Commentary: DP World’s lesson to infrastructure investors
The biggest risk perceived by investors seeking to invest in infrastructure projects is political, Christopher Lee, founder and managing partner of Highstar Capital, said Feb. 20 during a panel discussion at a transportation infrastructure summit hosted by the U.S. Chamber of Commerce.
Pension funds and other institutional investors like infrastructure as an asset category because it tends to offer relatively stable, moderate returns, but they are terrified by potential government interference.
Lee mentioned the turmoil that surrounded the failed attempt by DP World in 2006 to obtain operational control of several container terminals along the East and Gulf coasts. As you’ll recall, protectionist lawmakers used the specter of terrorism to force the Dubai-based marine terminal operator to divest its North American port business nine months after taking ownership as part of the acquisition of Britain’s Peninsular and Oriental Steam Navigation Co. P&O Ports operated terminals in five major U.S. ports, and provided stevedoring in 16 ports.
Highstar Capital, once affiliated with giant insurance conglomerate American International Group, is an independent private equity firm that invests in infrastructure-related businesses. AIG Highstar Capital bought P&O Ports and changed its name to Ports America, which now also manages the Seagirt Container Terminal in Baltimore and a large terminal in the Port of Oakland under long-term concession agreements.
During negotiations, Lee said DP World Chief Executive Officer Mohammad Sharaff wondered why U.S. lawmakers were concerned about his company being a threat to national security when it routinely handled U.S. military cargo and serviced U.S. Navy ships at the Port of Dubai.
“Why in America are we allowed to offload your halftracks, your ammunition and everything for the soldier, but you won’t let me operate a port to offload tennis shoes for Walmart,” he quoted Sharaf as saying.
Lee’s response was: “The problem is, in Dubai there’s one emir. In Washington, there’s 587 emirs, maybe more. And you went to the emir who lived on Pennsylvania Ave. and you thought you were fine. But you didn’t go talk to the other emirs. You didn’t do your homework.”
Foreign investors, who constitute a large portion of the funds looking for infrastructure opportunities, are spooked by the regulatory environment that can derail projects that make economic sense, such as the Keystone Pipeline, Lee said.
“The power of regulators, and environmentalists and the EPA, that terrifies them. Now, that’s good for my business because they look at us as kind of an American firm that knows its way around Washington,” he said.
Besides, he added, infrastructure is extremely Balkanized and deals are usually done at the city and state level.
Darrell Wilson, assistant vice president for government relations at Norfolk Southern Corp., added that infrastructure investors such as railroads also have watch out for financial risks because markets can change, leaving businesses without adequate revenue to cover their capital costs. (Eric Kulisch)