volume of deals involving public and private infrastructure assets — from power utilities and seaports to airports and toll bridges — last year tripled to $150 billion from the year before.
By some estimates, specialist funds have earmarked more than $75 billion for infrastructure investments, which with additional borrowing represents up to $400 billion in dry powder. Some bankers say buying power exceeds $750 billion.
All across Wall Street, firms have assembled teams and raised new specialized funds to handle the expected surge of public asset deals.
Lehman Brothers earlier this month hired former U.S. Treasury Assistant Secretary Emil Henry to lead infrastructure deals. Before RBS hired him in March, Levenson helped negotiated the sale of Chicago Skyway as that city's chief financial officer.
Credit Suisse tapped senior dealmaker Adebayo Ogunlesi to help run Global Infrastructure Partners, a $1 billion venture formed last May with General Electric.
Yet U.S. deal activity has come to a halt amid unexpectedly strong public resistance to parting with taxpayer-funded assets, many of which are monopolies.
"The market has slowed because there is growing public skepticism that these deals are not in fact good for the public interest," said John Foote, a Harvard Kennedy School of Government fellow and transportation expert who has testified before Congress on privatization.
Bankers had compiled lists of assets that could pass into private hands, including Chicago's Midway Airport, the Illinois lottery and the Pennsylvania Turnpike. New Jersey, where former Goldman Sachs co-CEO Jon Corzine is governor, hired UBS AG to explore options for the New Jersey Turnpike, bridges, the lottery and more.
Texas, Virginia and other states wanted to tap private money to develop new toll roads. Yet in most cases, these deals ran into red lights.
The Illinois house earlier this month voted against the lottery lease by a margin of 78-6, making it unlikely that initiative will pass this year.
Privatization plans have run afoul of legislatures in a raft of other states in recent months, including Indiana, New Jersey and Pennsylvania. In Texas, lawmakers declared a two-year moratorium on privatized highways.
GAPING BUDGET GAPS
Yet bankers and privatization experts said U.S. deals eventually will happen. After years of underinvestment, for example, more than $500 billion is needed to repair roads and build highways to handle growing traffic.
Lawmakers meanwhile are hard pressed to raise taxes further and may be limited in their ability to increase public debt.
"The needs are so great, this is not the end but just a delay in going to market," said Mark Florian, head of Goldman Sachs' infrastructure financing and advisory business.
Advocates say private interests like Australia's Macquarie Bank and Spain's Cintra can do a better job managing roads and other assets. Windfall payments generated by these deals can fill gaping budget gaps or fund the development of new infrastructure.
Yet credit markets have tightened up in recent weeks, which could make it more expensive to finance deals. Moreover, some observers say the public is right to be cautious.
Lawmakers across the United States have had time to review deals signed by Chicago and Indiana. Critics of these transactions say these deals are short-term budget fixes that don't do enough to protect taxpayers or expand capacity.
Trucking lobbies, motorist clubs and public interest groups, among others, oppose privatizing roads for fear private owners will raise tolls and be less accountable to the public.
"It boils down to the fact that what appeared to be a great idea," Foote said, "withered under further public scrutiny."
© 2007 Reuters
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