This article is sponsored by Fengate Asset Management
Fengate Asset Management is an alternative investment manager focused on infrastructure, private equity and real estate strategies, with $8 billion of capital commitments under management. Fengate Infrastructure has a portfolio of over 45 assets, valued at more than $20 billion.
In the infrastructure sector, the firm’s investments are split roughly 25 percent in Canada and 75 percent in the US, and focus on the energy transition, digital infrastructure and social and transport infrastructure. The social and transport group is led by managing director Mac Bell.
Bell notes that Fengate groups social and transport together because the underlying assets in both sectors tend to be procured through the P3 (public-private procurement) model. This means that – despite technical differences – there are similarities in the contractual structure, financing and legal aspects. It also means the firm can act as a developer, rather than being a hands-off manager, which is particularly attractive.
What do you see as the advantages of the P3 model?
The great thing about the P3 model is that it allows a lot of risk transfer. Effectively, governments which might be strapped for resources can take an entire project and say “over to you” to the private sector, whether that is building a whole new airport terminal or whatever other essential infrastructure they need.
For the taxpayer, even when you see a project with significant delays, that is running way over schedule and over budget, the good news if it has been procured through the P3 model is that these deficiencies are being absorbed by the private sector, not by taxpayers. From the perspective of the private sector firms taking on all the risk, obviously they also get compensated for that.
I also think there is a significant benefit to the model in terms of innovation, because when the private sector is challenged with coming up with something which involves output specifications, it has to come up with innovations in design. Ultimately, that benefits the public sector and all taxpayers.
What is going on in the P3 market in the US right now?
We see some very active markets, with a lot going on in California, Florida and Colorado, but it really varies on a state-by-state basis. There is a specific and very focused expertise needed for these projects.
Some states have developed the necessary expertise or otherwise have high-quality consultants, such as those we expect to be advising on Denver Airport. A state needs to have P3-enabling legislation and sufficient human resources to consider P3 procurements, and to act on decisions and develop contracts.
We don’t see the kind of centralised body in the US that we might see in Canada. There is a team of people to help the government of Ontario to run procurement projects, but we don’t have anything comparable in the US, which can be a challenge because the lack of human resource can become a bottleneck.
Under Joe Biden, the US federal government has been very supportive of transportation projects. We benefit not so much from tax incentives, but from the low-cost loans and grants channelled through the Build America Bureau.
This means that there is plenty of capital available to enable projects, but the human resources bottleneck can frustrate the private sector. It would be really helpful if the federal government in the US provided expertise through a centre of excellence; politicians could do more
here.
Politicians obviously do play an important role in the P3 procurement process. To what extent is political change a risk factor for investors?
Political change is always a risk factor, whether at the federal level, the state level, the county level or the city level. There might be different platforms and different agendas that could lead to changes in the project procurement, and sometimes a new government might be more protectionist and favour certain jurisdictions over others.
So, political change is something that we always watch closely, but generally the opportunity in infrastructure is so big it overrides political considerations. And the opportunity really is big – the required refurbishment of ageing American infrastructure is a massive opportunity for investors, so we expect there to be a huge need for private capital.
The most important thing for politicians in the P3 process is to maintain balance and fairness. The risk transfer has to be fair and to be something that the private sector is able to get to grips with and be willing to bid upon.
That balance is always in flux. Sometimes investors are forced to absorb risks that are too extreme, and we have seen investors lose money on certain projects. There must always be room for negotiation around that, and it is really beholden on the sector as a whole, both the private and the public side, to get it right.
If the public sector doesn’t adjust risk to the appropriate level, there will be fewer bidders. Of course, in some ways each project has its own specific risks. For something like light rail transit we have to worry about subsurface conditions, utility relocations and other such challenges. There isn’t a rinse and repeat to these projects.
Where are you seeing the greatest opportunities at the moment?
We are very excited about the redevelopment of airports in the US, in particular, because of the ageing nature of the infrastructure which I described earlier. Beside a major redevelopment at Los Angeles International Airport, we have seen redevelopments at New York airports such as John F Kennedy International Airport and LaGuardia.
With our investments in airports, it is all about modernisation rather than depending on increases in passenger numbers. I know others are getting involved in developments such as Terminal 6 at JFK, which do rely on an increase in traffic, but we are not really in that business; we are modernisers.
Across the US, we are going to see new terminals and we are going to see new consolidated rental car centres and other important airport infrastructure to help a better customer experience. The means of moving people around an airport will also need to be modernised, such as with people movers or rapid buses.
Sustainability is important here. A lot of the people mover projects are all about electrification of ground transportation. And obviously that is something that appeals to our investors given their increasing focus on environmental issues.
What other opportunities would you advise keeping an eye on?
There are several major rail projects happening in California and Canada. There is also the chance of a new, very large high-speed electric train project happening between Toronto and Montreal, and potentially on to Quebec City and Windsor. There are also a couple of other potential larger electrification projects in California.
These are very complex projects that require a lot of stakeholders around the table. And, sized at tens of billions of dollars, they are also very large projects, which makes the future very exciting.
The P3 outlook in general is exciting. There is so much infrastructure to be delivered in North America that the P3 model is essential, so I think this means the sector itself is on the cusp of getting far larger in dollar terms and that we are going to see a lot more activity in the transportation sector in particular.
However, this will only happen if there is that fairness and balance. If you want to know what keeps me up at night, it is that: worrying about whether governments feel they are being treated fairly, and if investors are getting a fair pricing on the transfer risk.
What is the role of new technologies in maintaining a fair balance for the private sector?
It is very important. Once a project has achieved substantial completion, typically the operations and maintenance contractor is on risk for project performance from that moment forward. Often what compels that contractor to be involved in the P3 sector is an opportunity to get their own equipment installed in the project.
For example, this is the case with groups like Johnson Controls or Honeywell, which are big equipment manufacturers as well as operation and maintenance contractors. For them, the role of technology is very important in continuously driving down the costs for which they are on the hook.