Private sector: a driving force in US infrastructure

16 January 2018

Investment from the private sector could become the driving force to restore and develop infrastructure assets across the US

The US must increase the role for private capital in infrastructure development if it is to address the nation's infrastructure challenges and remain globally competitive.

The American Society of Civil engineers estimates $US4.6 trillion needs to be spent by 2025 to improve critical services across every sector of infrastructure in the US.

However, with just over $US2.5 trillion allocated in existing government budgets for infrastructure spending in this period, there is a funding gap of $US2 trillion.

$US2 trillion funding gap

Macquarie Capital Head of Americas Infrastructure Rob Kupchak says there is $US156bn1 in untapped private capital that could be deployed to begin work on the US infrastructure backlog and improve the operating efficiency of existing assets.

He says the challenge for investors is communicating the benefits that funding models such as public private partnerships can bring to sectors like transport and roads which have traditionally relied on public funding.

“What the private sector is really good at is innovation, improving operations and managing risk," Kupchak says. “This leads to projects that are more commercially viable, more efficient and developed more quickly with the customer experience top of mind."

The Trump administration is considering how to boost the nation's infrastructure, speed up approvals for projects and fund essential services.

Macquarie Capital Government Advisory and Affairs Manager Geoff Segal says the private sector can work in partnership with governments to meet community infrastructure needs.

He says the timing is right for greater use of public private partnerships, asset recycling and direct user fees, such as tolling, which have been adopted throughout the world to build and manage infrastructure projects and make them viable.

"In the past, state and local governments have been able to rely on the federal government to carry a larger share of the funding task," he says. "That is changing, and this change is going to precipitate the need for private investment.

“The US must increase the role for private capital in infrastructure development if it is to address the nation's infrastructure challenges and remain globally competitive.”

Segal says while some sectors such as energy have historically experienced robust private investment, sectors such as airports and roads remain largely untouched.

"Nearly every state is building something every year and about 10 per cent of those are conducted as public private partnerships. Doubling that to 20 per cent would be a huge boost to industry, helping close the current infrastructure gap," he says.

There is also potential for asset recycling initiatives, offering federal government incentives to states that lease existing infrastructure to the private sector and use the profit to fund new infrastructure have enormous potential.

Such models have already proved successful in countries such as Australia and Canada, and Segal says they present the best opportunity for the US to close its infrastructure gap.

$US175 billion

in untapped private capital for infrastructure as of March 2019

According to Preqin, North America-focused infrastructure funds have raised ~$US177 billion in capital since 2016.

But Segal says the core challenge is not raising investment funds but building public support for private investment models when municipal governments can borrow money for infrastructure at lower rates than the private sector.

Segal says it is important for the private sector to highlight the broader community benefits of models such as public private partnerships.

These benefits can include the delivery of more efficient services including lowering costs over the long term, best industry practices and insights, a customer focused experience and local economic growth.

Segal believes the value of private sector investment in infrastructure will be more widely understood and embraced as more projects open that have drawn on private funding models.

“These aren't simply financing tools," he says. "This is about making more efficient decisions around infrastructure, focusing on long-term asset management, driving better performance into the system and most importantly, bringing in new investment to power the much needed updates to infrastructure across the US."

Although closing the nation's infrastructure gap is a significant challenge, increased cooperation between governments and the private sector could be a step toward delivering more projects and better meeting community needs. 

  1. Infrastructure dry powder is sitting at $US156bn as at Dec 2017, Preqin.