Summit News

UBS banker sees next U.S. privatizations smaller

NEW YORK (Reuters) - Sales of public infrastructure by U.S. states and cities, stymied first by politics and then the financial crisis, will be much smaller and come at a slower pace than once expected, UBS investment banker Thomas Osborne told Reuters on Wednesday.

Tom Osborne, Head of the Americas Infrastructure and Privatization Group for UBS Investment Bank, speaks at the Reuters Infrastructure Summit in New York, May 6, 2009. REUTERS/Brendan McDermid

With a few exceptions, public infrastructure privatization has yet to take root in the United States. Last fall, bidders withdrew a $12.8 billion offer for the Pennsylvania Turnpike after local lawmakers delayed passing key legislation.

Two weeks ago, the failure to line up financing grounded Chicago’s plan to lease Midway Airport for $2.5 billion.

While city and state governments will move more cautiously, Osborne said at the Reuters Infrastructure Summit that privatization will eventually take hold.

“Going forward, deals will be smaller. They will happen at a much more measured pace,” he noted. “You’re going to see a more incremental approach, both in the private and public sectors in order to prove out the concept that (privatizations) can be an essential tool.”

Osborne, UBS Americas’ head of infrastructure and privatization, predicted upcoming deals will be valued at less than $5 billion. That matches up with the current availability of equity capital and debt financing.

Looking back, New Jersey’s plan to lease several toll roads, generate $30 billion and slash the state’s debt in half may have been overwhelming.

“In New Jersey, it was challenging to win the political support needed. It was an extraordinarily ambitious plan,” said Osborne, who guides the state of New Jersey and advised the winning bidders for the Pennsylvania Turnpike.

About five years ago, the $1.8 billion lease of the Chicago Skyway, followed later by the $4 billion lease of the Indiana Toll Road were greeted as signs the United States would finally join the global trend of infrastructure privatizations.

Wall Street rushed to get a piece of the action as investment funds raised more than $150 billion for infrastructure plays and investment banks recruited bankers to serve as deal advisers.

Since then, however, public-private partnerships have been stuck in neutral. On several occasions, mayors and governors struggled to win over legislators and voters.

Then the global economic crisis squeezed the markets, drying up the pools of financing needed to finance these deals.

Yet Osborne says deals will eventually get done, fueled by cash-strapped governments seeking revenue, the dire need to upgrade crumbling infrastructure and a desire among pension funds for steady, long-term investments.

There is also a lot of money on the sidelines. Osborne estimates that banks and investment funds probably have $100 billion of purchasing power on hand, based on capital raised and typical debt financing.

Privatization “is by no means dead. It is here to stay. The public need is too great,” he said.