What role should private equity play in public projects? That question became a key focus of a panel on transportation, infrastructure and global warming held at the University of Minnesota Sept. 3 during the Republican National Convention.
While panelists such as St. Paul Mayor Chris Coleman advocate more private investment in public infrastructure, they were also careful to say it had to be balanced with the interest of keeping commuters?costs low and maintaining government control over needed public systems. “There is a lot of room for private investors in our community,” says Coleman. “But there are fundamental pieces of infrastructure that are best left to government.”
Defining the role of private equity in public infrastructure is a challenge. Updating and repairing America’s century old roads, bridges, tunnels, and mass-transit systems could cost more than $1.6 trillion over the next five years, according to the American Society of Civil Engineers. Tax payers don’t want to fund all of that—especially not as they are facing $4-a-gallon gasoline, related commodity price increases, and stagnant wages.
But private equity will want higher returns as the investment in infrastructure becomes riskier due to economic conditions. Such investments are typically long-term deals lasting multiple decades. Yet estimating the return on such deals, when fuel costs and a slowing U.S. economy could keep cars in the driveway, has grown more difficult. “If you look at the publicly reported forecasts for the Chicago Skyway or Wall Street estimates of global traffic they are completely different now,” says George W Bilicic, Jr: Managing Director at New York private equity firm Kohlberg, Kravis Roberts & Co. “It goes to the risk assessment associated with the decision.”
The more risk, the higher the expected return. Bilicic says that investors want a "good" return, not a great one when looking at public projects. Still, the definition of "good" is amorphous. For some private road investors, "good" has required tolls to rise ten fold during peak hours. For others, it has demanded much lower 2%-per-year toll hikes.