Despite the dramatic divisions in America after the election, on one issue there seems to be widespread agreement: we as a nation need a massive upgrade to our infrastructure. Our run-down airports, crumbling highways, obsolete ports and dangerous bridges now endemic across our country have become a global embarrassment, often contrasted to gleaming new Asian airports or elegant European rail. The costs of an upgrade, however, will be enormous.
Hillary Clinton called for as much as $500 billion in infrastructure spending while president-elect Donald Trump has fixed the price tag for his vision at between $800 billion and $1 trillion. This is a real problem: our national debt is closing in on $20 trillion, and all that money might be cash in the wind. From the Big Dig in Boston to the infamous Alaskan bridge to nowhere, the track record of state-led public projects is not a good one. New York's Second Avenue Subway, set to open New Year's Eve, has been almost a century in the making, first proposed in 1919.
But what if there were another way of funding infrastructure improvement—one that required the "art of the deal," one that Donald Trump, leveraged real-estate mogul, might be especially qualified to lead? As it happens, this way not only exists, it's already widely in use around the world: privatization.
As an investor in French toll roads, British airports, and Italian broadcast towers, I've seen how effective privatization has proven. Most European airports, for example, are owned by governments but leased to private operators who must maintain high levels of service and make significant capital expenditures (often in the billions of dollars) to maintain the physical plant.
The government retains direct control of critical functions such as security and regulates tolls and other charges; the owner makes a rate of return in part by operating commercial aspects -- such as the retail concessions -- more effectively. A visit to Heathrow or De Gaulle proves that efficiency benefits passengers as much as owners.
The benefits don't end there. Economists and politicians alike hail both the boost in jobs that would accompany a massive building program and the long-term efficiency gains to be realized. The American Society of Civil Engineers estimates that $1.4 trillion in needed infrastructure spending over the next ten years would add $4 trillion to GDP and create 2.5 million jobs. And unnecessary traffic delays alone cost $50 billion annually, according to the American Transport Research Institute.
So what about those sky-high costs? Financial markets have developed over the last decade an enormous appetite for infrastructure projects, which can offer highly stable cash flows and inflation protection over long periods of time. Recent numbers suggest more than $100 billion has been raised dedicated to this new "asset class."
McKinsey estimates more than $5 trillion available (including more traditional sources) to fund greenfield projects and renovations world-wide. The safety of these projects and historically low interest rates mean pension funds, endowments, sovereign wealth funds and other institutions are willing to accept ultra-low yields -- and consequently pay ultra-high prices -- for concessions.
Some forward-thinking states and municipalities in the United States have already taken advantage of this arbitrage. LaGuardia Airport's current $8 billion renovation is managed by a public-private partnership. The state of Indiana and the city of Chicago both sold concessions over a decade ago to operate and maintain toll roads at big valuations -- $3.8 billion and $1.8 billion, respectively -- to Australia's Macquarie and Spain's Cintra, two pioneers in the field.
On the flip side, Chicago mayor Rahm Emanuel's 2013 decision to cancel the proposed privatization of Midway Airport, which would have been the largest such transaction in U.S. history, did nothing to help a city spiraling towards insolvency. At a time when heavily indebted cities and states nationwide struggle to avoid becoming Detroit, how better to raise money than to take it from the private sector without losing control over service or regulation?
This virtuous circle seems right up Trump's alley. His first foray into the political spotlight was his successful renovation of Central Park's Wollman Rink following years of waste and delay by city government. He might well be able to nationalize that success. As an experienced builder, Trump understands that the private sector delivers higher-quality projects on time and on budget and that the profit motive leads to better service so long as these natural monopolies are regulated.
As the self-described "king of debt," Trump also knows that if you can get the private sector to finance capital expenditures at absurdly low rates or pay astronomical asset prices, you generally should. Having worked his way successfully out from under a mountain of debt, Trump also gets that selling assets is a great way for overleveraged entities -- be they the United States as a whole or one of its encumbered municipalities -- to restore their balance sheets.
Even better if they can keep control of the assets, as would be the case with infrastructure privatization. The Trump campaign has in fact already put forward a proposal to extend over $137 billion in tax breaks for projects, but it should go much further in engaging in outright transactions.
Rome rose and fell on the quality of its roads. Unlike other fields, this is an area Trump knows well. Perhaps an unexpected benefit to having the nation's first builder-in-chief in the White House is that we will approach this problem with all the entrepreneurial sense of the business world -- and benefit greatly as a nation.
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