Soon, Roads Could Start Tolling for Carlyle
Thursday, January 3, 2008
Someday, the Carlyle Group may want to sell you the Brooklyn Bridge. For real.
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.