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Yield of dreams

Nick Hildyard investigates the rise of private equity investment infrastructure funds in overseas development, and how they are turning public infrastructure into a new ‘asset class’

April 11, 2013
15 min read

Illustration: Andrzej Krauze

If buying and selling houses is all about ‘location, location, location’, capitalism is all about profit, and investment about ‘yield, yield, yield’. For the past 30 years, however, yields from conventional securities, such as stocks and shares, have been declining. As a result, investors have been faced with a series of crises as more and more money has sloshed around the system in search of fewer and fewer profitable investment opportunities.

One response has been to squeeze labour, notably by ‘offshoring’ factories to low-wage countries, in an attempt to boost profitability. Another has been privatisation – using the state to create new, highly profitable investment opportunities by selling off state-owned enterprises at knock-down prices. And a third has been the creation of new asset classes, often exploiting highly risky new financial products to make money by trading in the products of money: the bundled-up mortgages whose implosion triggered the 2007 crash are just one example.

But the problem of overaccumulation has not gone away. And now we have the latest crisis, erupting acne-like in various manifestations around the globe. Austerity programmes have been the most immediate and ruthless response. But governments have also held out the carrot of stimulus programmes, announcing support for major infrastructure development initiatives, particularly in China, Brazil and India. These countries already account for half of infrastructure investment worldwide, amounting to some $1.2 trillion a year.

Many on the left have welcomed these stimulus packages as evidence of a shift towards a new Keynesianism. But far from constituting a retreat from neoliberalism or a renewed state commitment to meeting unmet development needs (a constant refrain is the plight of the 1.4 billion people in the world who have no access to electricity), the planned infrastructure spending is better viewed as yet another attempt to satisfy the insatiable demand of investors for ‘yield’. What is being ‘stimulated’ is the construction of the subsidies, fiscal incentives, capital markets, regulatory regimes and other support systems necessary to transform ‘infrastructure’ into another new asset class. As such, ‘infrastructure’ is less about financing development (which is at best a sideshow) than about developing finance.

This has implications for the penetration of private interests into the public realm that go much further than past privatisation programmes. Many of the new investment vehicles – notably private equity funds – are seeking turbo-charged profits (typically, returns of 30 per cent a year) whose pursuit is leading to the increased financialisation of the infrastructure sector with profound implications for what infrastructure is funded and who gets to benefit from it. The state-backed guarantees demanded by investors are also cementing a new state-private combo that is geared to harnessing the state to extracting profit for the private sector. Moreover, many of the strategies that civil society has developed to hold infrastructure developers to account and to ensure positive development outcomes from specific infrastructure developments – including lobbying for better ‘standards’ – are arguably not keeping up with the swiftly-developing new realities.

A pot of gold: enticing the private sector

Until the 1990s, the vast majority of infrastructure projects in the developing world – from water treatment plants and drinking water supply systems to telecommunications networks, power stations, dams, railways, roads and ports – were funded by national governments, with substantial project-specific loans from multilateral development banks (MDB), such as the World Bank. The role of the private sector in financing infrastructure was minimal. But the past two decades have seen private sector involvement increase substantially. During 2002-7, private investment in infrastructure outstripped tenfold the £40 billion loaned for infrastructure projects over the same period by China, the biggest source of bilateral concessional development finance.

Governments argue that the sheer size of the ‘infrastructure gap’ means they have no choice but to bring the private sector into infrastructure development. But considerable untapped pools of public money exist in many developing countries, notably in public pension funds for state employees, which could be used for public sector investment in infrastructure. Governments could also restore their depleted coffers by abandoning the low tax regimes imposed through neoliberal structural adjustment programmes, or by clamping down on tax evasion and capital flight.

Such policies, however, would mean dismantling the current state-private settlement in which state power is used not to restrain capital accumulation but to enable it. To attract infrastructure investors, for example, many governments are rolling back hard-won environmental and social regulations, particularly those protecting poorer people against forced evictions. The government of India has set up a high-level committee (including the head of Goldman Sachs in India) to identify ‘regulatory or legal impediments constraining private investment in infrastructure’ and to ‘issue specific recommendations for their removal’. Other incentives now being offered include tax breaks and a £7 billion fund to provide debt finance through tax-free infrastructure bonds.

Legislation is also being introduced in many developing countries to encourage public pension funds (which, to repeat, are a major potential source of public finance for infrastructure) to invest in privately‑funded infrastructure programmes, for the profit of the private sector.

The rise of infrastructure funds

The push by governments to expand the private sector’s involvement in infrastructure requires more than just creating openings for the sector to build and manage infrastructure projects. It also requires manufacturing opportunities for accumulation that go beyond those that arise from simply building and operating new toll roads or water plants. With the trade in financial instruments now providing a major source of enhanced profits, this in turn has meant creating investment structures that maximise the buying and selling of money or the products of money.

