Carlyle Rides Privatizing Trend with Roads Fund

Tribune-Review/Pittsburgh Tribune-Review, January 6, 2008 | Go to article overview

Carlyle Rides Privatizing Trend with Roads Fund

WASHINGTON -- Someday, the Carlyle Group may want to sell you the Brooklyn Bridge. Really.

The Washington 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, 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.

Robert Dove, who is co-managing Carlyle Infrastructure Partners, 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.

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 businesses. The issue is 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 already is under attack from the Service Employees International Union for 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 asked, 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 always will 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. …

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