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Stalled Infrastructure Projects: What it Means for Investors
by David Fessler, Advisory Panelist
Monday, July 6, 2009: Issue #1033
Make no mistake: Government and privately funded investment in public works projects – not bubble inducing, debt-financed consumer spending – will be the guiding light that leads the way out of this recession.
The American Recovery and Reinvestment Act – otherwise known as the “Stimulus Bill” – provides $120 billion to begin to address our nation’s crumbling infrastructure.
It’s the largest infrastructure investment since Eisenhower’s Federal-Aid Highway Act of 1956, which created the U.S. interstate highway system.
Infrastructure investment – under-funded since the 1960s – will be unprecedented over the next three to five years, and let’s face it: the need is huge.
According to the National Surface Transportation Policy Review Study Commission, $225 billion needs to be spent annually for the next 50 years… that’s over $11 trillion, and that’s just for the transportation sector.
Of course, public infrastructure projects such as roads, bridges and water and sewer systems are by their very nature huge, expensive undertakings, requiring massive amounts of capital and manpower.
But very little actual construction activity is getting underway. Here’s why, and what you can do about it in the meantime.
What’s Going on in Big Infrastructure Project Financing?
So, why is little construction happening? Simple.
The current economic environment has upset the applecart with regards to funding these capital-intensive projects. As tax revenue continue to plummet, over 30 states have serious budget shortfalls, and most have shutdown funding for large capital projects. Most municipalities aren’t in any better shape.
At the Federal level, Congress is transfusing the Highway Trust Fund every year – last year it was $8 billion – as consumers drive less and switch to more fuel-efficient cars and trucks.
Clearly, new and innovative ways to fund infrastructure projects are needed. Last week, the fourth annual U.S. Infrastructure Investment Summit was held in New York to address this issue, and I was delighted to be in attendance at this important two-day event.
This high-level gathering annually brings together a small, but influential group of individuals in the world of infrastructure finance and investing.
In addition to yours truly, attendees included directors and managers of a number of infrastructure investment funds, together with those from Barclays Capital, UBS, the Blackstone Group, Jolene Molitoris (Ohio DOT). Several managers of large pension funds rounded out the group.
This year, the discussions and panel sessions focused on several key areas. Below are a few of the highlights:
- The Federal Infrastructure Spending Bill
Besides the $120 billion earmarked for infrastructure in the stimulus bill, the Federal Transportation Authorization bill provides for an additional $450 billion of funding over six years, in the form of a national infrastructure bank.
It accomplishes two things: It relies on bonds to provide the necessary funding for major infrastructure projects and it eliminates the huge, upfront payments. Clearly, there will be plenty of capital available from the government for infrastructure projects.
- The Impact of the Global Financial Crisis on Infrastructure Spending
The global financial crisis has changed the financial landscape for the foreseeable future. Retail lenders are far more conservative, warning potential homebuyers that they will need “serious skin in the game” in order to qualify for a mortgage.
The same thing is happening with infrastructure, according to Ben Heap, Executive Director of Infrastructure Asset Management at UBS, and Stephen Howard, a Director at Barclays Capital.
Most of the deals being done right now are more like partnerships with other investors and pension funds. And they have much more equity in them today as opposed to those done several years ago. The reason is that traditional debt financing is hard to come by with state budgets in crisis mode.
As a result, political acceptance of private funding deals is warming fast (money talks) – especially at the municipal level – where partisan politics is often non-existent. At the local level, most deals are small, bottom-up deals involving a few million dollars.
- The Current Lending Environment and Infrastructure Valuation
“Not all infrastructure is the same… many perform differently from an investment standpoint”, says Michael Dorrell, Senior Managing Director of Blackstone Group. Toll roads have very low earnings volatility, airports are higher and seaports are the highest.
According to Dorrell, earnings for infrastructure are off only 3% to -5%, versus the S&P index that’s off nearly 85%. Even infrastructure stocks are off 35% to 40% from their highs. His main criteria for valuing good infrastructure assets?
Making sure the capital structure of the underlying asset is durable and robust. In the past, over-enthusiasm on the capital structure side has had a significant impact on asset valuation.
