Private Equity Firms Turn Up Noses at Trump’s Infrastructure Headfake

Trump’s infrastructure plan, such as it is, has been getting well-deserved, widespread negative reviews. It’s too small a program to make any difference, overwhelmingly places the funding burden on already budget-strained state and local governments, and still requires localities to charge various user fees, thus obviating any economic benefit. It also ignores the highest bang for the buck spending, namely unglamorous repairs and rural broadband, in favor of weird unspecified exercises in pork that are supposed to “lift the national spirit.” Is adding Trump’s mug to Mount Rushmore on the project list?

But even better, even private equity robber barons who run infrastructure funds, one of the big audiences this program was meant to woo, aren’t keen about it either. , they aren’t all that keen about building things. They’d much prefer to loot purchase existing assets.

But enough of those too-innocously named privatization deals, like the sale of Chicago’s parking meters, have gotten the bad press they deserve so as to make not just local officials, but even more important, local businessmen leery of these initiatives. They understand that the price of getting a quick cash injection is being bled with user charges and what even amount to profit guarantees. For instance, in the case of the Chicago parking meter deal, the new owners would get paid fees by the city even if it took a lane of traffic with meters on it out of operation for emergencies or street repairs.

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Fund managers say they are mainly looking for assets that are already privately owned—such as renewable energy, railroads, utilities and pipelines—and not the deteriorating government-owned infrastructure like roads and bridges that helped attract the capital in the first place. To the extent they are interested in public assets, the focus is more likely to be on privatizing existing infrastructure than on new development—the heart of Mr. Trump’s push.

Even though America is typically in the forefront of implementing bad neoliberal ideas, it has managed not to get on the privatization bandwagon to the same degree as much of the rest of the world, in particular the UK. Those of you who have been following the collapse of Carillion are likely gobsmacked at the critical functions that the Government saw fit to hand off to them, leaving itself at risk if the Carillions of the world made a mess of it, or as it did, stopped performing altogether. Even though it was mainly a construction firm, Carillion also had many facilities management and services contracts, such as managing prisons and 230 military facilities in the UK, and catering for the NHS.

But you see nary a mention of Carillion in this article. Instead the US is depicted as a laggard by not allowing private operators to take a skim out of providing public services:

U.S. infrastructure has been a tough nut for investors to crack. The U.S. market is the largest in the world for privately owned infrastructure, but it also is behind other countries when it comes to privatizing critical transportation assets such as roads and airports. Unlike other countries in which the federal government often has more control, decisions about how U.S. infrastructure projects are financed are often made at the state and local level…

Mr. Trump’s plan would streamline the permitting and approval process for new projects, but not do much to change the dynamics of leasing or selling existing assets.

Thank goodness that US municipalities have resisted pressure to sell their airports. Australia’s Macquarie Bank was the pioneer in the infrastructure game and is famed for figuring out ways to rip out as much profit from its deals as possible. It was also early to target airports. Macquarie owns the Sydney and Budapest airports, which under its stewardship, implemented the highest and second highest landing fees in the world. Sydney also has the worst traffic congestion of any major airport, .

There will be a few bones that Trump will try to toss to his Wall Street buddies. He wants to sell the Reagan National and Dulles airports, the Tennessee Valley Authority’s grid, some DC highways.

But otherwise, as we said of earlier versions of this plan, it’s all smoke and mirrors. Despite the Administration having no trouble pumping for tax cuts and more military spending, it goes into deficit fusspot mode with infrastructure spending, calling on Congress to make cuts elsewhere to pay for it. As we indicated, even if there were actual net spending involved, it’s chump change, a mere $10 billion a year. And , the main state and local incentives come in the form of weaker Federal reviews and easier access to Federal land:

The plan, which the White House bills as a $1.5-trillion program, only provides $100 billion in federal funds over 10 years for major federal-state projects — and those funds are mostly, at this moment, mythical. The plan bristles with incentives to allow private investors to profiteer, to expand tolls and other user fees on crucial roads and bridges, and to despoil public lands with pipelines. It aims to fast-track the most environmentally hazardous projects, the better to keep experts and local communities from weighing in.

The Wall Street Journal does point out that infrastructure funds have raised a ton of dough that they will find difficult to deploy, given the parameters they have set. Note that these investors prefer “private” infrastructure like railroads and pipeline to public assets:

Take Blackstone Group LP. The private-equity firm plans to raise as much as $40 billion for North American infrastructure, but may devote only 10% to public assets, according to a person familiar with the matter. Other prominent infrastructure investors such as Macquarie Group have similar targets—if they target public assets at all. Macquarie, Carlyle Group LP and KKR & Co. are among the firms that have been raising infrastructure funds.

Concentrating their firepower on private assets could mean more competition, higher prices and ultimately lower returns for infrastructure funds. That has some deal makers warning of another false start for the U.S. infrastructure market after poor performance in the wake of the financial crisis.

So we have yet another “too much money chasing too few deals” syndrome happening in another sector. It’s hard to see how the desired returns could be produced absent exceptional luck, or failing that, accounting and/or valuation fraud. Don’t say you weren’t warned.

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13 comments

  1. Colonel Smithers

    Thank you, Yves.

    “But you see nary a mention of Carillion in this article.” That’s often the case. Last night’s France 2 news featured how Richard Branson may be able to sav(ag)e the NHS. Although the % of NHS activity conducted by the private sector was mentioned, 20%, the report did not mention the impact of such involvement. Neither did it mention Branson’s involvement with the railways.

