The Promise and Perils of Infrastructure Privatization: The Macquarie Model

204 Pages·2009·3.09 MB·English

by  Lewis D. Solomon (auth.)

The Promise and Perils of
Infrastructure Privatization
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The Promise and Perils of
Infrastructure Privatization
The Macquarie Model
Lewis D. Solomon
THE PROMISE AND PERILS OF INFRASTRUCTURE PRIVATIZATION
Copyright © Lewis D. Solomon, 2009.
Softcover reprint of tthe hardcover 1st edition 2009 978-0-230-61930-2
All rights reserved.
First published in 2009 by
PALGRAVE MACMILLAN®
in the United States—a division of St. Martin’s Press LLC,
175 Fifth Avenue, New York, NY 10010.
Where this book is distributed in the UK, Europe and the rest of the world,
this is by Palgrave Macmillan, a division of Macmillan Publishers Limited,
registered in England, company number 785998, of Houndmills,
Basingstoke, Hampshire RG21 6XS.
Palgrave Macmillan is the global academic imprint of the above companies
and has companies and representatives throughout the world.
Palgrave® and Macmillan® are registered trademarks in the United States,
the United Kingdom, Europe and other countries.
ISBN 978-1-349-38199-9 ISBN 978-0-230-10141-8 (eBook)
DOI 10.1057/9780230101418
Library of Congress Cataloging-in-Publication Data
Solomon, Lewis D.
The promise and perils of infrastructure privatization : the Macquarie
model / Lewis D. Solomon.
p. cm.
ISBN 978-1-349-38199-9 (alk. paper)
1. Infrastructure (Economics)—Management. 2. Privatization. I. Title.
HC79.C3S64 2009
338.9(cid:2)25—dc22 2009009523
A catalogue record of the book is available from the British Library.
Design by Newgen Imaging Systems (P) Ltd., Chennai, India.
First edition: December 2009
10 9 8 7 6 5 4 3 2 1
Contents
Acknowledgments vi
1 Introduction 1
2 The Rationale for Privatizing Infrastructure Assets 11
3 Macquarie: The Early Years, Its Culture, and Its Growth 25
4 Macquarie: Its Current Operations and Its Growth Strategy 37
5 Macquarie: The Creation of Its Infrastructure Funds 53
6 Macquarie and the Privatization of Highways
in the United States 83
7 Macquarie and the Privatization of Airports Globally 109
8 The Macquarie Model: Looking to the Future 137
Notes 153
Index 193
Acknowledgments
As is the case with most books one person is listed as the author, but many
made it happen. Without the tireless efforts of Jason J. Hawkins, Reference
Librarian, The Jacob Burns Law Library, The George Washington
University Law School, this work would not have come to fruition.
Stephen Syski, J.D. 2009, The George Washington University Law School,
assisted with research and citation checking. Nell Taylor-Christy diligently
inputted the manuscript and helped with the index.
Chapter One
Introduction
This is the corporate biography of the Macquarie Group Ltd., an
extraordinary Australian firm, set in the context of the global privatiza-
tion of infrastructure. It also provides a policy analysis of promise and
perils of infrastructure privatization, focusing on toll roads and bridges
as well as airports, worldwide and particularly in the United States.
Beyond the scope of the book is the privatization of social infrastruc-
ture (healthcare, long-term care, educational, and correctional facili-
ties), communications infrastructure (broadcast transmission networks
and mobile telephone towers), and regulated utilities (gas, water and
electricity transmission, storage, and distribution).
Highways, bridges, and airports may appear boring, rather prosaic,
but they are the heart of a nation’s capitalist economy—past, present,
and future. As an Urban Land Institute report concluded, “Sound
infrastructure forms the backbone that is critical to maintaining and
enhancing regional economic growth, competitiveness, productivity,
and quality of life.”1
The global economy pressures nations to upgrade their infrastruc-
ture to remain competitive and gain advantages. Moving goods and
people internally with efficient access to global pathways, such as air-
ports, is essential in the twenty-first century.
Macquarie has become one of Australia’s greatest corporate suc-
cesses, a model for a company managing to compete spectacularly on
the world stage. From its modest beginnings as the downunder out-
post of a British merchant banking company, Macquarie, through its
various investment funds, achieved preeminence as the world’s leading
nongovernmental owner or lessee of infrastructure assets. It has made
a significant difference in how we view infrastructure, its ownership,
management, and operation. The infrastructure fund model, pioneered
by the Macquarie, has spread around the globe.
2 / infrastructure privatization
One of the biggest drivers of the firm’s business is its securiti-
zation of infrastructure assets. Macquarie bundles steady-return
infrastructure assets across the world into investment funds, both listed
on stock exchanges and unlisted. The firm now manages more than
