Road Closed to Investor Cash for Infrastructure Funding
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.”
Pension funds are among the largest class of institutional investors. According to the research firm Towers Watson, public and private pension funds in the United States held almost $19 trillion in assets at the end of 2013, more than the country’s entire annual gross domestic product. Traditionally, these funds have looked for relatively low-risk investments promising steady and reliable returns.
With today’s low interest rates and with the recent upheavals in the stock market, more funds have looked at alternative investments, such as infrastructure projects. Recent announcements from large pension funds suggest infrastructures could become a larger share of their portfolios.
In 2011, for instance, California’s enormous public employee pension fund, CalPERS, announced a goal of investing 2 percent of its assets in infrastructure and forest land. The following year, Virginia’s public employee retirement system announced it would invest $450 million in two funds specializing in infrastructure projects. New York’s pension fund is also targeting 3 percent of its $175 billion to real assets such as infrastructure.
Many of these funds are trying to duplicate Canada’s model, where one of the largest pension funds, the Ontario Municipal Employees Retirement System, invests roughly 16 percent of its assets in infrastructure and even maintains its own infrastructure fund, called Borealis.
That strategy has proved to be hard to accomplish on this side of the border. The California fund, for instance, has only managed to push 1.3 percent of its portfolio into infrastructure, most notably buying a $155 million stake in London’s Gatwick Airport. Virginia’s money is invested in funds that focus primarily on investments in Europe and Australia. And New York has yet to make any investment in infrastructure projects.
Helping Hands to Others
In some respects the U.S. government helps send that capital elsewhere. A small unit within the Treasury Department offers technical expertise to foreign governments to help them set up public private infrastructure partnerships. This Office of Technical Assistance has advised governments in Costa Rica and El Salvador as they sought to refurbish airports.
Right now, 33 U.S. states have public-private partnership legislation in place, setting up a bidding process for the private sector and outlining obligations on both the public and private sides. Between 1985 and 2011, though, only $68.4 billion in public-private partnerships were approved in this country, compared with $353.4 billion in Europe and $187.2 billion in Asia and Australia, according to the Brookings Institution. That’s a fraction of the public sector’s gross fixed investment in transportation projects, which hovers around $20 billion a year.
Experts say what’s holding private investment back isn’t a lack of money. Rather, it’s a concern on the public side that the private sector is taking over public assets and a concern on the private side about sinking money into a risky government boondoggle.
“If you talk to folks in the industry, they will tell you there is private capital available to fund many more transportation projects in this country,” said Sean Slone, transportation policy manager at the Council of State Governments. “But to some degree that’s beside the point. It’s not about getting the private sector to throw money at states for their projects. It’s about finding the right mix of policy tools at the state and federal levels to bring public and private together and to translate for each other.”
To try to remedy that, the Obama administration this month announced a new Department of Transportation initiative that would offer expertise to local governments and the private sector trying to form partnerships while also easing access to government loans and credit programs.
An earlier version of this report incorrectly indicated that revenue shortfalls on privately run toll roads in Chicago and Indiana led to higher tolls.