Roads, airports on the block as budgets tighten

By Jonathan Stempel

NEW YORK (Reuters) - Cash-strapped U.S. state and city governments are likely to sell or lease more highways, bridges, airports and other assets to investors desperate for stable returns after being frazzled by the credit crisis.

The trend is set to pick up speed given worsening budget deficits in state capitals and city halls nationwide.

It will also be welcomed by Wall Street bankers hoping to help create and market so-called "infrastructure" transactions at a time many debt markets remain paralyzed, and after major U.S. stock indexes fell into bear market territory.

"When you are nervous about everything else, you put your money in a toll road," said John Schmidt, a partner at the law firm Mayer Brown LLP in Chicago. "That's the logic of infrastructure. Returns are stable and predictable. You won't get fabulously rich, but you'll get stable cash flow."

The latest enthusiasm for at least partially privatizing infrastructure assets came on July 30 from New York Gov. David Paterson, who is trying to plug a budget deficit caused in part by lower tax revenue as Wall Street retrenches.

"We're just looking at ways to be more efficient and that's why I used the term public-private partnerships -- trying to find some creative solutions," Paterson said. "The reason I'm avoiding taxes is because I think taxes are addictive."

Bankers and others in the industry say there is pent-up demand from dedicated infrastructure funds and public pension funds to invest in hard assets -- perhaps $75 billion to $150 billion of equity capital -- but not enough supply.

"Economic conditions are tough, and are going to be very harsh on the performance of state budgets in 2008 and 2009," said Greg Carey, co-head of infrastructure banking at Goldman Sachs Group Inc (GS.N). "States are looking for long-term solutions in running businesses. A public-private partnership is a tool in their toolboxes."

A high-water mark came in May, when a group led by Spain's Abertis Infraestructuras SA (ABE.MC) and Citigroup Inc (C.N) agreed to pay $12.8 billion to lease the Pennsylvania Turnpike for 75 years. The total could reach $18.3 billion, including promised improvements. Legislators must approve the lease.

Other transactions have included the $1.8 billion lease of the Chicago Skyway toll road bridge in 2005, and a $3.8 billion lease of the Indiana Toll Road the next year. Chicago Mayor Richard Daley is preparing to lease Midway Airport this year.

For Wall Street, infrastructure can be a bright spot at a time of deep job cuts and expected declines in bonuses.

"We've seen an unprecedented number of headhunters recruiting for positions on the buy and sell sides," said Rob Collins, head of Americas infrastructure banking at Morgan Stanley (MS.N). "Infrastructure investing can be counter-cyclical to economic trends."

John Ma, the other Goldman infrastructure chief, added: "We're very committed to this space. Our business activity has increased dramatically, even this year."

ALTERNATIVE TO TAX HIKES

According to the nonprofit Center on Budget and Policy Priorities, 29 U.S. states plus the District of Columbia may face a combined $48 billion of budget deficits in fiscal 2009.