Debt and equity remain the prime means by which companies in the infrastructure sector both fund their own expansion and the building of projects. But, reflecting the construction of infrastructure as an asset class, the raising of debt now involves a proliferating array of transactions, each of which expands the scope for accumulation, and a range of new financial actors – from shadow bankers to dealers offering credit default swaps and other derivatives.

The landscape for raising equity finance for infrastructure is also changing. Private investors have historically proved reluctant to make direct equity investments in specific new infrastructure projects, which are considered extremely risky, from both the financial and reputational point of view. But with the infrastructure sector set to boom, investors are keen not to lose out on possible profits.

The solution, engineered by investment banks such as Macquarie, has been to create ‘infrastructure funds’. These are pooled vehicles through which investors can invest in companies within the infrastructure sector without having to invest directly in the projects that the companies are building, thus reducing the investment risks inherent in the sector. As private equity builds its social and political base, its market is deepening and expanding. Worldwide, the total investment by the top 30 private equity infrastructure funds over the past five years has topped £112 billion.

Who’s investing?

Private sector investors in infrastructure funds include high net worth individuals and pension funds. But public sources of finance, including development funds from public development finance institutions (DFIs) such as the International Finance Corporation (IFC) and Britain’s CDC Group (a private equity fund wholly owned by the Department for International Development), are also heavily involved. In effect, you, dear reader.

The compatibility of investing development funds via such turbo-charged profit-driven investment vehicles as private equity funds with the stated poverty alleviation mandate of most DFIs is questionable. Shamelessly taking refuge in the widely discredited ‘trickle down’ theory of development (in reality, wealth, like cream, always rises to the top), most DFIs generally judge the success or failure of investments primarily on the basis of their profitability, the assumption being that what’s good for investors must be good for poorer people. But a review of the IFC’s private equity portfolio has concluded that any correlation between high profits and wider positive development outcomes is relatively weak and that the most pronounced impact of private equity investments has been in ‘improvements in private sector development’, such as encouraging changes in the law favourable to the private sector. In effect, what is good for private equity is good for private equity – but not necessarily for the wider public.

Hardwired for exclusion

Private equity funds are not charities. They invest to generate ‘alpha’ profits – that is, above market returns on investment. They do so primarily in order to extend their local and global reach, increase their share of markets, and, above all, if they are to retain investors, to boost returns to their shareholders. This has a number of consequences that make private sector infrastructure development in general – and its turbo-charged private equity variant in particular – inimical to positive economic and social justice outcomes.

One is that privately financed and managed infrastructure is hardwired for social and economic exclusion. Only those who can afford to pay get to enjoy its benefits. Within the energy sector, for example, the liberalisation of retail power supplies has excluded poorer consumers from access to energy simply because they are unable to pay for it (in economists’ jargon, they have been ‘rationed out of the market’). The quest for turbo charged profits by private equity funds can only exacerbate this trend.

The history of Globeleq, a power generation company owned until recently by Actis, a private equity fund set up by the UK government and in which the Department for International Development (DfID) is invested through CDC Group, serves as a warning. Since 2002, Globeleq has bought out a number of energy companies, sharply increasing the tariffs charged to consumers. Following Globaleq’s 2005 investment in Umeme, a Ugandan power distributor, the company increased prices by 24 per cent and then again by 37 per cent, leading to a court challenge by the Uganda Electricity Users Association (UEUA). Many poorer Ugandans were forced to take electricity themselves directly from the grid because of the high prices; Umeme’s manager is reported to have called for their execution.

Disenfranchising the public

A second feature of privately financed infrastructure is that it is profoundly anti-democratic. Key decisions relating to infrastructure investment become the prerogative of private investors and companies, rather than being determined through public debate and consensus-building. Moreover, with state and commercial interests now so intimately co-mingled, the role of the state in securing the public interest has become increasingly eroded.

The financialisation of infrastructure further disenfranchises the public by giving still greater power over decision-making to a small elite of investors. Unsurprisingly, the infrastructure favoured is that which maximises their profits. Indonesia’s second largest thermal coal producer, Adaro Energy, which is backed by private equity funding, is explicit that its plans to build the country’s largest coal-fired power station are intended to ‘create a significant base demand’ for its coal. In effect, the company is using infrastructure to lock society into an energy path that serves its corporate agenda, despite the devastating implications for climate change.

Entirely absent from the portfolios of all but a few philanthropically-financed infrastructure funds are projects that respond to the demands of poorer people. There is investment, for example, in privatised water utilities servicing those with the money to buy water, but no investment in rainwater harvesting that, once installed, provides water for free; in toll motorways connecting major industrial centres to ports through which goods can be exported abroad (and which labourers and small businesses cannot afford to use), but not in all-weather minor roads that link producers to local markets. If poorer people feature at all in the discussions of investors and developers, it is as labourers – or as obstacles to be removed.

