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Infrastructure Goes Private


Selling airports, roads and bridges may be best way to save them.

Problem: The American Society of Civil Engineers says the United States needs to spend about $1.6 trillion in the next five years to maintain and expand its infrastructure.

Big oops: There's no way local, state and federal governments have that kind of dough.

Possible Solution: Privatization.

Selling airports, roads and bridges can bring an immediate cash infusion to government and is likely to provide long-term benefit to the public and investors.

The $52 billion Ontario Municipal Employee Retirement System last year generated a 12.4% return on its $5 billion infrastructure investments, above the 9.9% benchmark, but down from 2006's 14% return, The New York Times reports.

But you can bet labor unions will oppose privatization because they see it undercutting job security of their members.

Democratic Representative James L. Oberstar of Minnesota, chairman of the House Committees on Transportation and Infrastructure, has said his panel will "work to undo" public-private partnerships that don't protect the public interest.

Private investors make money by boosting revenue. This can be done by upgrading the infrastructure to increase capacity or by raising tolls. Paradoxically, the public may object to the improvements brought by privatization - reconstruction means delays while construction of a new highway by the government means shorter trips.

Privatization doesn't deliver immediate miracles. The development of high-occupancy toll, or HOT, lanes around Washington took six years to complete after Fluor Corporation (FLR) made an unsolicited bid in 2002.

However, interest in infrastructure investment is intense and new deals continue to be signed or discussed.

Australia's Macquarie and Spain's Cintra, foreign funds with extensive international investments, signed leases for the Chicago Skyway, and the Indiana Toll Road. Midway Airport in Chicago could be transferred to private investors this fall.

Florida approved plans for groups that included JPMorgan (JPM), Lehman Brothers (LEH) and the Carlyle Group to bid for a 50- to 75-year lease on Alligator Alley, a toll road known for sightings of alligators lazing it up in the sun.

The prospect of long-term leases and steady returns has caught the interest of major investors such as KKR (formerly Kohlberg Kravis Roberts), Morgan Stanley (MS), Goldman Sachs (GS) and Credit Suisse (CS).

The California Teachers' Retirement System recently authorized up to $800 million for infrastructure investments. The California Public Employees Retirement System has set aside $7 billion for such investments through 2010.

Theory is one thing. Practice is another.

Indiana Governor Mitch Daniels confronted a sharp backlash when the state pocketed $3.8 billion for a 75-year lease on the Indiana Toll Road. One bumper sticker read, "Keep the toll road, lease Mitch."
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