This Week at Amtrak; March 11, 2008

A weekly digest of events, opinions, and forecasts from
United Rail Passenger Alliance, Inc.
1526 University Boulevard, West, PMB 203
Jacksonville, Florida 32217-2006 USA
Telephone 904-636-7739, Electronic Mail info@unitedrail.org
http://www.unitedrail.org



Volume 5, Number 10



Founded over three decades ago in 1976, URPA is a nationally known policy institute that focuses on solutions and plans for passenger rail systems in North America. Headquartered in Jacksonville, Florida, URPA has professional associates in Minnesota, California, Arizona, New Mexico, the District of Columbia, Texas, and New York. For more detailed information, along with a variety of position papers and other documents, visit the URPA web site at http://www.unitedrail.org.


URPA is not a membership organization, and does not accept funding from any outside sources.


1) NEWS FLASH! Three cheers for the Union Pacific Railroad; Amtrak’s reservations web site is showing sleeping car space available on the full route of the Coast Starlight from Los Angeles to Seattle, effective April 1, 2008.

A visit to the web site confirms all types of accommodations, along with full dining car service is shown for sale. Checking the same trip for March 31, 2008, only a combination of coach rail and bus connections are available.

This can ONLY happen by the hard and diligent work of the Union Pacific Railroad and its profound determination to reopen its north/south rail line in Oregon.

As of press time for this space, at 10 P.M. on the East Coast, no announcement has been forthcoming from Amtrak.

It looks like the Coast Starlight is back in business. It has only been running a coach service between Los Angeles and Sacramento since the end of January after the mudslide on Oregon north of Klamath Falls that wiped out the Union Pacific right of way on the side of a mountain.

2) Here is an important reprint from Innovation NewsBriefs, Volume 19, Number 8, published March 10, 2008. Further information can be found at www.innobriefs.com.

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March 10, 2008

A $400 Billion Solution?

"There’s upward of 400 billion dollars available in the private sector right now for infrastructure investment." Secretary of Transportation Mary Peters addressing the nation’s Governors at the White House, February 25, 2008

Secretary Peters’ claim was greeted with skepticism in some quarters, but after consulting a number of financial sources we have come to the same conclusion as Mrs. Peters. Dedicated infrastructure funds have indeed raised impressive sums of money in the recent past. After leveraging the estimated pool of equity capital through bank loans and the capital markets, the funds available for infrastructure investments meet or may even exceed Secretary Peters’ estimate. The question that casts a shadow on this upbeat picture, however, is how much of this capital will end up in other parts of the globe because ill-advised barriers against foreign investment will discourage or prevent much of the equity capital raised abroad from being invested in this nation’s transportation assets.

As for the amount of private capital available for investment in infrastructure, the facts are indisputable. A McKinsey survey estimates that the world’s 20 largest infrastructure funds have raised $100 billion in 2006 and 2007 alone (Robert N. Palter, Jay Walder and Stian Westlake, How Investors Can Get More Out of Infrastructure, The McKinsey Quarterly, March 2008). The Financial Times reports that equity capital available for investment in infrastructure ranges from $50 billion to $150 billion (Infrastructure M&A, December 30, 2007, www.ft.com). Michael Wilkins, managing director of S&P’s European Infrastructure Finance Group, estimates that the amount of equity capital raised globally for infrastructure investments is in the range of $100 billion to $150 billion. Mark Florian, Managing Director at Goldman Sachs and Dana Levenson, Managing Director and Head of North American Infrastructure Banking at The Royal Bank of Scotland are both of the opinion that the amount of available capital for infrastructure investments, after leveraging, may reach $500 billion or more. That's a pretty solid consensus.

Probably the most detailed and authoritative study of dedicated infrastructure funds has been done by Stanford University’s Collaboratory for Research on Global Projects under the direction of Ryan J. Orr (The Rise of Infra Funds, Project Finance International — Global Infrastructure Report 2007, June 2007). Orr reports that a "tidal wave" of 72 new infrastructure funds have been launched in the last two years. Collectively, these funds, he estimates, have raised in excess of $120 billion. Assuming a leverage in the range of 65-80%, not uncommon in infrastructure deals these days, the estimated pool of equity capital could support investments in the range of $340 to $600 billion. (The Indiana Toll Road lease for $3.8 billion was financed with only 19% equity capital)


Of the 72 funds in the Stanford University project’s data base, 31 funds have an estimated value each of one billion dollars or more. The two largest funds, Borealis and the Canadian Pension Plan (CPP) have $10B and $7B, respectively, allocated to infrastructure investing. Other large dedicated infrastructure funds, each in excess of $3 billion, include Goldman Sachs Infrastructure Partners, Macquarie Infrastructure Partners, Ontario Teachers Pension Plan, Alinda Capital Partners, Citigroup Infrastructure Investors , AIG Highstar Capital, Morgan Stanley Infrastructure, JP Morgan Partners and Babcok & Brown Infrastructure Fund.

