July 28, 2014, 6:20 p.m.; Corrected July 31, 2014 4:37 p.m.
Pension funds are slowly starting to take a look at investing in infrastructure projects, raising hopes among transportation advocates and lawmakers that the country’s roads and bridges could see an infusion of private cash.
But there’s a catch.
Much of the money from these funds gets invested in projects overseas, largely because the United States has a complicated relationship with private investment in public projects.
Public-private partnerships are often pointed to as a possible solution to the country’s transportation investment shortfall. But they have not been universally successful in this country and have had a difficult time gaining traction among transportation planners. Most notably, traffic on public private partnerships such as the Chicago Skyway and a toll road in Indiana fell short of projections, while drivers ended up paying higher tolls.
Such stories have made Americans reluctant to embrace toll roads, making it difficult to sell a skeptical public on public-private partnerships. And local officials are just as reluctant to cede control over public infrastructure.
Governments also have preferred to rely on traditional tax-exempt municipal bonds to finance their projects. While many investors like such bonds, pension funds tend to ignore them, in part because the funds themselves already are tax-exempt.
All of this has reduced the appeal of private financing for public projects in this country. As a result, billions of dollars of Americans’ retirement savings have gone looking for returns abroad.
To some transportation advocates and lawmakers it makes little sense to send that kind of money abroad when roads and bridges are crumbling here. The American transportation network will need $3.6 trillion in new investments by 2020, according the American Society of Civil Engineers. And pension funds — to name just one class of institutional investor — have trillions of dollars in assets. Why can’t they come together?
“You have the pools of capital that are interested and what they’re looking for is the opportunity to invest it in a way that makes sense,” said Heidi Crebo-Rediker, a senior fellow at the Council on Foreign Relations and a former top aide to the Senate Foreign Relations Committee who specializes in infrastructure investment. “If the opportunities are not there for those investments here in the United States then many of these funds have a global mandate and can invest elsewhere.”
Many pension fund managers want to target their investments to their home states. But that loyalty is secondary to their fiduciary obligation to the best interest of their pension fund participants, said Keith Brainard, research director at the National Association of State Retirement Administrators.
“They’re not allowed to consider state economic development opportunities or other considerations above the interests of the plan participants,” he said.
A Nascent Trend
So far, large pension funds — both public and private — are investing relatively small amounts in infrastructure. An Organization for Economic Cooperation and Development survey last year of large pension funds worldwide found only 0.9 percent of their total assets were invested in infrastructure. But the survey also found “evidence of a growing interest by pension fund managers.”