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The Financial Engineering of Infrastructure Privatization

Author

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  • Philip Ashton
  • Marc Doussard
  • Rachel Weber

Abstract

Problem, research strategy, and findings: Leasing government infrastructure to private investors has been proposed as a practical way to increase both public revenue and investment in aging facilities, yet questions remain regarding lease value. In particular, some recent private auction bids surpassed government's lease estimates for U.S. roads and parking systems by hundreds of millions of dollars. We argue such discrepancies are largely explained by the use of structured finance or financial engineering techniques; these lower capital costs and maximize quick investor payouts, yet are often ignored in lease agreements because governments do not understand them. Our approach models the separate effect of several deal parameters on the investment return of a hypothetical tolled facility. We find even modest financial engineering (such as interest rate derivatives and swaps, deferred payment sweeps, or mark-to-market accounting practices) increases the current value of future facility revenues far more than changes in lease length, tolls, or operating costs. The public sector undercharges for its infrastructure when it ignores how private investors package and assess future revenue. Takeaway for practice: When leasing public facilities, governments would be smart to better understand potential investors’ capital structure and financial engineering strategies. Doing so avoids leaving money on the table; it also reduces the risks of future underperforming assets. Research support: None.

Suggested Citation

  • Philip Ashton & Marc Doussard & Rachel Weber, 2012. "The Financial Engineering of Infrastructure Privatization," Journal of the American Planning Association, Taylor & Francis Journals, vol. 78(3), pages 300-312.
    • Handle: RePEc:taf:rjpaxx:v:78:y:2012:i:3:p:300-312
    DOI: 10.1080/01944363.2012.715540
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    Cited by:

    1. Kevin Fox Gotham, 2016. "Re-anchoring capital in disaster-devastated spaces: Financialisation and the Gulf Opportunity (GO) Zone programme," Urban Studies, Urban Studies Journal Limited, vol. 53(7), pages 1362-1383, May.
    2. Michael Pryke & John Allen, 2019. "Financialising urban water infrastructure: Extracting local value, distributing value globally," Urban Studies, Urban Studies Journal Limited, vol. 56(7), pages 1326-1346, May.
    3. Spies-Butcher, Ben & Bryant, Gareth, 2024. "The history and future of the tax state: Possibilities for a new fiscal politics beyond neoliberalism," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 98(C).
    4. Yun Li & Ming Xu & Juncheng Dai & Zhenshan Yang & Zhe Cheng, 2023. "Examining the Impact of Infrastructure Financialization on Uneven Regional Development: Evidence from China," Land, MDPI, vol. 12(3), pages 1-12, March.
    5. Jenny McArthur, 2024. "Infrastructure debt funds and the assetization of public infrastructures," Environment and Planning A, , vol. 56(3), pages 681-698, May.
    6. Heather Whiteside, 2019. "Advanced perspectives on financialised urban infrastructures," Urban Studies, Urban Studies Journal Limited, vol. 56(7), pages 1477-1484, May.
    7. Phillip O’Neill, 2019. "The financialisation of urban infrastructure: A framework of analysis," Urban Studies, Urban Studies Journal Limited, vol. 56(7), pages 1304-1325, May.
    8. Pierce, Gregory & Willson, Hank & Shoup, Donald, 2015. "Optimizing the use of public garages: Pricing parking by demand," Transport Policy, Elsevier, vol. 44(C), pages 89-95.
    9. Philip Ashton & Marc Doussard & Rachel Weber, 2016. "Reconstituting the state: City powers and exposures in Chicago’s infrastructure leases," Urban Studies, Urban Studies Journal Limited, vol. 53(7), pages 1384-1400, May.
    10. Laura Deruytter & Ben Derudder, 2019. "Keeping financialisation under the radar: Brussels Airport, Macquarie Bank and the Belgian politics of privatised infrastructure," Urban Studies, Urban Studies Journal Limited, vol. 56(7), pages 1347-1367, May.
    11. Martijn Hurk, 2016. "Learning to contract in public–private partnerships for road infrastructure: recent experiences in Belgium," Policy Sciences, Springer;Society of Policy Sciences, vol. 49(3), pages 309-333, September.
    12. Martijn van den Hurk & Marlies Hueskes, 2017. "Beyond the financial logic: Realizing valuable outcomes in public–private partnerships in Flanders and Ontario," Environment and Planning C, , vol. 35(5), pages 784-808, August.
    13. N/A, 2020. "Book symposium: Pike et al.’s Financialising City Statecraft and Infrastructure," Environment and Planning A, , vol. 52(4), pages 790-813, June.
    14. Callum Ward, 2021. "Contradictions of Financial Capital Switching: Reading the Corporate Leverage Crisis through The Port of Liverpool's Whole Business Securitization," International Journal of Urban and Regional Research, Wiley Blackwell, vol. 45(2), pages 249-265, March.
    15. Bresnihan, Patrick, 2016. "The bio-financialization of Irish Water: New advances in the neoliberalization of vital services," Utilities Policy, Elsevier, vol. 40(C), pages 115-124.
    16. Clifton, Judith & Fuentes, Daniel Diaz & Warner, Mildred, 2016. "The loss of public values when public shareholders go abroad," Utilities Policy, Elsevier, vol. 40(C), pages 134-143.
    17. Mitra, Sovan & Date, Paresh & Mamon, Rogemar & Wang, I-Chieh, 2013. "Pricing and risk management of interest rate swaps," European Journal of Operational Research, Elsevier, vol. 228(1), pages 102-111.
    18. Peter O’Brien & Phil O’Neill & Andy Pike, 2019. "Funding, financing and governing urban infrastructures," Urban Studies, Urban Studies Journal Limited, vol. 56(7), pages 1291-1303, May.

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