1. Palisades China Group Palisades Consulting Group, Inc. Foreign Direct Investment in US Transportation Infrastructure Eva Lerner-Lam, President Palisades Consulting Group, Inc. and Palisades China Group, LLC Presented at the 2011 ASCE Annual Conference Beyond Financial Engineering: Building, Operating, and Maintaining Transportation Infrastructure Memphis, TN October 22, 2011

2. Palisades China Group Palisades Consulting Group, Inc. Outline Recent History of Foreign Direct Investment in Transportation Infrastructure in the US Current Situation: “Disappointing” Reasons for Disappointment What is the US Public Looking for? Who Are “Foreign Investors”? BRIC Sovereign Wealth Funds are the New Global Investors What Foreign Investors Look For Opportunities and Challenges Priming the Pump In Summary

3. Palisades China Group Palisades Consulting Group, Inc. Recent History of Foreign Direct Investment in the US In a 2009 study 1, NJ PIRG concluded that: “Toll road privatization is becoming increasingly prevalent in the United States: Between 1994 and early 2006, $21 billion was paid for 43 highway facilities in the US By the end of 2008, 15 roads had been privatized in 10 different states Currently, approximately 79 roads in 25 states are under consideration for some form of privatization.” 1 http://cdn.publicinterestnetwork.org/assets/H5Ql0NcoPVeVJwymwlURRw/Private-Roads-Public-Costs.pdf

4. Palisades China Group Palisades Consulting Group, Inc. Current Situation: “Disappointing” Severe public finance constraints on maintenance and upgrading of transportation infrastructure made up-front cash payments from private investors seem attractive However, many privately-funded projects are not performing well financially, creating major uncertainties for investors, public agencies and taxpayers

5. Palisades China Group Palisades Consulting Group, Inc. Reasons for Disappointment Traffic projections were greatly overestimated Compensation and non-compete terms in privatization agreements guaranteed returns to investors at taxpayer expense Agreements distorted public policy decision- making for emergency, traffic and environmental management

6. Palisades China Group Palisades Consulting Group, Inc. What is the US Public Looking For? Control over regional decisions about transportation planning and management Fair value so future toll revenues won’t be sold off at a discount Deals that do not last longer than the uselife of an asset State-of-the art maintenance and safety standards instead of statewide minimums Transparency to ensure proper public vetting of privatization proposals Full accountability in which the legislature must approve the terms of a final deal, not just approve that a deal be negotiated. NJPIRG Education Fund (Spring 2009)

7. Palisades China Group Palisades Consulting Group, Inc. What is the US Public Looking For? Knowledgeable and accountable technical and political leadership Knowledgeable and accountable technical and political leadership

8. Palisades China Group Palisades Consulting Group, Inc. Who Are “Foreign Investors”? Sovereign Wealth Funds from the Middle East, Europe and Asia (In 2010, SWFs from the Middle East held 44% of all SWF assets under management 2 ). Today, the BRIC SWE’s have rapidly growing foreign exchange accounts and foreign asset holdings—they are the “new kid on the block” Taken together, SWF’s represent trillions in available funds for US infrastructure (foreign assets under management of SWFs could reach US$6–10 trillion by 2013 3 2 Rebuilding America: The Role of Foreign Capital and Global Public Investors, Brookings Institute, March 2011 3 Sovereign Wealth Fund Institute, http://www.swfinstitute.org/research/imfswfreport.pdf

9. Palisades China Group Palisades Consulting Group, Inc. BRIC Sovereign Wealth Funds are the New Global Investors

10. Palisades China Group Palisades Consulting Group, Inc. BRIC Sovereign Wealth Funds are the New Global Investors

11. Palisades China Group Palisades Consulting Group, Inc. What Did Foreign Investors Look For? Pre-2008, SWFs looked for: – 20-30% returns – Such high returns required complex, opaque agreements involving accelerated depreciation tax benefits, taxpayer guarantees of “stabilized” revenues, non-compete restrictions that limit public sector management of emergencies, traffic and the environment

12. Palisades China Group Palisades Consulting Group, Inc. What are Foreign Investors Looking for in a Post-2008 World? Today’s SWFs are looking for: – In general: Long-term investment horizons, capital preservation, asset diversification, predictable returns, and the mitigation of political risk – For transportation infrastructure projects: Transparent, project-finance deals (passive minority equity and bond investments)

13. Palisades China Group Palisades Consulting Group, Inc. What are Foreign Investors Looking for in a Post-2008 World? With global economic crises continuing unabated, most SWFs are now seeking more traditional, conservative places to put cash Private Activity Bonds (PABs) are increasing in popularity Timing may be right for civil infrastructure investments by SWFs

14. Palisades China Group Palisades Consulting Group, Inc. US Infrastructure Projects Sovereign Wealth Funds Cash Our Projects, Their Cash ? “highest and best use”

15. Palisades China Group Palisades Consulting Group, Inc. US Infrastructure Projects Sovereign Wealth Funds Cash $ Our Projects, Their Cash “highest and best use”

16. Palisades China Group Palisades Consulting Group, Inc. US Infrastructure Projects Sovereign Wealth Funds Cash $ Our Projects, Their Cash “highest and best use”

17. Palisades China Group Palisades Consulting Group, Inc. Opportunities and Challenges Opportunities: New era of infrastructure needs and available cash from SWFs Challenges: Understanding the economic, financial and political motivations for foreign investment by SWFs

18. Palisades China Group Palisades Consulting Group, Inc. Priming the Pump Evolve a “dynamic twenty-first century policy architecture” (Brookings Institute, March 2011) Encourage a “Global Public Investors Roundtable” (Ibid)

19. Palisades China Group Palisades Consulting Group, Inc. Priming the Pump Civil Engineers: Engage, and demand a seat at that Roundtable

20. Palisades China Group Palisades Consulting Group, Inc. Priming the Pump Knowledgeable and accountable technical and political leadership Knowledgeable and accountable technical and political leadership

21. Palisades China Group Palisades Consulting Group, Inc. In Summary America’s infrastructure funding needs are great Post-2008 financial conditions are changing the landscape in private sector infrastructure investing Sovereign Wealth Funds owned by BRICs are growing substantially; they are new, and want to engage We (as a nation, and as a profession) should move slowly, but deliberately, toward engagement directly with SWFs

22. Palisades China Group Palisades Consulting Group, Inc. References Crumbling Infrastructure, Crumbling Democracy: Infrastructure Privatization Contracts and Their Effects on State and Local Governance, Ellen Dannin. http://www.law.northwestern.edu/journals/njlsp/v6/n1/2/2Dannin.pdf BRIC Sovereign Wealth Funds: The External Wealth of Governments, Deutsche Bank, September 24, 2010. https://www.dws-investments.com/EN/docs/research/BRICsovwealthfunds.pdf Private Roads, Public Costs: The Facts About Toll Road Privatization and How to Protect the Public, Phineas Baxandall, Ph.D., U.S. PIRG Education Fund, Spring 2009. http://cdn.publicinterestnetwork.org/assets/H5Ql0NcoPVeVJwymwlURRw/Private-Roads-Public- Costs.pdf Privatization and the Sale of Tax Revenues, Julie A. Roin. http://www.minnesotalawreview.org/wp-content/uploads/2011/06/Roin_PDF.pdf Rebuilding America: The Role of Foreign Capital and Global Public Investors, Monday, October 17, 2011. http://www.brookings.edu/papers/2011/0311_sovereign_wealth_funds.aspx

23. Palisades China Group Palisades Consulting Group, Inc. Thank You!