"Carlyle's new fund allows big foreign investors to purchase America's infrastructure indirectly. "
Thomas Heath and David Cho
The District buyout firm has raised $1.15 billion for an infrastructure fund that it will use to partner with federal, state and local governments in running vital public projects in the United States, including water and sewer systems, bridges, tunnels, highways and airports.
From the long lines at Dulles International Airport to Capital Beltway traffic and Loudoun County growth pains, Carlyle and other investment firms see themselves as part of the solution for governments facing declining tax revenues and a troubled municipal bond market that has left them unable to complete or repair billions of dollars in public works projects.
A group of private firms closed a deal recently to build high-occupancy vehicle toll lanes on the Beltway in Virginia. And Carlyle would love to participate in an expansion of Interstate 270 in Montgomery County that could ease traffic congestion, said Robert Dove, who is co-managing Carlyle Infrastructure Partners, as the fund is known. Dove says his team can run most airports, highways and water systems better than the public authorities and governments now doing the job, and make a profit for investors to boot.
Carlyle would even consider putting money into the controversial Dulles Rail project, which does not have money from private sources. "If Governor Tim Kaine and state and local leaders decide to move ahead with private investment, as the hometown firm, Carlyle would be particularly interested in partnering with them and committed to the project's success," Barry Gold, a Carlyle managing director, said yesterday.
But transportation analysts say they expect opposition to the idea of government handing over key roads, ports and utilities to profit-driven private firms that do not have to disclose much about their business. The issue is also raising questions over who would be responsible for the security and safety of such projects.
An attempt by DP World, a state-owned company in the United Arab Emirates, to buy the port management businesses at major U.S. seaports two years ago incited widespread political opposition over security concerns, leading DP World to withdraw.
Carlyle's new fund allows big foreign investors to purchase America's infrastructure indirectly. Last summer Carlyle sold a 7.5 percent stake to the oil-rich emirate of Abu Dhabi for $1.35 billion. But Abu Dhabi has no say in Carlyle's day-to-day operations or investment decisions, Carlyle officials say.
Carlyle is already under attack from the Service Employees International Union over its takeover of the Manor Care nursing home chain, which SEIU has called a relentless pursuit of profit. James Bellessa, a utilities analyst with D.A. Davidson & Co., in Seattle, said Carlyle can expect similar opposition from unions and politicians if it starts buying the nation's infrastructure.
"How do they feel about a bunch of billionaires making a buck off roads and bridges and ports that municipalities built?" Bellessa said, voicing the view of critics. "Isn't there a concern that the drive for profit might outweigh public safety, security issues or even whether public employees could get fired? It raises issues of national security and safety as well as whether Carlyle could run it better."
Dove said, however, that unions could benefit from construction jobs on projects that might not have been built without the aid of private capital. He pointed out that union and public employee pensions will invest and profit from the fund, and governments will always oversee security and quality of service. "It's not like they are handing over the keys and walking away," Dove said. "These are long-term partnerships."
Carlyle, with more than $75 billion in assets under its control, views its foray into infrastructure as a low-risk way to make annual returns of about 15 percent. That is well below the high-flying profits Carlyle has earned from some of its traditional buyout funds. But turmoil in the credit markets has squeezed returns on Wall Street, and many of Carlyle's clients are seeking low-risk, lower-return investments.
The company hasn't sealed any infrastructure deals yet, but a spokesman said several are in the works.
"What we bring is capital," Dove said. "Maryland could raise taxes, put up sales tax and raise municipal bonds to build the intercounty connector. An alternative could be to say to the private sector, 'You build that, you run it in partnership with us and we [Maryland] will use the money to build schools, hospitals or health-care facilities.' Virginia is a state that does this now."
Carlyle raised the $1.15 billion for its infrastructure fund in 15 months from clients around the world. That money will allow Carlyle to borrow another $2.5 billion from banks to buy infrastructure. The firm hired John Flaherty, who was senior assistant to then-Transportation Secretary Norman Y. Mineta, to help run the operation and look for opportunities to partner with utilities and transportation agencies.
Preference for Partnership
Some toll roads, such as the Dulles Greenway, are owned and managed by private companies. But the push by private equity is different because buyout firms prefer to partner with municipalities rather than run the projects on their own. This type of relationship is more appealing to state and local governments and is expected to spark the privatization of huge swaths of infrastructure, transportation analyst say.
"The word is spreading and the climate of opinion has changed significantly in the last five years or so in that the public accepts tolls now much more readily than they used to," Ken Orski, who writes a newsletter on transportation and has worked in the field for more than three decades. "They don't necessarily love them, but view them as inevitable given the shortage of funds and the public's dislike of increasing the gas tax."
In October, Australia's Macquarie Bank led a foreign consortium that purchased Puget Energy in the Pacific Northwest, which regulators are expected to approve. In the first privatization of an existing U.S. road, Macquarie in 2005 led a group that paid the city of Chicago $1.83 billion for the right to operate and maintain the Chicago Skyway, a 7.8-mile toll road, for 99 years.
Other big Wall Street firms, such as J.P. Morgan Chase, Goldman Sachs and Lehman Bros., have made deals or are looking for similar ones for their investors, most of whom are pension funds, foreign governments, endowments and wealthy families and individuals.
Private companies have been running toll roads throughout Europe for decades. Toll roads in France, Italy and Portugal -- and increasingly Eastern Europe -- have turned to private firms to finance infrastructure. The Chunnel, the tunnel that runs under the English Channel, is also partly financed with private money.
"Private-equity funds invested heavily in public purpose infrastructures in Europe," Orski said. "Toll roads, water systems and other utility-like assets produce predictable streams of revenue, and this is what private equity is looking for."
Trading Contracts for Cash
As the U.S. highways age and the costs of repairing infrastructure exceed the revenue from highway trust funds, public authorities are looking to partner with private firms such as Macquarie to get upfront cash.
Virginia has been at the forefront of public-private partnerships for transportation projects, entering into long-term operations and maintenance contracts with private companies in return for upfront cash.
One project that appears off the table for now is Dulles Rail. Virginia Secretary of Transportation Pierce R. Homer said yesterday that he has received numerous unsolicited proposals and expressions of interest from private equity firms who want to run the project after it is built. But state officials turned them down and gave control of the project to the Metropolitan Washington Airports Authority, which is responsible for overseeing its financing and construction. The authority could bring private partners into the Dulles Rail project later, Homer said.
Virginia Deputy Secretary of Transportation Barbara W. Reese said her office typically seeks to finance 20 percent of its needs through public-private partnerships.
The department finalized agreements on Dec. 20 with private operators for a $1.4 billion project, including $409 million in public money, to expand the stretch of the Capital Beltway between Springfield and the America Legion Bridge.
The project includes 56 miles of roadway and high-occupancy vehicle toll lanes. It is due to open around 2013 and will be run by a consortium that includes Fluor, a private U.S. company, and a U.S. subsidiary of Australian company Transurban.
Reese said the state sets performance standards and technical requirements that the private investors must adhere to throughout the life of the contract. Unforeseen events such as weather, earthquakes or the collapse of a bridge that raise liability issues are dealt with jointly through the agreement.
"To have a private partner that is willing to help you with that is a good thing," Reese said. "It's like a marriage. You have to work together."
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