, The Infrastructure Bill & Pension Funds – A $3 Trillion Action Item, The Nzuchi News Forbes

The Infrastructure Bill & Pension Funds – A $3 Trillion Action Item

, The Infrastructure Bill & Pension Funds – A $3 Trillion Action Item, The Nzuchi News Forbes

There is a tide in the affairs of men, which taken on the flood leads on to fortune.  Shakespeare

As the Senate’s bipartisan infrastructure initiative moves forward, the talk is of spending rather than of long-term, strategic, 30-40 year investment. Its a question of focus. The political discussion is also leaving an important tool on the sidelines — at least half of the spend under discussion lies in the traditional domain of private investment — renewable energy, high voltage electricity transmission, broadband, 5G and even social infrastructure are solid private investment opportunities. Pension funds link these two issues — by my conservative calculation, we could easily add $1 trillion – or more – of disciplined capital to long-term infrastructure investment by bringing institutional investors into high priority projects, creating enormous benefits in terms of good jobs, innovative services, a growing and ambitious supply chain and everything else that creates opportunities for all of us.

In the midst of all the talk of taxes, including raising the gasoline tax, leaving pension funds on the sideline is an unforced error. Bringing pension funds directly to infrastructure project investments is a big lift to be sure, but it would be transformative, more than doubling our infrastructure investment capacity – and adding discipline to our investment decisions and management. Moreover we need these funds: at 10% of pension fund assets our country would all of a sudden have $3-4 trillion in dry powder, to revitalize old investments (Army Corps and DOI reservoirs), comfortably make new investments (Gateway, Texas Central high speed rail), and project strategic investments for the next generation (digitization and electrification, innovative strategies to remove pressure on the environment).  

The World’s Pension Funds & Infrastructure. I recently participated in a sharp panel discussion organized by the World Pensions Forum and the Singapore Economic Forum, coinciding with the G7 meetings. The topic my panel addressed was “Infrastructure as an Asset Class, Ten Years On.” The problem is that infrastructure projects are not now an asset class as far as U.S. pension funds are concerned.  

Canadian pension funds are another story. They tend to invest over 10% of their assets in infrastructure, making cutting-edge investments, like Ontario Teacher’s Pension Plan’s (OTPP) 40% equity investment in the U.S. offshore wind firm Anbaric, and they own – and drive innovation in – much of the U.S. renewable energy and natural gas business. Australian pension funds – through innovative companies like Macquarie, TransUrban, IFM and Plenary – own the vast majority of U.S. P3 projects (at least those not owned by Spain’s ACS).  

The architect of Australia’s pension fund shift into infrastructure — former Australian minister Nick Sherry — highlighted the fact that the big advantage of pension funds is that ‘you get equity type returns without the volatility.’ This is exactly the point, particularly now when inflation is an increasing concern.  

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The graph below, prepared by Nicolas Firzli, Director-General of the Paris-based World Pensions Council, allows you to map the future of institutional investment. The study from which it is drawn emphasizes the fact that many asset owners could improve their yields by doubling their allocation to infrastructure projects over the next four years.  

This doubling is going to happen — it should be a key objective of the Biden Administration that U.S. pension funds participate, helping us achieve otherwise unachievable domestic investment levels, while at the same time allowing us to strive to achieve currently unattainable geopolitical objectives. 

Creating the Infrastructure Innovation Machine. For this to happen we will need to create an elegant mechanism that can confidently channel our savings into the systematic creation of infrastructure assets. Infrastructure investment is not just a financial investment — the real point is that it creates hope, and its yield is a better future. The will is already in place: in conversations with officials in states around the country I constantly hear them wonder why their pension funds aren’t investing in our infrastructure assets.  

This new U.S. infrastructure investment mechanism would have three components:

First, there has to be something to invest in – this is our money, we want good investments. Australia made their shift work because, as Nick Sherry highlighted, they were ‘privatizing everything in sight.’ They recycled their old assets, creating new ones while revitalizing old ones.  

