The bill — which passed the US Senate in early August with bipartisan support and which the House aims to pass by October — encourages PPPs, includes a provision for “asset recycling” (selling public assets to private owners and reinvesting the proceeds in new infrastructure) and expands access to low-interest loans for private projects.
‘Huge opportunity’ for Aussie retirement dollars
The president initially proposed a $US2.3 trillion infrastructure plan, but scaled it back to win Republican support.
Nonetheless, if passed, it will be a step in the right direction to finally pry open the US transport sector to private investment, according to Kyle Mangini. He’s the head of infrastructure at IFM Investors, the $172 billion fund manager owned by 23 Australian industry superannuation funds, which is chaired by Labor and union stalwart Greg Combet.
“It’s such a huge opportunity,” says Mangini. “If the transport sector does open up more broadly, we’ll be extremely active there.”
IFM already owns half a dozen major assets in North America in its $74.5 billion global infrastructure portfolio, including a tollroad in Indiana, a container terminal at the New York-New Jersey port and energy assets.
It also owns a stake in almost every Australian mainland capital airport – Melbourne (25 per cent), Brisbane (20 per cent), Adelaide (13 per cent), Darwin (77 per cent) and Perth (3 per cent) – and is part of the consortium that lobbed a $22.8 billion takeover bid for the ASX-listed Sydney Airport last month.
So it’s unsurprising that American airports – which are almost all government-owned – are high on IFM’s list of targets, with “several opportunities” on Mangini’s radar.
But with the politics of privatisation still hotly debated in the US, Mangini says the first major privatisation deals need to deliver good financial outcomes while maintaining good service for the public, or the private investment boom might never make it off the tarmac.
“It really comes down to tolls, taxes or privatisation and none of those three things are particularly popular anywhere,” he says. “What needs to happen is for one or two of these to get done really well, and for other cities or states to see that.
“So I think it will start slow and if we see some that are done well and without too much political or collateral damage – that’s where you’ll see momentum.”
Transurban’s attack on the capital
That makes Transurban’s latest project in the US all the more important. The Maryland Express Lanes Project — a 60 kilometre so-called “Lexus lane” motorists can pay to slip into and avoid gridlock on the road to Northern Virginia — is the largest PPP in development anywhere in the US.
Transurban has some powerful backers. It’s working with AustralianSuper; UniSuper and the Canada Pension Plan Investment Board, which paid $2.8 billion for a 50 per cent stake in Transurban’s North American roads late last year and have exclusive rights to invest alongside it in any future projects in the Greater Washington Area.
Transurban and its superannuation partners are in a 60/40 consortium with another Australian business, Macquarie Infrastructure, together calling themselves Accelerate Maryland Partners.
In August, Maryland’s Board of Public Works selected Accelerate Maryland as the exclusive developer to build the first $US4 billion to $US5 billion phase of the Maryland Express Lanes Project. They still need to develop a project plan and reach financial agreement with Maryland, which will go to another vote in late 2022, while the state is working through environmental approvals.
None of that will be easy, according to Marc Elrich, who is the executive of Montgomery County, where the road will run through, and one of the project’s leading critics.
He cites concerns over environmental issues, community opposition, design flaws and worries the deal is designed to maximise commercial returns over public benefit — a common criticism of PPPs in Australia and elsewhere. There’s been an outcry over the prospect of motorists paying $US50 for a 19-kilometre trip.
“So there’s lots to be questioned about it,” says Elrich.
Elrich says critics of the express lanes project have jumped on the fact that Transurban’s West Gate Tunnel under construction in Melbourne has spiralled from a $6.7 billion project to at least $10 billion after running into problems with contaminated soil. They are also concerned about what they see in Australia’s three largest cities, where Transurban has leveraged initial road concessions to win control over more and more of the road network.
“That’s what we’re worried about,” he says. “Where does this go, what other assets could they try to get a hold of around the county?”
The project has been championed by Maryland’s Republican governor Larry Hogan, who led a delegation of state governors to Australia in 2019 to study asset recycling. Hogan will finish his term in office in late 2022, and his replacement could spike the Transurban deal if it hasn’t been finalised by then.
Meanwhile, Spanish road group Cintra is mounting a legal protest over the fact it missed out on the rights to build the road, arguing it was unfair for Maryland to award the project to Transurban and Macquarie because they failed to name a construction partner in their proposal.
But Transurban’s Charlton says he’s confident of getting over those hurdles. And while lucrative in its own right, delivering the first section of the road also sets his company up to win future stages of the project, valued at another $US9 billion to $US11 billion over the next decade or so. That would give Transurban a continuous network of roads through Maryland and Virginia that encircle Washington DC.