Of course, not all of the equity capital raised for infrastructure is destined for transportation. Infrastructure funds also target power plants, water supply and treatment facilities, pipelines, and natural gas production and distribution networks. However, many funds tend to favor transportation infrastructure (roads, bridges, airports, seaports, transit systems and parking facilities) because transportation assets generate strong demand even in times of slower economic growth and produce steady and predictable cash flows. Transportation-related investments appeal especially to long-term investors such as pension funds and insurance companies, which require stable, long-term income-oriented investments to match their long term- liabilities and payout obligations.

Most of the infrastructure funds have a global reach, although many of the funds focus on mature markets in the developed countries where political risks and legal and regulatory uncertainties are less severe. The United States has lately become a favorite investment target because of the perception that a large percentage of its existing transportation infrastructure needs rehabilitation, modernization and expansion. However, Latin America, and more recently India, the Middle East, Southeast Asia and China, are also considered to offer attractive investment opportunities. Indeed, a majority of transport-related projects identified in the McKinsey report and those listed in the Public Works Financing annual survey of International Major Projects, are located outside the OECD countries.

The Rise of the Infrastructure Funds

The rapid rise of infrastructure funds can be explained by the confluence of several factors:

+ Growing population, rising incomes, global economic interdependence and a desire for more personal mobility are creating pressures to expand the capacity of infrastructure and, in particular, transportation infrastructure. The United States alone needs $1.6 trillion worth of new infrastructure over the next five years according to the American Society of Civil Engineers (ASCE). Transportation-related infrastructure will demand an annual infusion of at least $80 billion and as high as $225 billion by some estimates. Global demand for new infrastructure is expected to run into many trillions of dollars.

+ Much of the infrastructure deficit is expected to be financed with private capital, as financially-strapped central governments increasingly embrace public-private partnerships as a means of developing and operating all manner of infrastructure. For governments, private infrastructure funds may offer an important new source of capital for investment in much needed transportation facilities. The United States is a relative newcomer to this field, but the realties of a growing infrastructure deficit and funding shortfalls, we think, will inevitably drive state governments to embrace the use of private capital in infrastructure development (for a discussion of these trends, see, Infrastructure 2007, A Global Perspective, Urban Land Institute/Ernst & Young, 2007; and Closing the Infrastructure Gap, Deloitte, 2007).

+ In an economic environment of high liquidity and low interest rates, investments in infrastructure have offered attractive yields with relatively little risk. Most infrastructure deals include rate increases to keep pace with inflation, thus reducing or eliminating inflationary risks.

+ Infrastructure assets offer opportunities for structural, management and operational improvements which can enhance asset performance, stimulate demand, produce more income and hence increase returns on the initial investment. This assumes, of course, that the infrastructure fund managers have the knowledge and expertise to enhance the value of the acquired assets — or strike a fruitful partnership with experienced manager-operators as, for example, Macquarie has done with Ferrovial's Cintra. A McKinsey analysis of 60 private equity deals showed that over 60 percent of the value they created arose from improved performance of the acquired asset.

Potential Obstacles

Casting a shadow on this rosy scenario are several potential threats. First, in the face of the spreading credit crisis, banks may be less willing to lend the high cash multiples that have made past infrastructure deals profitable. A rise in long-term interest rates could reduce the attractiveness of infrastructure investments, which rely on substantial leverage to produce attractive returns. Should interest rates go up, an increasing share of operating revenue would go to service outstanding debt, thus reducing yields on invested capital. However, most analysts we have consulted believe that the current credit crunch will not be of a long duration and will not fundamentally affect the prospects for infrastructure investments. A report by Probitas Partners, advisers to pension fund managers, predicts an increase in private equity commitments to infrastructure in 2008 (Investing in Infrastructure Funds, September 2007).

Second, the multiplicity of new entrants into the field of infrastructure investments has created an intensely competitive environment. New deals coming to market have not kept up with the growth in the supply of investment capital, resulting in vigorous bidding for existing assets and new assets under development. This is driving up their prices, reducing yields and lowering the attractiveness of investments in infrastructure as compared to investments in other asset classes.

Finally, there is a potential threat of legal and regulatory barriers — not only to foreign investments but also to the concept of private toll concessions. Although a recent GAO report (GAO-09-44) has given the concept of public-private partnerships a positive verdict, skepticism and constraints on private sector involvement, ostensibly on the grounds of "protecting the public interest," can be expected on Capitol Hill from House Transportation & Infrastructure Committee Chairman James Oberstar (D-MN) and some members of his committee. The upcoming reauthorization of the surface transportation program may thus become the battleground on which the idea of private investment in transportation infrastructure will be fought out. It is a challenge that the financial community should take with utmost seriousness.

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J. Bruce Richardson
President
United Rail Passenger Alliance, Inc.
1526 University Boulevard, West, PMB 203
Jacksonville, Florida 32217-2006 USA
Telephone 904-636-7739
brucerichardson@unitedrail.org
http://www.unitedrail.org