of commitment is costly to maintain and those who have asset
management roles in the funds need almost daily contact with the
managers of their assets on the ground.
If a fund is global and multisector, finding executives who are able
to improve the operations of an airport in the U.K., a transmission
line in Chile, and a waste water facility in India is difficult. This
is, perhaps, the main reason why public and private pension
funds have found it very difficult to move to direct investing in
infrastructure, even though it makes sense in theory.
“In infrastructure investing, you need
people who are more worried the day after
you have done a deal than the day before.”
In response, private funds have come into existence to provide that
level of expertise—for the price of 1.5% of assets and 20% of the
profits—but investors need to look very carefully at the DNA of the
fund managers and the firms that support them. LPs should look
for a strong commitment to fiduciary responsibility, a deep sectoral
understanding, and a compromising, political demeanor. however,
if they also are greeted by a man stroking a white cat, saying “we
have been expecting you,” perhaps they should think again.
One of the greatest paradoxes in the infrastructure space is that
the U.S. has the greatest potential as an investment destination,
yet it has proved to be the biggest disappointment. The Obama
administration is making noise about reversing this situation, but
skeptics feel that the reasons behind the stunted development of
the market are so deep-seated that it will take decades to reverse.
The U.S., until a year or two ago, had a vibrant, tax-free
municipal bond market, from which came most of the funding for
infrastructure. This precluded the ability of private-sector money
to compete. There is also a deep-seated public antipathy toward
private ownership and outright hostility to foreign ownership of
public infrastructure. A political system that elects everyone from
the President to the dogcatcher every four years leads to difficulty
when creating centralized regulatory structures which match the
20-, 30-, or 40-year life spans of infrastructure assets.
Optimists in the U.S. take encouragement from the conditions
present in other countries before their own private infrastructure
markets took off. In the U.K., Canada, Australia, and then Europe
and Latin America, there was a shift in public perception that
government was a bad owner of infrastructure. In the U.K., in the
late 1970s, the images of rubbish piled high on the streets ushered
in the Thatcher-led privatization wave. In the U.S., the theory goes,
collapsing bridges on YouTube and potholed roads will have the
same effect and diminish some of the antipathy toward private
ownership of infrastructure.
The more intractable problem is the U.S. political system. The
U.S. is not one market but 50 separate markets, and each state
has almost total leeway as to how it funds its own infrastructure.
While 28 of the 50 states now have legislation on the books to
allow public/private partnerships in infrastructure, deals are being
shelved consistently amid political wrangling.
The Pennsylvania Turnpike deal was a particularly egregious
example. After two years of negotiations, a final bidding consortium
of Citigroup, Goldman Sachs, and Spanish infrastructure giant
Abertis offered $12.8 billion to complete the deal; however, final
approval lay with state legislators in harrisburg. historically, the
legislators had always had the Turnpike as a cash cow to hand out
contracts to favored union leaders and political cronies. Seeing
that this deal would take away that leverage, they refused to
approve the transaction, thus depriving a state with a 2009 budget
deficit of $2.3 billion some $12.8 billion in upfront cash.
“Money is fungible,” says Rober Dove, co-head of the Carlyle
Group’s U.S. infrastructure fund, “and situations like that just
drive the money offshore.” Dove is now part of a group of private
equity funds, banks, and law firms that have formed a coalition
to lobby for the benefits of private investment in infrastructure. In
a report prepared for the group by Kearsarge Global Advisors, a
government affairs consultancy, they point to the fact that there is
$180 billion in private-sector money sitting on the sidelines ready to
invest in U.S. infrastructure. With leverage, this amount increases
$450 billion, which, if fully invested, would create 1. 5 million jobs.
Most of the debate in the U.S. now is coalescing around the
formation of a new National Infrastructure Bank. This idea was
proposed in 2005 by veteran financier Felix Rohatyn and has
been taken up by the Obama administration. The idea would be
for the bank to provide the kind of cheap, long-term debt finance
that the European Investment Bank lends so successfully to
European infrastructure projects. It also could take equity stakes
in certain projects and provide guarantees as other government
entities have done in countries such as Korea and Mexico, which
have galvanized private-sector investment into those countries’
The U.S., then, is actually in the enviable position of being able to
avoid the decades-long learning curve that the rest of the world
has gone through and leapfrog straight to best practices. And if
Washington is in the mood to listen, some of these best practices
have been developed right in its own city, where many of the
multilateral development financial institutions (MDFIs) reside.
Lessons from Abroad
The World Bank and International Finance Corporation (IFC) stand
one block apart from each other on Pennsylvania Avenue in
Washington: If President Obama is looking for lessons in how to
get private-sector money into U.S. infrastructure, he does not have
far to walk.
MDFIs, which include the World Bank, Inter-American Development
Bank, Asian Development Bank (ADB), Islamic Development Bank
(IDB), and IFC, have been developing the methods, rules, and
practices for getting private-sector money into developing world
infrastructure for decades. Many of the issues that the U.S. now