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As the Trump administration touts its as-yet-unannounced $1 trillion infrastructure program — most recently talked up by Transportation Secretary Elaine Chao this week — private equity firms are readying their pocketbooks.
They are now raising $30.5 billion in funding for 43 new funds targeting North American infrastructure, according to Preqin, an industry data service. That money will be in addition to $68 billion in "dry powder" that funds have on hand but have yet to invest.
The United States is still considered an "emerging market" for public-private partnerships, referred to colloquially as "P3s," according to PWC. States and municipalities have access to cheap funding, and investors are often reticent to have their money tied up in long-term projects. But the pipeline is growing for the "right kind of project with certain criteria," according to Kylee Anastasi, director of capital projects and infrastructure at PwC.
The criteria are strict but pretty straightforward: Private equity funds and companies want to see returns greater than 10 percent, and they want their money tied up in projects for fewer than 10 years, since they need to return that money to investors. They also seek projects that guarantee a revenue stream while their money is committed — which is one reason toll roads have been popular targets.
"The greatest challenge in the public-private partnership is there's only so many projects that easily lend themselves to the kind of toll revenue that pays back private investors," said Gene Sperling, a former economic adviser to President Barack Obama.
Sperling served during Obama's release of the 2009 Recovery and Reinvestment Act, an infrastructure program that sought to inject $800 billion into the U.S. economy during the financial crisis, but which some studies later suggested did not have a statistically significant effect on the economy.
Wary investors cite the Indiana Toll Road — built in 1956 but converted to private ownership in 2006 — as a cautionary tale of an infrastructure deal gone awry.
A joint venture between Spain's Ferrovial and Australia's Macquarie purchased a 75-year lease on the 157-mile stretch of highway for $3.8 billion, but ended up declaring bankruptcy just six years into the deal. Estimates prepared for the state assumed that every seven years, traffic would rise 1 percent and toll rates would increase by 22 percent. However, traffic actually declined 31 percent, causing a steep reduction in the revenue collected by the owners.
"We anticipated this could be a possibility," then-Indiana Gov. Mike Pence said. The Congressional Budget Office, in a 2012 report on public-private partnerships, estimated the implied loss to taxpayers from the Indiana Toll Road was 42 percent.
Not all programs are money-losing endeavors. In 2009, a joint venture between the Carlyle Group (which then owned Dunkin' Donuts) and the parent of the Subway restaurant chain announced a $178 million investment to renovate 23 service areas along Connecticut's Merritt Parkway. Instead of toll revenue, the partners got a share of the sales on site.
A press release announcing the deal said it would create 340 jobs and $500 million in economic benefits to the state. The partnership was structured to last 35 years, though the joint venture sold it seven years later for $105 million to U.K.-based John Laing Infrastructure. At the time of the sale, Carlyle said the deal's "innovative structure" saved the state of Connecticut $150 million in construction costs.
International companies — like sovereign wealth funds — have been attracted to U.S. infrastructure because they lack access to cheap capital at home and mind less that their money is tied up for long periods of time.
It's the cheap capital that has worked for Virginia, according to Aubrey Layne, the state's secretary Transportation. And it's why he worries that the involvement of the private sector might drive up the price of tolls or other costs that the taxpayer would ultimately bear.
"There's municipal bonds or other programs that are much less expensive than private equity," Lane told CNBC. "The flip side of that is then that means it's going to be four to five times as expensive to do these types of projects."
Mike Sommers, president and CEO of the American Investment Council, defended private-sector involvement as giving the economy a double shot in the arm. Not only will citizens enjoy refurbished communities, he said, but private equity investors like pension funds and educational endowments could see increased returns.
"You could see American taxpayers see great benefit from better infrastructure, and you can see American pensioners see significant returns from private equity," he said.
—CNBC's Stephanie Dhue contributed to this report.