With their economies soaring, infrastructure in Brazil, China, India and Russia is under strain. Investment in infrastructure projects in these markets is predicted to balloon, with private capital likely to be part of the solution. Evgeny Trusov, partner and leader of Ernst & Young’s CIS project finance group, estimates the investment requirements of Russia’s infrastructure sector alone to be in the hundreds of billions of dollars.

Australia, the UK and Canada have adopted public-private partnership (PPP) models. The UK has more than 700 PPP projects either completed or under construction. Many have involved rebuilding or constructing schools, police/fire stations, hospitals, and water/ sewage treatment plants.

Latin America is lagging and invests only 2% of its gross domestic product in infrastructure improvements, compared to 9% by China.

Norman F Anderson, president and CEO of CG/LA Infraestructura Strategy Group, is optimistic, however. He sees the region tripling its investment in infrastructure to match its upward growth trend of 5% in the past five years.

McKinsey & Co reports that further evidence of the interest in this sector is the fact that multilateral credit organisations, such as the Inter-American Development Bank, the Andean Development Corporation and the Central American Bank for Economic Integration, have earmarked half of their total investment for infrastructure projects.

These multilateral credit institutions have also contributed a combined total of some $120m for feasibility studies for different projects.

A wider problem

But developing countries are not the only ones whose roads and bridges are creaking under the weight of time, traffic and under-investment. A pull-no-punches report entitled Infrastructure 2008: A Competitive Advantage, co-published by Washington, DC-based Urban Land Institute (ULI) and Ernst & Young, states the problem succinctly: “The US is headed toward decline and needs to wake up to the dire state of its infrastructure.”

Consequently, US communities such as Phoenix are taking a hard look at their options, which includes foreign investment in PPPs that could help develop and upgrade their highways, airports and railways.

Martin L Shultz, vice-president for government affairs at Phoenix-based Pinnacle West Capital Corp, suggests that the state needs to establish a critically needed, state-wide comprehensive, multi-model transportation plan, backed with appropriate funding.

Arizona’s legislature has already expanded its transportation plan and successfully passed Proposition 400, which continues a one-half cent sales tax until 2025 for infrastructure improvements. “I have concluded, as many others have, that the Arizona Surface Transportation System is at a critical juncture and in real jeopardy,” says Mr Shultz. “Our state’s costs of maintenance, acquisition of new right-of-way and materials to construct the needed segments to our Arizona Surface Transportation System are mounting.”

Highway needs

Mr Shultz points out that until 2030, estimated highway needs in Arizona will range between $60bn and $70bn.

“In my view, through 2030 we should count on revenues of approximately $7bn through state highway fund sources, $9bn in federal funds, and $5bn in regional funds for highway purposes,” he says.

He adds: “Assuming there would be a $21bn contribution to construction, that would leave Arizona with an unfunded balance of $39bn to $49bn.”

Consequently, in November Arizonians will vote on a one-cent sales tax increase that would help fund $42.6bn, to be used over 30 years by the Arizona Board of Transportation and the Arizona Department of Transportation (ADOT) for infrastructure improvements. More importantly, the money would help to provide incentives for PPPs.

“This would be a non-traditional arrangement where they’d be able to accept private contributions in exchange for public benefits,” says Mr Shultz.

No simple solution

ADOT director Victor Mendez does not see the extra tax as a silver bullet for solving Arizona’s infrastructure budget shortfall, but he supports the motion. “It would raise money for all forms of transportation improvements on a state-wide basis,” he says. “If passed, it will give ADOT authority to encourage PPP corridors of the future.”

So far, three infrastructure projects in Arizona that could benefit from PPP funding have been identified as in critical need of improvement. With insufficient monies in the coffers and many politicians arguing against rising taxes, more state and local governments are considering PPPs as a funding option. The trend comes not too soon. The ULI study warns that this year could mark a critical juncture where new approaches to land use, infrastructure and energy efficiency could likely determine and possibly re-order the next generation of winners and losers – countries, companies, investors and people.

“If the US fails to embrace this model, it could lead to our economy falling behind more of our global competitors,” warns Dale Anne Reiss, global director of real estate at Ernst & Young in New York.

Plenty of money is available. US transportation secretary Mary Peters says: “There’s upwards of $400bn available from the private sector right now for infrastructure investment. Much comes in the form of foreign direct investment from non-US citizens and foreign governments.”

Enormous growth

McKinsey & Co reports that worldwide investment in infrastructure projects, from roads, bridges and tunnels to schools and hospitals, has grown enormously in recent years and the trend is expected to continue. From 2006 to mid-2007, it estimates, private investment funds raised $105bn for infrastructure projects and the 20 largest infrastructure funds have some $130bn under management.

However, Ernst & Young warns that the huge capital demands of large-scale infrastructure projects around the world – running into trillions of dollars in the next decade – are likely to create intense competition among governments to attract private investment.

“Private capital supporting public infrastructure is not new,” says Mr Reiss. “But what is new is the extent and the sophistication of private investment. It is truly emerging as a new asset class.”

Some projects in the US have already been funded by PPPs. In 2006, Australia’s Macquarie Infrastructure Group (MIG) and Spain’s Cintra (a Spanish toll road company) purchased a $3.8bn agreement to lease and operate the 253-kilometre Indiana Toll Road for 75 years in exchange for all tool and concession revenue.

MIG has also obtained stakes in three other privately owned toll roads in the US: the Dulles Greenway, which links the Dulles International Airport to Leesburg, through Loudoun County, Northern Virginia; the Chicago Skyway; and the South Bay Expressway in San Diego.

As these deals show, PPPs can provide large up-front payments in exchange for long-term operating leases. The downside, however, is that such concession agreements can hamstring governments and limit flexibly to adapting to changing usage patterns in the region as a whole.