Privately financed infrastructure from Pension funds: the missing link in development?

What would you like to finance form your pension fund? Would you rather like to finance debts of corporations, emerging capital markets, public debts or public infrastructure privately financed and operated? Of course, it depends on risks and returns, and also opportunity costs. Given the choice, I would certainly go for infrastructure.

This also has been quite a trend in recent years. “Over the past decade, pension funds … have moved significantly into infrastructure, as part of their "alternative investment" category. Long-lived assets such as toll roads, airports, and electric utilities are a good match for the investment needs of such funds: long-term, steady growth in revenues based on providing an essential public service.” This has been pioneering by pension funds from Australia, Canada and UK. Pension funds investments have focused on publicly traded infrastructure funds, but not exclusively. Some pension funds found event courage to invest directly in to PPP/infrastructure projects. Examples include Ontario Teachers Pension Plan purchasing in to the Birmingham Airport or Canada Pension Plan Investment Board investing in to New Zealand International Airport in Auckland. Telegraph has reported on this “In the past two years, a fledgling market has sprung up. Pension funds have put aside £2billion for PFI investments, with groups such as the Secondary Market Infrastructure Fund, Barclays' I2, Henderson, 3i and the Prudential managing the proceeds.”

In US is the situation completely different. Despite the fact that US pension plans have over USD 15 trillion (2007) value representing over 60% of pension funds globally, connecting pension funds and PPPs have not been successful so far in US. The main reason for this is simply lack of PPP projects available for pension funds investment, given US public sector ownership and even operation of infrastructure. The discussion on the link between pension funds and PPPs has been ongoing for some time especially in California and Texas. Last week there has been Stanford organized Executive Roundtable to discuss these issues supported by very good paper by Stanford Managing Director Ryan Orr. His paper not only looks at California, it looks at the possible impact of US pension funds on infrastructure investment globally in the comment saying:

“In 2007, U.S pensions were valued at just over $15 trillion (109% of GDP) and represented 60% of pension capital held globally.35 If 5-10% of this amount were invested in infrastructure, this would equate to $750 billion–$1.5 trillion. Levered conservatively at 60% debt to equity, this would amount to $1.9 – $3.8 trillion of overall investment for infrastructure projects.

OECD and World Bank research shows that most developed countries invest in infrastructure at the rate of 3.5% of GDP, which for the U.S. in 2007 amounted to $490 billion. Assuming that 15% of infrastructure transactions ($73 bn per annum) could be delivered via the public-private partnership format (which is what the UK and Canada have concluded to be the appropriate mix of conventional and P3 delivery), then the $1.9–3.8 trillion that is available could provide for a staggering 26-51 years of public-private partnership investment needs, assuming zero growth of the pension capital stock.”

This can also have tremendous impact on developing countries, should the US pension funds have the expertise and being able to invest in developing countries, this could provide additional enormous capital flows to finance the infrastructure in developing countries. How can we help to mobilize this opportunity?