Paving the Way for Profits

The process by which construction crews grind up rock with water to create cement is a relatively simple and ancient one. The process by which cement is turned into money for cash-strapped states and into a new asset class is a little more complicated, much newer--and far more controversial.

Across the country, from the Great Lakes to the shores of Southern California, the highways, roads, tunnels and parking garages that were built at public expense and for public benefit are being sold or leased to corporations. And in a related development, states with little cash but a big need for new infrastructure are partnering with private investors who are eager to ribbon states with toll roads. What's driving this is supply and demand, or rather demand and supply.

First, the supply. This summer's bridge collapse in Minneapolis tragically illustrated how badly U.S. infrastructure is in need of repair. In 2005, the American Society of Civil Engineersestimated that $1.6 trillion is needed over a five-year period to bring the nation's vast infrastructure network up to good condition. The Federal Highway Administration2006 report says $79 billion a year is needed just to maintain highways and bridges and another $131.7 billion is required annually to improve them. But from the federal government in Washington down to municipal administrators in Michigan, money for new roads is hard to come by. Given their harsh fiscal realities, it's easy to see why states would rather earn cash from their roadways than spend money on them.

The demand? It's coming from pools of capital forming around the globe, seeking safe havens that provide consistent, reliable returns. For those investors, toll roads seem the way to go. The reasons: toll collection is done electronically and efficiently, traffic is rising steadily and Americans have generally not changed their driving behavior despite rising gas and toll prices. There are several major players looking to profit by paving more of America. Among the biggest are Macquarie, a massive Australian financial conglomerate, and Spanish roadway operator Cintra. But Wall Street firms aren't far behind, and investment houses like Morgan Stanley are forming funds to invest in infrastructure in the United States and around the world.

The recent trend to monetize America's infrastructure started in 2005, when Chicago Mayor Richard Daley decided to sell the Chicago Skyway, the 7.8-mile toll road that connects the Dan Ryan Expressway to the Indiana Toll Road. Just months after a $250 million modernization was completed, Chicago reaped a $1.83 billion windfall by selling a 99-year lease on the toll road to Macquarie.

Indiana Gov. Mitch Daniels followed suit the following year by selling the Indiana Toll Road, which traverses the northern part of the Hoosier state from the Illinois border to Ohio, to a consortium of Macquarie and Cintra. The price tag: $3.8 billion for a 75-year lease. Not to be outdone, Chicago last fall agreed to sell 99-year leases on four city-owned parking garages to Morgan Stanley and a private company for $563 million to Morgan Stanley's Infrastructure Group.