Fickle, impatient capital

Even if the interests of the private sector developers could be brought into alignment with those of the general public, the demands of investors for above‑market profits makes private equity a poor source of funding for essential infrastructure.

One reason is that it is too fickle. To avert catastrophic climate change, for example, sustained, predictable and ensured streams of finance are needed to fund the transition away from fossil fuels. But private equity investors remain invested only so long as their investment achieves or exceeds its benchmark growth rates. ‘Clean-tech’ funds, which until recently accounted for some 10 per cent of private equity energy investment and had been enjoying a boom, began to falter in 2009, with investment in the sector declining by 30 per cent in the third quarter of 2010. Many predict financing will soon dry up further.

Indeed, private equity is a prime example of what US economist James Crotty has termed ‘impatient finance’. Private equity funds do not just bring finance to a company; they also bring a culture and a set of financial priorities that are centred on enhancing short-term shareholder value. Even after the funds have disinvested, this culture tends to remain.

As infrastructure becomes more firmly entrenched as an asset class, one consequence is thus likely be a progressive financialisation of companies throughout the entire supply chain – from the companies that build infrastructure to those that service them. The means through which future shareholder value will be boosted and extracted remains to be seen. But, if past history is a guide, layoffs, casualisation of labour, share buybacks and the increasing use of speculative financial instruments are likely to feature prominently.

Building markets and subsidies

Perhaps most fundamental of all, though, private equity infrastructure finance is about more than building bricks and mortar. It is part of a wider project, as yet far from complete, whose purpose is to enshrine markets, rather than democratically-accountable decision-making processes, as the means through which infrastructure is not only financed but its disposition decided.

US investment bank Goldman Sachs, one of the original architects of infrastructure funds and whose alumni now hold key positions in many of the world’s most powerful policy-making institutions, is explicit about the agenda. In a paper modestly entitled Building the World, it identifies private sector financing of infrastructure as a driver of both financial innovation and the building of capital markets, stimulating the dismantling of ‘current onerous restrictions on investments’, the growth of derivative-based products and the opening up of developing country economies to foreign banks. But the core of Goldman Sachs’ proposals for Building the World, shared by private equity infrastructure fund investors and promoters, is the role it envisages for the state. On the one hand, it demands that ‘governmental interference’ be kept ‘at a minimum’, while on the other it envisages its entire political project being underwritten by the continuation (and extension) of a raft of state subsidies in the form of ‘public/private partnerships, government credit guarantees, and coinvestment by governments’.

As Dexter Whitfield discusses (page 16), the cost of public-private partnerships to the UK has been huge. Similar conclusions have been drawn for PPPs in developing countries, where projects have frequently failed to deliver promised services while hiking prices for health care, transport, energy and water beyond what poorer people can pay. Despite this, the World Bank and other multilateral development banks (MDBs) are pushing for a new wave of PPPs in developing countries – and many governments are obliging, with the Philippines, India, Mexico, Brazil and others all recently announcing new programmes. Indeed, this is a major reason why many investors, ever alert to public subsidies that can be captured for private profit, are investing in private equity infrastructure funds.

And when the bills finally come in, it will be the poorest people in the world who suffer through cuts in public services to pay the hidden debt.

Resist or accommodate?

In India, plans to make it easier for the private sector to acquire land for infrastructure development have triggered mass protest. Trade unions are also active worldwide in opposing private equity and resisting public-private partnerships. But the response of many European and US environment and development groups to the emergence of private equity infrastructure funds has been muted.

In the main, the tendency has been to treat them as essentially the same as publicly financed projects and to press for better application of international standards. Another has been to view the private sector as benign in its intentions but misguided as to where it is placing its money. In a version of this approach, Oxfam UK has gone as far as setting up its own private equity fund to demonstrate how private equity could be used for good. The strategy is to ‘reprogramme’ the private sector in order to shift its undoubted financial resources from harmful sectors (particularly those that fuel climate change, for example) to environmentally-sustainable sectors.

But better standards, though desirable, would leave unchallenged the intrinsic tendency of infrastructure-as-asset-class to exclude poorer people from access to infrastructure and to undermine democratic control of infrastructure development – a tendency that ineluctably arises from the investors demand for ‘yield, yield, yield’.

Unless campaign groups address this underlying driver, there can only be one outcome: business as usual. Time to ‘organise, organise, organise’.

Nick Hildyard is an analyst with the solidarity, research and advocacy organisation The Corner House. A longer, referenced version of this article is on

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