A$239 b illion of assets with approximately A$149 billion devoted to
infrastructure assets.2 It manages thirty-five infrastructure funds, cov-
ering the investment spectrum.3 Looking to equity markets to provide
liquidity for investors, nine of its infrastructure funds are listed on
five stock exchanges, the New York, Australian, Toronto, Korean, and
Singapore exchanges. It also manages twenty-six unlisted infrastruc-
ture funds open only to pension funds, other institutions, and accred-
ited investors (those with certain asset and income levels).
Through the funds it controls, Macquarie owns or leases 118 non-
real estate businesses around the world, in 26 countries.4 These include
highways (Chicago Skyway and the Indiana Toll Road), airports in
Sydney and Brussels, seaports (Changshu Xinghua in China), water
distribution (Thames Water Co. [Southeastern U.K.]), and parking
lots (in Manhattan). It has become the biggest toll road operator in the
globe and the second largest private investor in airports.
Macquarie infrastructure assets affect people’s lives. Each day more
than 100 million people use essential services provided by Macquarie
funds, approximately 2.3 million cars drive on Macquarie managed toll
roads, each year 81 million people pass through its airports, and some
82,000 people work at its businesses.5
Despite its aggressive reputation, today Macquarie is cognizant
of its responsibilities. As Allan E. Moss, then Macquarie’s CEO and
Managing Director put it, “The big difference between the 1980s and
the period we’re in now [2007] is that it is far more important to us
that we be conscious of our community responsibility.”6 The firm real-
izes the importance of the infrastructure it owns or leases. One disaster
could well end the entire privatization party, not only for Macquarie
but also for other infrastructure privatization players, such as Goldman
Sachs, a leading U.S. investment bank.
Once labeled by Financial Times and Barron’s, respectively, as the
“upstart bank run by Australians,”7 and the “Aussie Upstart,”8 today
as a financial services phenomenon, Macquarie has exported its
unique model around the world. Admirers have come up with a noun
“Macquisitions” to describe its forays into a toll road in Chicago or
an airport in Brussels. To succeed in investment banking in Australia,
introduction / 3
a small domestic market compared to the United States or Europe,
Macquarie needed to be innovative. In searching the globe for deals, it
operates from a simple assumption: there is money to be made at every
step of a transaction, not just one step.
Macquarie was among the world’s first financial institutions to rec-
ognize infrastructure investments as an asset class and create funds
to hold them. Infrastructure assets generally are monopoly or quasi-
monopoly businesses and the investment funds it sets up and man-
ages are loaded up with debt. It takes the funds public or privately sells
shares in them. In short, Macquarie has pioneered the bundling and
securitizing of infrastructure into diversified portfolios and figured out
how to take new fees at every step of the process.
Macquarie developed an integrated model, a one-stop shop, with its
units advising, arranging, securing funding, executing, and managing
as many parts as possible and taking care of each step of every com-
plex deal. This model allows Macquarie to pick up multiple-fee streams
along the way.
The potential for fees in infrastructure deals, even if market-based,
at arm’s length and approved by independent directors, is astound-
ing. Macquarie advises public sector bodies that are considering the
construction of a new facility or the privatization of an existing asset.
It takes fees for originating, advising, underwriting, and serving as
the lead manager of a deal. It takes more fees for helping arrange the
financing for an asset acquisition and raising funds that others invest.
Once an asset is packaged into a fund, it earns management fees, say
1.0 to 1.5 percent of a fund’s value, and incentive fees. The firm takes
a healthy (typically 20 percent), hedge fund-type, performance fee on
a fund’s profits above a specified threshold level that varies based on
benchmarks appropriate to the assets in a fund and whether a fund is
listed on a stock exchange or not.
The Macquarie Model focuses on yield-oriented infrastructure assets
as investments that meet the needs of pension funds and other financial
institutions with long-term liabilities. The assets possess the following
attributes: highly predictable, stable, long-term cash flows; slight com-
petitive pressures with relatively high barriers to entry, preferably having
a monopoly or nearly so; and high revenue certainties with low risk and
volatility. Predictable cash flows are based on relatively fixed operating
costs, reasonably low ongoing capital expenditure requirements, and
contractual mechanisms for rate increases. As virtual monopolies, with