Aging infrastructure is stunting growth around the globe. Aware of the challenges posed by crumbling roads, airports and railways, President Donald Trump's administration has pledged to spend $1 trillion on infrastructure over the next decade. Other countries, such as the U.K. and Australia, have faced similar challenges in reinvigorating public infrastructure spending.
As in the U.S., Australian policymakers' key challenge has been how to encourage individual states — the primary owners of most infrastructure assets — to spend more on new infrastructure. One proven method of achieving this has been through the concept of “asset recycling,” a method the U.S. government could readily adopt to help states kick-start their own ambitious infrastructure spending plans.
Effectively, the Australian government provided states with a financial incentive to privatize assets. Upon the sale (or long-term lease) of assets, the federal government would provide a financial contribution equal to 15% of the assessed sale value of the asset, to be used solely to invest in qualifying infrastructure.
One of the most prominent examples of the policy in action has been the state of New South Wales' 99-year lease of Ausgrid, the state's largest power distributor, to a consortium of AustralianSuper (the largest Australian pension fund) and IFM Investors.
For the Ausgrid lease, the NSW government pocketed an incremental A$800 million ($592 million) bonus payment from the federal government, in addition to A$2.2 billion in bonus payments from previous sales. The sums added materially to the funding of an ambitious infrastructure spending plan while allowing owners to partner with the state government for the long term.
As a result of asset recycling, state governments have an incentive not only to unlock potentially trillions of dollars of otherwise trapped capital, but to reinvest it in new infrastructure projects. In the U.S., proceeds could be reinvested in aging infrastructure to bring it back to “good repair” condition, as defined by the American Society of Civil Engineers. Such repairs could be in addition to transformative greenfield projects and social infrastructure, or indeed in place of them, as those projects are brought to shovel-ready stage.
Asset recycling and reinvestment alleviate what is often the key problem when otherwise pushing ahead with such fiscal stimulus, namely, the persistent funding gap faced when considering investment in vital infrastructure projects, as governments at all levels remain fiscally constrained due to budget deficits and high levels of debt.
Further, states undertaking sales are likely to be met with significant interest from investors both domestic and global. Indeed, in Australian privatizations state governments have benefited, in terms of realized prices, from the participation of global capital, notably from Canadian pension funds There is ample deployable private capital lined up to invest in infrastructure as an asset class. But deployment is being frustrated by a current dearth of investible assets.
A potential hurdle in this effort might be the relatively limited nature of private-public partnerships — known as PPPs or P3s — in the U.S. In the Australian and U.K. infrastructure markets, PPPs account for about 15% of infrastructure investment, whereas in the U.S., despite gaining traction in recent years, the level is still closer to 1% to 2%. There has been some past skepticism of PPPs with privatizations viewed as favoring Wall Street investors over Main Street infrastructure users, but well-structured deals can effectively balance the interests of both.
We would argue the privatization experience does not have to be greeted with skepticism. This is especially true should governments look to partner with pension funds for capital — a tweak to the traditional PPPs that we call pension-public partnerships, such as Ausgrid.
Such pension-public partnerships are possible only because the objectives of pension funds and governments can be particularly well aligned. Pension fund investors see themselves as long-term stewards of infrastructure assets whose long-term cash flows are a good match for pension liabilities. Additionally, the open-ended nature of the investment will encourage owners to improve productivity and the user experience, while fairly addressing any environmental, social and governance issues that may arise. U.S. pension funds could follow a similar course, and indeed might benefit directly, in terms of experience and a diversified source of capital, by working in partnership with aligned and like-minded global counterparts.
The U.S. economic and social narrative about infrastructure investment in such a model would be overwhelmingly positive and would cut through partisan party politics: Everyone wins by investing American workers' savings in domestic infrastructure to provide improved services, economic growth, jobs and retirement security for Americans.
But these are also investments in the future, as they provide productivity dividends over the long term. Infrastructure investments serve to raise living standards, alleviate drags on the economy and boost longer term growth rates.
Asset recycling and pension-public partnerships are concepts that can easily be adopted by policymakers in the U.S. based on a proven Australian example. Indeed, given the scope, scale and ambition of the infrastructure investment plans favored by the Trump administration, the opportunity seems nearly boundless.