Charlton says Transurban’s growing footprint around the US capital (with 85 kilometres of express lanes operating currently) also positions it bid for other roads across America, where there are between $US200 billion to $US300 billion worth of toll roads owned by state or local governments.
“We see big opportunities,” says Charlton, pointing to large cities like Dallas-Fort Worth, Miami and Los Angeles.
“We would anticipate that there’s going to be, over the next five years, tens of billions of dollars worth of opportunities.”
‘We see big opportunities. We would anticipate that there’s going to be, over the next five years, tens of billions of dollars worth of opportunities.’
Transurban CEO Scott Charlton
While not all of them will be right for Transurban, the company is preparing for the right roads to come along with an expanded team on the ground and additional financial firepower from its superannuation fund backers.
“Now we’re just looking for those opportunities that we believe are out there to eventuate,” Charlton says.
Even better for the group is that there are no major private players in the US, leaving the market wide open for foreigners such as Transurban and its European rivals.
Analyst Suraj Nebhani says that with Australia already tied up, Transurban needs to focus on the US if it is to continue growing in the long term.
“When you look at Australia, they are present in the major cities already,” he says.
“Yes there’ll be future projects they can take advantage of but to a certain extent there’s a lot of development that has already happened. Whereas in North America it’s at an earlier stage from an opportunity perspective.”
“In North America… they’re only present in a few states as of now, and even within the states that they are present in, they’re only on a couple of roads.”
The ‘Australian model’
Joe Hockey, the former federal treasurer and Australia’s ambassador to the US during President Barack Obama’s second term and Donald Trump’s first, has been advising US senators from both sides of the aisle on Biden’s infrastructure bill and trumpeting the virtues of asset recycling (or “the Australian model”).
After all, “I invented it when I was treasurer,” he says, referring to his 2015 initiative to give states and territories a 15 per cent bonus when they sold assets to fund new infrastructure spending. The first to take it up was the ACT, selling public housing developments and the territory’s TAB bookmaker.
“It was ironic it was with a left wing government and a right wing federal government,” he says.
“I cite that everywhere – that the most left wing government in Australia was the first to adopt it [asset recycling]“.
Hockey now works with Australian investment giant Macquarie to help land infrastructure deals in the US and has set up his own advisory in DC, too.
He says America’s infrastructure repair work will become more urgent as ageing roads and ports weigh more and more on its economic output, and as China challenges its title as the world’s largest economy.
“China, with new and always upgraded infrastructure, is able to constantly improve its productivity and therefore run sustainably at a faster pace than the United States,” Hockey says.
“It’s put the infrastructure in place that allows it to grow faster than the US even at close to the same size economy. So infrastructure is crucial and the fact is no government can build infrastructure as well as the private sector.”
A second driver, says Hockey, is the wave of carbon accountability coming for local and state governments, particularly under Joe Biden’s administration.
“Governments are massive owners of real estate and infrastructure that emits carbon and at the moment it’s not properly measured nor offset,” he says.
“Sooner or later the boot’s going to fall and all these governments will be scrambling to reduce carbon emissions from existing infrastructure. The only way they’ll be able to do it effectively and pay for it is by engaging the private sector.”
‘Tip of the iceberg’
AustralianSuper — the nation’s largest super fund, managing $225 billion of retirement savings on behalf of 2.4 million members — sees so much potential in the US infrastructure space it opened a dedicated office in New York in May this year, which will grow to around 50 staff within three years.
The fund owns about $24.5 billion worth of roads, airports and other asset around the world, with $6.5 billion in North America already, including the stake in Transurban’s roads, a railway company and several oil, gas and renewable energy assets. Its head of infrastructure, Nik Kemp, says he expects to invest another $5 billion in US over the next few years — possibly up to $10 billion if the right opportunities come along.
Kemp nominates the challenge of navigating federal, state and local governments, and a strong municipal bond market which make it easier for states to fund major projects (there is no equivalent in Australia) as holding back a private involvement in US infrastructure (outside the energy sector, which is a notable exception) to date.
“There are a whole heap of assets where [private ownership] absolutely makes sense, because of the efficiencies you’re able to drive through the private sector, [and] being able to continue to invest in these assets or operational improvements,” he says.
“And I think credit to the Australian government, they understood that a number of years ago. In the US… the benefits that can drive is still not well understood.”
But Kemp says it feels like the tide is turning and will be spurred further by the Biden infrastructure bill and – he hopes – the success of his fund’s road projects around the Greater Washington Area with Transurban.
“What I hope will happen is that other states will look at the success that those around that Washington-Maryland area have, and realise the real benefits partnering with the private sector to improve and upgrade the roads,” he says.
“I do think there is a long way to go; you can talk about Biden and all of that, which is great – it’s the tip of the iceberg. It’s not something that opens up in two years, it’s a 10, 20 year journey.”
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