The Organisation for Economic Co-operation and Development may have found a new and much-needed source of infrastructure funding in pension funds, but the problem is far from solved, as governments still need to set up the framework to help them invest.
An Organisation for Economic Co-operation and Development (OECD) report in September highlighted an unpalatable truth for governments around the world: that the financial crisis has aggravated an existing infrastructure gap by further reducing the scope for public investment at the same time as drying up traditional pools of private capital. Luckily for governments, particularly those in the slow or no-growth developed markets, the authors suggested an alternative source of funding for global infrastructure, estimated by the OECD to be about €50,000bn until 2030: pension funds.
Policy-makers in cash-strapped countries are clearly thinking along the same lines. In New York, governor Andrew Cuomo is reported to be in discussion with public pension funds to help pay for a raft of construction projects. In the UK, it is looking likely that the government is putting infrastructure at the heart of its November growth review. Reports suggest that the review will unveil a proposal of a £50bn ($77.5bn) plan to pool local pension money
While pension funds – bar a handful in Canada and Australia – barely dip their toe in the infrastructure pool, the bringing together of public projects with pension assets is not just pitched as a good deal for governments. Infrastructure is seen as a great match for investors with long-term liabilities such as pension funds: it has the potential to secure sustainable, strong returns, can offer a good hedge for inflation, and typically has a low correlation with other asset classes.
So far so good. However, crucial details about how such a marriage will work have yet to be hammered out. The role of government in any fund is unclear, for example, as is how much pensions would invest. Some plans suggest a pooled infrastructure fund structure, which will operate like an orthodox infrastructure fund; if so, who will manage it? Or are pensions expected to invest directly in infrastructure assets? If so, this requires a great deal of in-house expertise, which most pension funds will not possess. Others wonder if the government will be required to underwrite a certain return on investment to get funds involved; in which case, could taxpayers again be on the hook if things go wrong?
Many believe this could be a marriage made in heaven. It would certainly provide some relief for the exhausted coffers of many governments, who nonetheless see strategic public infrastructure projects as a way of boosting anaemic growth rates and building for the future. But if direct investment and equity ownership is envisaged, this will require a very steep learning curve. While those forward-looking Canadian and Australian pension funds are already sophisticated infrastructure investors, others are not.
