The tragedy of the Minneapolis bridge collapse underscores the need for financing repair, maintenance, improvement and expansion of publicly controlled infrastructure across the country, as well as worldwide.
It is a challenge for traditional government finance, and a potential opportunity for private capital to provide innovative financing.
Municipal bonds wont cut it anymore.
Pension funds, endowments and foundations, working with private equity and other specialty managers, have begun to provide capital for infrastructure. At present, institutional investor interest is small but growing. But while the supply of tax-exempt institutional capital for infrastructure investment has been limited, returns have been high.
Looking at road and other transportation infrastructure alone, the opportunity for institutional investment will depend on the willingness of state and local governments to break away from long-established public ownership and tax-exempt bond financing of infrastructure. These governments need to liberate the capital held in these assets and use it for other governmental purposes.
Government sees infrastructure as a cost; private investors see it as investment to produce steady returns. Investors are willing to assume the risk of providing the capital through owning, leasing or operating concessions. Infrastructure is a growing need and government is of limited means.
The American Society of Civil Engineers estimates $1.6 trillion is needed over a five-year period to bring the nations infrastructure to good condition, according to its statement.
Trillions of dollars will be needed in the U.S. alone, but infrastructure needs are immense all over the world. Besides bridges, infrastructure includes roads, public transportation, seaports, airports and water-treatment and sanitation plants, as well as communications, electricity and other energy production. Many of these are publicly owned, especially transportation-related infrastructure in the United States.
A high-quality infrastructure is crucial for a vibrant economy.
Governments in the U.S. are just beginning to allow private investment in public infrastructure assets, but other countries are more advanced in the process.
State and local governments should welcome new capital willing to assume risks pension fund, endowment and foundation capital, for example. Governments should recognize infrastructure is no longer only a government responsibility.
But many public officials have resisted, and likely will continue to resist, such moves, and seek to hold onto traditional public works arrangements, pursuing more debt financing, further burdening taxpayers.
Some large pension funds are stepping up to provide capital. The Ontario Municipal Employees Retirement System, Toronto, created Borealis Infrastructure in 1999 to invest its allocation, now at C$5.6 billion of its C$48 billion in total assets. The Ontario Teachers Pension Plan, Toronto, has C$8 billion of its C$106 billion fund in infrastructure.
In the U.S., the Illinois State Board of Investment, Chicago, has allocated 5% of its $12.3 billion fund to infrastructure. The $242.7 billion California Public Employees Retirement System, Sacramento, is considering an allocation to infrastructure as a separate asset class, instead of its current practice of allowing managers to invest in infrastructure as part of their private equity funds.
This infrastructure investing allows public entities to draw on the worldwide resources, knowledge and experience in such projects of private equity firms.
But as state and local governments wake up to the potential supply of capital, they might seek to tap public pension funds for political and social reasons.
Pension funds will have to resist pressures to channel capital to less sound projects that couldnt compete for financing and that will result in low returns and in a less efficient allocation of resources.
More capital will bring more engineering and construction companies forward to meet the needs faster, and provide greater financial incentives to bring innovation not only to building and maintenance, but also to critical structural testing and benchmarking.
A bridge will have to be built in Minneapolis, and others are needed elsewhere, and many others must be repaired.
Pension funds and other patient investors with long-lived liabilities are ideally suited to take on the risk of such long-term assets and cash flows.