May 11, 2017

Pointer Down Under

by Breakingviews.

Australia just handed Donald Trump a timely example of how to finance infrastructure. The U.S. president has promised $1 trillion of investment in roads, bridges and other assets. On the other side of the world, the New South Wales state government on Thursday said it was selling a 50.4 percent stake in electricity grid Endeavour Energy to private investors for A$7.6 billion ($5.6 billion). The model for “recycling” the proceeds from selling existing assets into new projects is worth imitating.

The buying group, led by Australian infrastructure expert Macquarie and pension fund manager AMP, will get a 99-year lease on the business. Investors from Canada and Qatar round out the consortium, keeping foreign interest small enough to avoid political trouble. Australia’s most populous state has now exceeded its target of raising A$20 billion from recycling transactions.There are a few pointers for Trump and his team. First, the investor group didn’t need tax breaks or other subsidies. The Endeavour grid’s established business record was sufficient to draw a price higher than originally expected at about 1.6 times the utility’s regulated asset base.

Incentives from the federal government did, however, provide motivation for the state of New South Wales. Canberra bumps up the proceeds of asset sales like Endeavour by 15 percent if a state pours the entire amount into new infrastructure.

In the United States, many infrastructure assets are also under the control of state or local governments which are often reluctant to cede control. This may be where Washington needs to focus effort and resources, too.

Third, raising money against existing assets rather than new ventures is a faster way to mobilize private funds. The U.S. Bipartisan Policy Center noted in February that a greenfield infrastructure project may need as many as 59 different permits involving a dozen federal agencies. Trump administration officials talk of cutting a 10-year approval process to two years, but for now red tape is a roadblock.

Partially privatizing public infrastructure can be controversial, even in countries like Australia where it’s hardly novel. Yet if Trump and his colleagues want to attract private capital, the recycling model is one to take seriously. There’s plenty of investor demand for U.S. infrastructure; the dearth of supply is the problem.

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