- What it Takes to Create Public-Private Partnerships (P3s)
People don’t want to pay twice for infrastructure. They think it should be free, given that they’ve already paid taxes. The federal gas tax – due to its fixed nature – has lost much of its value as a proxy for the use of roads and bridges.
Paying for use is coming as a result of all of this. Proper tolling is a way for people to understand the value of the asset they are using. Expect toll roads to proliferate across the country.
States and municipalities will partner with private equity funds and pension funds as a means of raising capital and reducing annual budgets. These P3s will proliferate at the local level, where partisan politics is relatively absent. Some state deals will happen, particularly in those states with budgetary crises, where raising capital by any means is paramount.
What it All Means for Investors
The bottom line is this: The funding issues are being solved, albeit slower than initial expectations.
Dorrell said it best: “Now is a terrific time to buy infrastructure assets. They are extremely undervalued.” Of course infrastructure stocks are good buys as well… and for all the same reasons: nobody likes them.
Jacobs Engineering Group, Inc. (NYSE: JEC), Fluor (NYSE: FLR) and Foster Wheeler AG (Nasdaq: FWLT) are three great examples of companies that stand to benefit as the infrastructure cash gets deployed this year and next.
As credit markets loosen, it will begin to free up billions in capital that will be put to work on infrastructure projects all across America, creating hundreds of thousands of jobs in the process.
As most of you know, I’ve been following the energy and infrastructure sectors for some time now for both Investment U and The Oxford Club – I believe that in the next three to five years there will be incredible investment opportunities in these two sectors.
And the prospects are exciting enough that we’re looking to devote an entire service to profiting from them. So stay tuned for more information as things unfold.
Good investing,
David Fessler
- New York or Bust: We Pledge to Follow the Money…
- Jacobs Engineering Group, Inc. (NYSE: JEC): Stock of the Day
- Capitalize on the “Age Of Infrastructure” With This Industry Giant
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4 Responses to “Stalled Infrastructure Projects: What it Means for Investors”
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David Fessler is an Advisory Panelist for Investment U and The Oxford Club, one of the world’s most exclusive and prestigious networks of private investors.
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July 6th, 2009 at 10:36 am
You talk a long time–I don’t have time to read your elaborate explanations and sales pitch. Put the “bottom line” in the first paragraph. Give details afterwards. PR
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July 6th, 2009 at 10:37 am
Too much to read—too long. PR
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July 6th, 2009 at 5:51 pm
These are DEFLATIONARY times where deleveraging is rampant. All governments are running huge deficits, and these stupid “bailouts” and “stimulus” programs are NOT helping the economy – they are mostly transferring $ to the unions, ACORN, etc. Fiat money IS and has been the big villain. We must remake our broken monetary system before we can consider huge infrastructure projects. You talk as if the gov’t. isn’t broke, and as if we’re not entering into a prolonged world-wide depression. Central banking is the problem and surely we cannot continue as in the past without solving it.
I wish I was wrong on this and am rather certain you think I am….but in a credit economy, the gov’t. can’t borrow money to spend because the deflation is destroying credit faster than the Fed can create it. Banks have lots of cheap credit available from the Fed, but potential borrowers are scared and are paying down debt rather than putting on more (a la Greenspan/Bernanke). The credit exdpansion bubble has burst and “all the king’s horses and all the king’s men can’t put it together again”!(Inspite of Obama, Bernanke, Geitner and the Congress).
Why don’t you put your talents to navigating through this enlarging depression? It’s sure not nice but is what we have!
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July 7th, 2009 at 12:26 am
I believe the reason for ” Economic Recession ” is due to so called economic liberalisation in the name of ” reforms “. But that lead to uncontrolled and nuclear-like – chain – reaction in the name of innovative products in the finance sector. The growth of service sector could not be tangible ; though it too generates economic activities.
Therefore , we need regulated – yet it generates economic – system for stablised and all – inclusive model.
We need not make attempt to ever inreasing economic growth to match the population growth – resulting depleting non-renewable energy sources and global warming.
American should lead the world for sustainable economic growth.
Note : My comments are on ” Economic System ” ; nothing to do share markets.
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