The Biden administration’s infrastructure and jobs plan makes no mention of tapping private capital via long-term public-private partnerships to refurbish aging transportation or other infrastructure. And, after four years of jokes about “infrastructure week” during the Trump administration, congressional Republicans recently released their own brief infrastructure outline that at least mentions private investment and user fees, but without any specifics.
President Biden and some Senate Republicans continue to express interest in developing a bipartisan infrastructure bill. Yes, some congressional Democrats may view any profit-seeking private investment and partnerships in infrastructure as enriching Wall Street and the one percent. But, what if there were a way to make equity investment in public-private partnership (P3) infrastructure more appealing across the political aisle and with public workers?
Public-pension fund investment in P3 infrastructure could be the needed ingredient.
Many U.S. public-employee pension funds have large unfunded liabilities and are actively seeking to invest equity in long-lived, revenue-producing infrastructure in efforts to increase their portfolios’ overall returns. Historically, U.S. pension funds have had limited infrastructure investment options, such as railroads and investor-owned utilities.
The trend to expand into pubic-private partnership infrastructure began about a decade ago. One of the early movers was the California Public Employees’ Retirement System (CalPERS), the country’s largest public pension fund. One of its landmark early infrastructure investments was a 10 percent stake in investor-owned London Gatwick Airport. And after the original P3 company for the long-term lease of the Indiana Toll Road went bankrupt, Australia’s IFM Investors put together a consortium of about 70 U.S. public pension funds to acquire the remaining 66 years of the toll concession.
Public pension funds seek to invest equity, but government-owned airports, seaports, toll roads, and utilities are financed by debt, in the form of tax-exempt muni bonds. Only if such an enterprise is leased under a long-term P3 agreement is there an opportunity to invest equity. Because Europe, Latin America, Australia, and much of Asia have privatized much of their infrastructure via sale or long-term lease, public pension funds have been able to invest portions of their assets in these enterprises—and are thereby generally doing well.
Canadian and Australian public pension funds are way ahead of American pension funds in infrastructure investment. In Infrastructure Investor’s annual tally of the world’s 50 largest infrastructure investors, Australia’s IFM investors ranked sixth last year, up from seventh the year before.
The largest Canadian pension funds, such as CDPQ, OMERS, OTPP, CPPIB, and PSP Investments are investing worldwide in long-term airport and toll road P3 leases. Three of these Canadian funds now own the concession company for the Chicago Skyway lease, and PSP owns global toll road company ROADIS, which is seeking a long-term public-private partnership lease of the E-470 toll road in Denver.
Yet, because long-term revenue-risk P3 concessions for airports, seaports, and toll roads are so few in the United States, our public pension funds mostly turn to global infrastructure investment funds, and those funds find most of their transportation investments overseas. Based on the evidence we have, if there were many more revenue-risk transportation P3s in America, our public pension funds would be eager to invest in them—either directly or via one or more of the major infrastructure funds.
Last year, Norman Anderson, chairman of CG-LA Infrastructure, wrote a piece for Forbes making the connection between the problem of U.S. pension funds’ low average return on equity and America’s under-investment in aging infrastructure. He argued that if our state pension funds increased their allocation to infrastructure from around 2 percent to closer to 10 percent, like Australian and Canadian pension funds, 10 percent of their $3.48 trillion assets could finance a major portion of the rebuilt infrastructure this country needs. And pensions’ increased return on investment would reduce the nation’s $1.3 trillion in unfunded public pension liabilities.
What kinds of infrastructure would be the best fit for public pension funds?
Rebuilding and modernizing existing infrastructure (brownfields) would be much lower-risk than greenfield public-private partnerships. These would be revenue-generating P3s such as airports, seaports, toll roads, and municipal utilities. Some such projects could be former greenfield P3s that have passed their ramp-up period. That’s the case with two recent transactions in Virginia—the sale of the Elizabeth River Tunnels project to Abertis and Manulife (an insurance company, not a pension fund) and the sale of 50 percent of Transurban’s express toll lane concessions to two Australian and one Canadian pension fund. And of the teams that were organized for the planned long-term P3 lease of the St. Louis International Airport, five of the 11 shortlisted teams included one or more public pension funds, and another included union investment fund Ullico.
The potential scope of toll-financed P3 projects could be expanded if Congress were to respond positively to the half dozen or so states where the legislature and state departments of transportation have studied toll-financed reconstruction and modernization of their aging Interstate highways and/or bridges. Instead of having Congress or the Biden administration cherry-pick the 10 most significant Interstate bridge replacements—likely the best candidates for toll financing and P3 procurement—perhaps Congress could offer to fund 10-15 percent of the project cost for those states willing to do the project as a revenue-risk design-build-finance-operate-maintain (DBFOM) public-private partnership. The federal contribution would lower the toll rate needed, and the federal government would be reinforcing the users-pay/users-benefit principle that is at risk of being lost in parts of U.S. transportation.
A similar approach could be offered to states that want to toll-finance the reconstruction and modernization of their long-distance Interstate highways. The existing federal three-state pilot program has been a non-starter, probably because it allows only one corridor in each state to be rebuilt via toll financing—which is politically toxic. Instead, Congress could open this program to all 50 states and all Interstates and include customer-friendly provisions to prevent the toll revenue from becoming a cash cow for the state—again, reinforcing users-pay/users-benefit.
If Senate Republicans are seriously looking to negotiate a bipartisan infrastructure bill, they should seek to tap the potential of public-private partnerships to help rebuild America. Both major political parties could emphasize what a great opportunity this would be for public pension fund investment in American infrastructure.
Just think, with one policy change, Congress could address two looming national problems: aging infrastructure and ailing public pension systems. Sound public policy should be addressing both of these important issues and public pension investment in much-needed American infrastructure projects is an excellent way to do that.
A version of this column first appeared in Public Works Financing.
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