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NEW YORK CITY-As recent events such as the collapse of the I-35W Bridge in Minneapolis on Aug. 1, show, public infrastructure requires investment to make safety repairs and maintenance. The private sector could provide a major part of the solution for governments struggling to fund these projects, according a recent report by Ernst & Young titled "Investing in Global Infrastructure 2007: An Emerging Asset Class."

The huge capital demands of large-scale infrastructure projects around the world--running into more than a trillion dollars over the next decade--will likely create intense competition among governments to attract private investment. The report estimates private sources could account for 10% to 15% or roughly $240 billion to $360 billion of the capital needed for infrastructure projects annually worldwide.

"There are good opportunities to create win-win situations," notes Dale Anne Reiss, Ernst & Young's global real estate director. "Governments urgently need funding and private-sector expertise to improve or replace aging infrastructure. And investors can benefit through the steady, long-term returns infrastructure investments can provide."

According to Reiss, "the growing need for private capital for infrastructure is caused by the budget shortfalls municipal and national governments around the world have faced in recent years. Private capital supporting public infrastructure is not new. But what is new is the extent and the sophistication of private investment," Reiss says. "It is truly emerging as a new asset class. Governments wanting to embrace private finance need to educate the public about the benefits, and overcome fears of losing control of public assets."

Governments with the political will and a coordinated approach to building and preserving key infrastructure will attract the most attention from private investors and be offered the best terms, according to the report. "In many cases private investors bring tremendous experience in managing large scale projects, potentially at lower costs than public agencies," Reiss concludes.

In the US, the American Society of Civil Engineers estimated in its 2005 Infrastructure Report Card that $1.6 trillion needs to be spent over a five-year period just to bring the nation's infrastructure up to "good" condition. "Infrastructure funds are interested in the long-term success of the utility businesses they acquire," according to Joseph Fontana, utilities and power industry leader of transaction advisory services at Ernst & Young US. "They see themselves as a holder of the asset, keeping the management team in place and maintaining the business."

In Australia, the average cost of toll road construction has doubled in the past few years from $427 million to $854 million per road project. "Today in Australia, we are seeing increasing opportunities [in infrastructure projects] for international investors, mainly because there are more mega-deals in the billion dollar range," explains Bill Banks, head of Ernst & Young Australia's infrastructure advisory group.

In Brazil, public funding of infrastructure has been constrained by the fact that the country already has a huge national debt running roughly 50% of Gross Domestic Product. "Over the next five years, Brazil has a need for $30 billion annually in public and private capital for investment in infrastructure," notes Luiz Claudio S. Campos, a senior manager of transaction advisory services with Ernst & Young Brazil.

In China, the government is investing state funds heavily in infrastructure development. The government is also inviting foreign investors and their advanced technologies to take part in toll road, water supply, and renewable energy projects.

Instant Insights /

Private Equity May Target Public Infrastructure

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