An earlier version of this piece appeared in Public Works Financing, for which Mr. Poole writes a regular column, © Robert W. Poole, Jr., 2008.
Published here September 2008.

Editor's Note | Introduction | An Alternative Source of Funding 
A Shift in Investment Thinking | Tax Implications Overlooked
Pension Funds in Australia and Canada | Construction Trade Unions in the US

An Alternative Source of Funding

Fortunately, there is an alternative way to pay for the big-ticket highway projects that need doing - rebuilding and widening key Interstate routes used by long-haul trucking, adding networks of congestion-relieving express lanes to urban freeways, etc. It's called a long-term toll concession. It has been used in Europe since the 1960s and 1970s, in Australia and Latin America since the 1990s and, today, is a major feature of the huge motorway building programs in China and India.

Long-term toll road concessions work as follows. An investor-owned company (or consortium) wins the bidding for, say, a 50-year concession and signs a detailed (several hundred page) agreement spelling out numerous terms and conditions and what-if questions. Essentially, the agreement allows them to charge tolls and keep the revenue for 50 years. They can then take that agreement to the capital markets to raise the funds needed to build the project and keep the bills paid until the traffic and toll revenues start flowing. Over the life of the agreement, they will manage, market, maintain, and expand (as necessary) the toll road, funding everything out of the toll revenue stream and hopefully, make a decent return on their investment.

Who invests in toll roads? Banks generally provide the construction financing via short- and medium-term bank loans. But the long-term financing is usually a combination of equity and long-term debt (revenue bonds). For long-term investors, the characteristics of toll roads are much like those of utilities; they provide a long-term, gradually increasing cash flow, backed by a large income-producing physical asset that provides an essential service. This is precisely the kind of investment that insurance companies and pension funds are looking for, to match against their expanding long-term liabilities as the baby boom generation enters its long retirement years.

Over the past several years, the global capital markets have discovered U.S. toll roads as one of the most promising investment opportunities anywhere. One recent estimate from an overseas investment bank is that equity funds specializing in infrastructure now total $175 billion. Goldman Sachs, Morgan Stanley, JP Morgan, and the Carlyle Group, among others, have created major funds in the United States. Major non-US players include Macquarie Bank and Credit Suisse First Boston. Since most toll road projects are financed with only 20-30% equity and the rest as debt, the total investment potential of $175 billion in equity is as much as $875 billion. I estimate that such a sum would cover about 15 years' worth of $60 billion per year investment shortfalls.

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