Even during a time of unprecedented strain in the global financial system and on state and federal transportation budgets, enormous sums of private capital are seeking attractive infrastructure investments. Widely reported estimates of the cash currently sitting in infrastructure funds top $400 billion88, while another estimate has calculated that private investment funds raised $105 billion for infrastructure projects from 2006 to mid-2007 alone.89
Many investors, such as insurance companies and pension funds, face an ongoing struggle to match the duration of their assets to that of their liabilities, and these organizations find highway projects attractive due to their long lives and reasonably steady cash flows over time.
This is equally true of public employee pension funds. Across the globe, public pension funds have been actively investing in economic and social infrastructure for a number of years - including transportation, energy, utilities, education facilities, health care facilities, and even military housing - as part of an "alternative investment" strategy intended to capture above market financial returns.
Public pension funds, like insurance companies and their private pension fund counterparts, view infrastructure investments as not only having long lives but also providing both steady growth and a good hedge against inflation. By 2005, global infrastructure investments as an asset class had an estimated value of $17 trillion, and the OECD estimates that total global expenditure requirements for infrastructure through the year 2030 could reach $27 trillion. In addition, financial crises tend to drive additional commitments to infrastructure (though often as public works programs intended to generate employment and stimulate beleaguered economies).
Australian pension funds were the pioneers of this trend in the 1990s when the Australian economy suffered a downturn and local governments encountered severe financial problems. Firms such as Macquarie partnered with government entities to start investing in infrastructure.
Canadian funds have also become enthusiastic investors in infrastructure assets. The Ontario Municipal Employees Retirement System (OMERS) has $10 billion committed to this investment category via infrastructure specialist Borealis, while the Canada Pension Plan Investment Board has $7 billion invested. In addition, the Ontario Teachers' Pension Plan recently teamed with Australia's Victoria Fund Management to purchase 48% of the Birmingham airport, the U.K.'s fifth largest.
A new report shows estimates that PPPs now provide funding for 15% of infrastructure projects in Europe, making these projects prime candidates for pension investments.
Pension fund investment in infrastructure is now making its way to the United States. Late last year CalPERS Board made the decision to commit an initial $2.5 billion to infrastructure investments. Other major U.S. pension funds, including CalSTRS, the State of New Jersey, and the Illinois State Board of Investments have target infrastructure allocation levels.
In the past, some of the greatest opposition to PPPs came from labor unions. For instance, California has not yet passed enabling PPP toll road legislation primarily due to the objections of state employee unions. However, across the country, unions that were once strongly against PPPs seem to be warming up to investing their own pension assets in privatized infrastructure. One of Macquarie's newer funds, Macquarie Infrastructure Partners, includes, among the 47% of its investors that are U.S.-based, the Midwest Operating Engineers Pension Fund and the Mid-Atlantic Carpenters Pension Fund.
We note that typically, pension funds do not invest directly in specific projects. Rather, they invest in infrastructure funds that target and invest (i.e., supply the capital and expertise) in such projects. This is an important distinction.
Recently, Texas officials have been exploring the possibility of direct investment by the state's $24 billion Employee Retirement System and the $107 billion Teachers Retirement System in toll roads and other state infrastructure.
One proposed concept would be for Texas public pension funds to consider investing in Texas infrastructure projects through a Texas Transportation Finance Corporation that would be created through the passage of new legislation. The earliest this could go into effect would be late 2009, if such legislation did pass, and we stress that the current proposals would permit, but not require Texas state pension funds to invest directly in Texas infrastructure.90
The proposed Texas Transportation Finance Corporation (TTFC) raises two important issues. First, if Texas does not authorize the use of PPPs, few transportation projects will exist that would be suitable for an investment by a Texas Transportation Finance Corporation.
Second, unlike the situation where a Texas pension fund invested in another state or overseas, Texas pension funds making direct investments in Texas projects could face situations that created independence issues and the Fund trustees would have to make sure that investments be made based on consideration of the project's financial merits - and administrators of pension funds must retain their fiduciary obligations to their stakeholders as their highest duty.
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88 Source: Mary Peters, US Secretary of Transportation, in a speech to the National Governors Association,25 February 2008.
89 Source: Robert N. Palter, Jay Walder, and Stian Westlake, "How Investors Can Get More Out of Infrastructure,"McKinsey Quarterly, February 2008.
90 These funds already have the ability to invest in private infrastructure funds - just not directly in the infrastructure itself.