, The Infrastructure Bill & Pension Funds – A $3 Trillion Action Item, The Nzuchi News Forbes

We have an aversion to privatization, of course, but there is another option —- select long-term concessions from the roughly $43 trillion in U.S. infrastructure stock that is nearing retirement age. The supply of great assets that our pension funds could revitalize is extraordinary. It is also urgent – 70% of our current infrastructure budget goes to the operation and maintenance of old assets, and if we don’t address this issue we will be constantly disappointed by our infrastructure spend

Second, because governance is crucial – infrastructure is a public good, after all – we need to fix the terribly broken regulatory system. I am struck by the antitrust revolution that Lina Khan is about to bring to the FTC, and wonder if that same kind of logic might also apply to NEPA and the disheartening ambiguity and complexity around infrastructure project permitting (taking nearly nine years, on average, to move a highway project through the process). Making government decisions less complex, less ambiguous, more predictable and speedy is not just logical, it is critical to the future of the infrastructure marketplace — and so to our country. 

The graph above highlights this fact, showing that while most projects move through the permitting process at a predictable pace there are far too many outliers depressing market reliability. 

The ‘slows’ in the current system – all too often resulting in project death, and always burdening projects with unfair costs – would not be acceptable once it is our money, the value of our savings, that is being eroded. If we are worried about global warming, and innovation, and using hard-earned dollars effectively, shouldn’t we bring everything we have to the fight, as quickly as possible? Again, in Nick Sherry’s words, speaking to the critical role of trustees – ‘treat the investments as if they were your own.’ And I would add: “because they are.” By enabling and engaging our pension funds we might finally address our broken regulatory system.  

Third, for the machine to work – for this shift to take place – pension funds will need to dramatically up their games. This would be a welcome development, creating sophisticated internal teams to analyze project opportunities. Ontario Teachers, for example, has a 60 person executive team working on infrastructure investments, and recently announced – as Firzli projected – that they will double their level of investment in infrastructure, focusing on airports, toll roads, regulated utilities and renewable power generation. Imagine creating this capacity in each of the 50 states, just as Canada has done with their 10 provinces – and their federal pension plans? 

There are over 3000 public pension funds in the U.S. The largest 15 control $2.6 trillion in assets, covering 11 states and, among other things, would be welcome contributors to the Gateway Tunnel between New York and New Jersey, the Texas Central High Speed Rail project and the digitization of Ohio’s highways, driving innovations in the logistics around advanced manufacturing.  

Zeroing in on pension funds as an infrastructure funding source means that policymakers need to focus on creating supply (fairly easy), getting governance right, especially in terms of the current opaque and highly ambiguous regulatory framework (logical, but politically challenging), and creating capacity in state, and federal, pension funds (straightforward, energizing, democratic, expensive). 

This is too important to not get right, it will make all the difference.

The Upshot – The Benefits & Cui Bono. Bringing pensions funds directly into the infrastructure market will be tremendously disruptive to the current funding ecosystem and to everyone who benefits from it, and it will also be a tremendous shot in the arm for the country. 

Project design and speed to finance would improve dramatically as this new group of investors came on the scene. If 50% of projects – especially those projects of concern to the younger generation – were funded by pension funds, then 

  • there would be a lot more public support for projects,
  • there would be support for making the regulatory structure work,
  • there would be real citizen participation in projects throughout their lifecycle, and 
  • we might even effectively address the abysmal state of trust in government (only 42% of citizens trust the government according to Edelman’s 2021 barometer). 

Engaging pension funds would also support one of our country’s geo-strategic goals as well – highlighted by President Biden at the G7 meeting – to revitalize democracies by providing an alternative to China’s Belt and Road Initiative. Unlikely? Two Canadian pension funds just invested in the Rio de Janeiro water system, and Canadians are the only ones – aside from the Chinese – who show up to bid on Brazilian infrastructure assets. CDPQ, Quebec’s pension fund, owns wind and solar projects in Mexico, highways in India and assets throughout the U.S.  We have a great model, pioneered by our partners to the north of us, and it works!

Mobilizing U.S. pension funds as active investors in the infrastructure market is a first order priority, a priority that goes hand in hand with the (still not properly recognized) rise of infrastructure as a first order policy issue.  Cui bono? All of us.

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