The new Trump administration should embrace privately financed and operated projects as a key element in its plans to make infrastructure a priority in its economic stimulus program.
Asset owners and other institutional investors are hungry for infrastructure opportunities.
“Donald Trump has talked a lot about potential infrastructure investments and the like, and obviously that is something we like and fits into our portfolio. That might be an area where we would be interested — along with other pension funds, I would think,” Inger Huus Pedersen, Copenhagen-based head of fixed income at the 250 billion Danish kroner ($35.6 billion) PKA, was quoted as saying in Pensions & Investments.
High and rising budget deficits have challenged the ability of traditional government financing to fund infrastructure improvements without increasing the burden on current and future generations of taxpayers.
In setting up a strategic and policy forum that includes leaders from institutional investors, the president-elect displays an eagerness to attract investment for infrastructure. Among the members of the panel are Laurence D. Fink, chairman and CEO of BlackRock Inc., and Adebayo “Bayo” Ogunlesi, chairman and managing partner, Global Infrastructure Partners, New York.
Mr. Trump's campaign platform included calls for leveraging new revenues, working with public-private partnerships and in general wanting to “harness market forces to help attract new private infrastructure investments.”
The extent of a Trump program will depend in part on the willingness of state and local governments to break away from public ownership and tax-exempt bond financing for infrastructure.
Not every infrastructure project can generate revenues and returns. But those that have expectations to do so have potential to attract investment from asset owners and ease the burden on public financing.
To government, infrastructure is a cost. But private investors willing to assume the risks view infrastructure as a potential asset and source of expected investment return. Private financing and operations could turn this type of infrastructure into an income-generating asset for government from the sale or new development of projects as investors ultimately pay taxes on their investment return. Government should free up this capital.
High-quality infrastructure is essential for a robust economy, and the discipline of the financial market would often allocate capital resources in a more effective way than public financing.
Asset owners, especially pension funds, will have to resist political pressure to become economic development arms of state and local governments that promote projects designed more to serve political purposes than to produce competitive risk-adjusted return. Likewise, the asset owners, as fiduciaries, have to strengthen due diligence to evaluate projects from enthusiastic investment bankers, trying to sell the Brooklyn Bridge.
In the United Kingdom, Chancellor of the Exchequer Philip Hammond's commitment to increasing infrastructure spending has encouraged institutional investor interest.
David Curtis, head of U.K. institutional sales, Goldman Sachs Asset Management LP, said “infrastructure is often seen as an attractive investment for pension funds in need of reliable long-term investments.”
Core infrastructure projects that offer solid, nominal or inflation-linked income “are exactly the kind of projects needed by schemes struggling to find sufficient long-term investments with the income profile they require to meet liabilities,” Mr. Curtis was quoted as saying in Pensions & Investments.
As Vivek Paul, director, client solutions at BlackRock, said, “A natural advantage for pension funds ... is their greater ability to hold illiquid assets.”
Creative financing will help bolster infrastructure investments' potential attractiveness to institutional investors. In 2014, the Fiduciary Infrastructure Initiative sought to enlist pension funds for an alternative lower-fee approach than the typical infrastructure-manager model.
Patient asset owners like pension funds have the long-term horizons to take on the risk of long-term assets like infrastructure. They should engage the new administration to encourage more market-oriented projects.