Guy: Hello. I’m Guy Haselmann the host of “MIM Cuts to the Chase” podcast series. Today we will discuss Infrastructure investments.
Guy: Our guest today is Syed Ahmed, a member of the Infrastructure & Project Finance team at MetLife Investment Management. Syed and his team are responsible for transaction sourcing, originating, underwriting, and portfolio management of infrastructure assets in the United States, Canada, Europe, Latin America and Australia. Since inception, MIM’s infrastructure portfolio has grown to approximately $34.4 billion (as of December 31). Welcome Syed.
Syed: Thank you. It’s it nice to be here.
Infrastructure is a fascinating and relevant topic. There has certainly been a great deal of publicity in recent years around the need for investment and upgrades to infrastructure. When most people hear the word “infrastructure”, I bet they think roads, bridges, and tunnels. And, I know firsthand simply by driving around the greater New York region that there is great need in a bunch of areas.
With that in mind, I recently read an article that said that more than one-third of the nation’s 600,000 plus bridges need structural repair or replacement, and that over 45,000 are actually categorized as “structurally deficient[i]. I found that a terrifying thought.
But the term infrastructure is about so much more than road and bridges and such….and includes things like power grids, water control and delivery, rail freight projects, or even the cleaning-up of superfund sites, so on and so forth.
There is still so much more but that is some context for our discussion. But first, I’ve heard you talk about something that you are deeply involved in, which you refer to as “social infrastructure”. Can you tell us what that is and how it differs from some of the things I just mentioned?
Sure. Thank you for the question. Social Infrastructure assets include hospitals, schools, court houses, wastewater — basically all things that support local economies. There is great need for, and I’d even say a desire, for these types of projects and upgrades for long term sustainability. The need is more than just the older age of the existing assets, but it’s also a result of shifting population trends and a result of the tremendous advancements in technology as well.
Guy: It seems to me that there should be great support, and as you said “desire”, for Social Infrastructure Projects basically because those assets directly impact people and do so on an almost daily basis?
That is exactly right and a good observation. Social Infrastructure plays an important role in development and maintenance of a society’s quality of life. After all, who doesn’t want to live in a nice community that offers amenities like modern hospitals and schools or proactively protects against flooding or wastewater. You can see the direct, tangible impacts of those projects that benefit and improve local communities which is personally very rewarding.
Guy: That is great to hear. I can sense your passion. The rationale for these projects sounds easy and makes sense, but it must take a lot to get the project done – I know your involvement covers sourcing and underwriting projects as an investment. So, my question is how are deals typically structured and how are the projects paid for?
Historically, most U.S. investment into social infrastructure has largely been funded by on-balance sheet municipal financing. But the US has been learning from its friends in Canada, Australia, and the U.K. where social infrastructure assets have been mostly supported over the past 3 decades by Public Private Partnerships or PPP’s.
The US has certainly been late to the game, but has the potential to become one of the largest markets in the world given the sheer size of its infrastructure and the appetite for private capital. As a matter of fact, the US now ranks 4th in the word by deal value for Greenfield or new/development construction PPP’s.
Guy: Why was the US so slow in adopting PPP’s and how do they work?
Let me answer the second part of your question first. PPP’s are exactly as the name implies: a partnership between public and private sector for the delivery of a public asset. This model allows each side to do what it is best at. The model allows the public sector to transfer key risks over to the private sector – typically including construction, financing, operational and/or maintenance risks.
The transfer of the main projects risk to the private sector is potentially the biggest benefit simply because the private sector is generally better equipped to handle them. The partnership is not an asset privatization as there’s no transfer of ownership of the assets to the private sector. The public authority retains all ownership.
Public authorities often run a “value for money” exercise to help convince their constituents on the time value of money on using a PPP relative to a standard model.
As to the first part of your question, the US was slow to adopt PPPs I believe because of the perception that the public and private sectors don’t want the same things. There have been situations in the past where the strategy around asset privatizations did not execute as planned
There has also been an evolution in understanding the PPP process and the time value of money it often adds as a benefit. In addition, there are several more layers of government in the US when compared to other countries which raise complexities on funding. For example, there have been PPPs procured by the federal government, the State government, and even down to county and city level
Guy: So, that brings me back to my earlier question of who pays for it? How does the flow of money work in a PPP and how does funding flow into the project?
Compared to economic infrastructure such as airports or toll roads, social infrastructure typically doesn’t generate the same level of revenues to allow for self-funding. The most widely used funding model for social PPP’s is something called the availability-based model. Under the availability-based model, the private and public partners negotiate a long-term concession agreement whereby the public authority agrees to pay a fixed periodic payment to the private entity for the delivery, operations, and maintenance of the asset. This allows the public authority to source the project without massive upfront costs that would likely stress its balance sheet. These projects are typically bid for by multiple private entities allowing the public authority to pick the best bid, not only based on economics, but also the technical qualifications of the team.
Additionally, performance measures are placed on the private sector that seek to ensure assets are delivered on-time, on-budget and maintained at the highest quality. At the end of the concession period, the asset is required to be handed-back to the public authority under a pre-determined asset condition.
Guy: Have new trends developed or have technological advancements increase efficiencies?
Yes absolutely. Newer projects look to capitalize on modern technologies and responsible design principals. Earlier I mentioned how I find it personally rewarding to be involved with projects that are viewed as a public good bettering communities. The trend now, certainly for me and my group, are for projects to commit to best practice standards like those put forth by the UN Responsible Investing Network. There are ways to complete these projects and investments that take Green initiates, and impact guidelines into account, and it is new technologies that are used. In addition, certain authorities also require contractors to meet diversity-based qualifications, enhancing the social elements of projects. I believe committing to those standards is how you do it right and do it responsibly - and that is rewarding.
Guy: Can you give us an example of a deal?
Last year, our private’s capital team led a PPP transaction that we believe is the first of its kind involving a public school system in the US. We loaned 203.5 million dollars, which was a little less than one-half of the full financing package, to support the future education needs of the district. This district is the second largest public school system in the state and a top 20 in the US.
They were seeking financing to replace aging school building. The design-build project also involved the demolition of four aging schools and the simultaneous construction of six new schools which will provide a modern learning environment for approximately 8,000 students.
The project will also employ over 4,000 people and requires at least 30% of the contract value to be allocated to local and minority-owned businesses.
Guy: That is a good place to end. Thank you for sharing your thoughts and insights with us today.
Syed: Thank you.
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