To privatise or not to privatise?

Even as the stars align for investors wishing to privatise infrastructure, they must not ignore the nay-sayers in their regions, writes Philip Borel.

For proprietors of infrastructure funds, the stars are in the process of aligning nicely. This is the message you are bound to hear again and again if you ask investment professionals involved in infrastructure about their prospects for the future.

The alignment they hail is in part driven by the fact that in many corners of the world, existing infrastructure assets are in need to refurbishment, and new ones are badly needed.

Philip Borel

In addition, the harsh macro-economic realities of our times also play a part. Governments everywhere are now scrambling for ways of boosting their economies in order to keep the fallout from the global financial crisis to a minimum. Fiscal policy is one popular strategy; big government spending on infrastructure is the other.

The trouble with the latter, at least in the brutally battered economies of the West, is that government coffers aren’t exactly flowing over with cash. Yes, the United States can look forward to $25 billion of direct public funding being made available for infrastructure under President Obama next year. And yes, similar infrastructure-focused spending plans are now in place in countries including Germany and the UK, to name but a few. But funding these plans will be no shoo-in, not after unprecedented efforts to rescue the financial system have stretched public sector finances to the limit.

So if governments are to meet their infrastructure objectives, support from the private sector is a must. That is the argument that fills private infrastructure financiers with joy. Their help will be crucial. Governments will roll out the red carpet to bring them on board.

But there is a caveat. Politically, the private sector is now a very difficult source of capital for governments to tap. This is a time when tax payers want to see financial institutions held to account for the financial catastrophe they created, rather than offering them incentives for investing in roads, ports, schools and hospitals – however badly these assets are needed, and even if there is no one else around to pay for them.

One especially hot potato is the privatisation of existing assets. In this area, doubters are legion.

One of them, the public policy think tank Century Foundation in New York, stepped forward with a new report written by Anthony Shorris, a former executive director of the New York New Jersey Port Authority. Shorris argues that infrastructure assets are public goods that cannot be appropriately financed with impatient, RoI-driven private sector money: “In the end, if we want great public works to reflect public policy objectives rather than maximising the profits of their private investors, public goods must be publicly funded.”

It’s a well-rehearsed argument, though it is telling that here it is being espoused by a US commentator. In the current environment, it is not difficult to imagine Shorris’ views resonating with ordinary Americans up and down the country. It’s even easier to find people with similar views in Europe, and it is safe to assume that the coming years will see privatisation sceptics on either side of the pond fighting the enthusiasts tooth and nail.

In the end, it seems likely that the boosters will have the edge. Needs must as they say. Given the enormous requirement for new infrastructure everywhere, and the fact that public budget are under huge pressure, it is hard to see how keeping private sector investors out of public infrastructure can be viable. Governments may not always like it, but privatisation is bound to remain on their agenda for the foreseeable future.

In the meantime, private infrastructure financiers must not ignore the anxieties their activities tend to provoke. As ever-more prominent owners and providers of public assets, an appropriate, self-imposed code of conduct for the industry will be essential. Now, on the eve of a massive investment opportunity becoming available, is the time to think about its core principles.