Hedge funds and Private Equity - PES

fulfilment of public service responsibilities, where Private Equity Funds are likely to maximise
their discretion to minimise expenditure on service delivery;
staffing and training where the short-term requirements of Private Equity Funds require significantly
fewer resources than traditional infrastructure operators long-term development
programs;
services pricing strategy, where the long-term market and services development associated
with long-term investment strategy of infrastructure operators conflicts with short-term pricing
and cash generating strategy of Private Equity Funds.
Given that infrastructure provision in some public utilities in some European countries is in need
of significant improvement in managerial or operational efficiency, and that the degree of competition
they face is relatively weak, one might expect Private Equity Fund take-overs to provide
some unambiguous efficiency improvements. However, these same operators need dramatic
increases in long-term investment to improve their relatively poor infrastructure networks. The
distinctive characteristics and circumstances of infrastructure operators in Europe suggest that
Private Equity Fund takeovers are likely to have negative effects on the longstanding public policy
objectives for infrastructure operators, i.e., long term efficient infrastructure development in the
public interest, and the provision of universal public services of a high quality, for the benefit of
the economy and society.
The effect on public finances of the TDC purchase is, as yet, unclear. One conservative
estimate, however, suggests that the Danish government will lose some €2 bn in tax revenue.
3.3 Impact on society
The infrastructure industries provide important foundations for economies and societies. They
are priority factors for many industries making decisions on the location of investment. They are
standard economic indicators of the differences between developed and developing countries.
The effects of the efficiency and universality of a country’s infrastructure services ripple
throughout the economy and society in a manner that multiplies their impact many times.
Because of their centrality to all economic and social life, infrastructure services always have
been treated differently from industry in general. Public policy has been directed to ensuring to
the greatest possible extent the universal availability of infrastructure services at a reasonable
quality and price.
As state ownership and provision of infrastructure has begun to be privatised in line with market
liberalisation policies in recent years, governments have sold shares to the public that are then
traded on public stock exchanges. The infrastructure operators have retained their public interest
obligations for long-term infrastructure development and their public service obligations. The
entry of Private Equity Funds into the infrastructure industries raises serious new issues. By
following their traditional practices and financial incentives to maximise short-term cash returns,
Private Equity Funds can be expected to leave infrastructure operators in a condition where their
capabilities for pursuing their long-term objectives have been severely weakened, if not jeopardised.
There is a serious risk that investments in long term infrastructure development are likely
to be significantly reduced both during the period of Private Equity Fund ownership (usually five
years or less) and for a period afterward because of the debt mountain created, and the highly
restricted possibilities and costs of renewing long term investment programs.
Part II – Six concerns about our European social market economy
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