    I went to the same school as Branson. Branson recently served as president of the Old Stoic Society and has just been succeeded by the film director and my classmate Matt Vaughan (Mr Claudia Schiffer). Until this decade, Branson kept well away from any association with the school as it threatened his public image, but he feels able to do so now. Why?

    On the topic of private sector involvement with infrastructure, Cannes hosts MIPIM, the property industry gathering, from 13 – 16 March. This is the opportunity for construction companies, realtors and banksters to con gullible and / or corrupt local politicians and local government officials, vide the derivative transactions entered into by EU municipalities pre-crisis. Such entities are now treated as retail investors under EU investment services law.

    MIPIM is notorious for the personal / extracurricular services provided. I wonder if the FT, which threw so many hacks into the Dorchester expose, will dare send that big hit team to Cannes. If yes, the pink paper may find that advertising for its week-end edition, including the property and how to spend it sections, dry up as many of the advertisers provide these services. Decisions, decisions, Lionel!

    1. rd

      The NHS example is interesting. Many people use the NHS as an example of why socialized healthcare is bad. However, if you look at available statistics it is pretty clear that many of the NHS challenges are because Great Britain places a low spending priority on it. This can be clearly seen as the total healthcare spending in Britain is one of the lowest per capita spenders on healthcare in the developed world.

      So how would privatizing a system help improve healthcare without increasing per capita spending which the government could do without privatizing? Britain spends one-third on healthcare per capita that the US does. Even factoring in 30% waste due to administration etc. in the US, Britain would still be spending only half as much per capita. My guess is that privatizing the NHS and handing it over to for-profit entities would increase healthcare costs in Britain by at least 25% without an improvement in performance.

  2. BTilles

    Hi Yves,
    Thanks. One thought re government transmission asset sales. Ask yourself this question: Do you believe the individuals behind this list realize that selling only the transmission assets could dramatically change the value of the remaining power generating assets at these so called “integrated” utilities. Exactly. But since they specifically mentioned TVA I’ll believe this when I hear the words from McConnell’s mouth. Unless of course we’re looking at the real audacity of grift and they try to sell system, power plants and all. If I were Macquarie or KKR I’d bid for all of TVA next week, ditto for BPA. Let’s see if we’re really going full metal TINA.

    1. ocop

      re: sales of federal transmission assets. There is no way. This is a suicidal fantasy dreamt up by some naive think tank types. Federal hydro, transmission (and low cost rates) assets of the Power Marketing Authorities, and public power more generally are thoroughly entrenched across the country with advocates across politics and geography.

      In a conversation yesterday I described privatizing PMA assets as the Afghanistan (where empires go to die) of the power sector policy. Steven Chu (former secretary of energy) was hauled before Congress and spit-roasted for having the temerity to suggest the PMAs use their assets a little differently to integrate renewables.

      The president’s budget is more a primal ideological scream than it is anything they’d be willing to put political capital behind. I have no doubt they want to privatize federal power assets but it’s a far cry from being stupid enough to try.

  3. The Rev Kev

    Maybe the simple truth of the matter is that equity firms may not consider themselves financially competent to assess the risks involved in building new infrastructure. I have read of them buying a highway after being built with public money, whacking toll booths along its length and charging whatever the could get, skimping on maintenance as the end of the contract ended, and then handing back a highway that needs to be rebuilt to the government. A project like that you can run the numbers on with fair accuracy.
    Doing and financing new contracts for new infrastructure can blow up in your face. Not long ago in Brisbane, Australia a toll road was being financed by a private company that involved (drum-roll) Macquarie Bank and Deutsche Bank. It failed spectacularly as they had wildly estimated the number of cars that would be using it () and subsequently lost a boat load of cash. Eventually the State government took it over but the shareholders took a bath.

  4. johnnygl

    If they’re serious about privatizing the TVA, they are likely to get some very strong pushback.

    Obama floated the idea years ago and was slapped down very quickly, and by numerous repub pols. It seems to be a third rail issue in many southern states.

    1. Synoia

      I believe the Southerners invented the term “Carpetbaggers”

      After loosing a war intended to extend privileges – slavery.

    2. Synoia

      I believe the Southerners invented the term “Carpetbaggers.”

      After loosing a war intended to extend exploitative privileges – slavery, and thus recognizes the the intent,

  5. PKMKII

    As we indicated, even if there were actual net spending involved, it’s chump change, a mere $10 billion a year.

    Comparatively speaking, phase 2 of the second avenue subway expansion (bringing it up to 125th street), subject to much hand-wringing over how to pay for it, is estimated to cost $6 billion. Getting the whole thing down to the lower east side would probably be another $10-15 billion. So they could easily get the whole thing paid for by the feds, not a cent of state money, by allocating what would be a rounding error for the military budget into transportation funding, within a year or two, with plenty left over for every other transportation project. Which would have far greater economic boons than their hare-brained tax cut and privatization schemes.

  6. Fred

    I bet on a infrastructure index fund. It was going up and down with the market. Then Trump annouced his plan and while the market went up, the fund went down. It’s only been a couple of days so it’s it’s still inconclusive.

  7. MG

    Not many things large piles left to loot in the U.S.

    You have select publicly-owned infrastructure which people can’t live without, primary education, and privatizing SSI and Medicare.

    If the 2018 midterms go well enough for the GOP because the economy doesn’t tank by then, I full expect we’ll see a big push in at least one if the two later areas.

    This infrastructure bill is DOA but the gasoline excise tax increase isn’t because the US Chamber of Commerce is behind it in a major way. They just want individual consumers to pay for the Highway Trust Fund which is going to face real problems as soon as late 2020. The 2015 Congressional fix put no money into the system.

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