â€¦it is assumed that we do not discount later enjoyments [the lives of future generations] in comparison with earlier ones, a practice which is ethically indefensible and arises merely from the weakness of the imaginationâ€¦â€ Â Â Â Â Â Â Â Â Â Â Â Â Frank Ramsey, A Mathematical Theory of Saving, 1928
Weakness of the imaginationâ€¦Â Just before the Christmas holidays there were two public pension fund strikes into the heart of the U.S. infrastructure market.Â On December 16th TransUrban (TCL.AX) – the Australian owner/operator of toll roads in Virginia – sold 50% of its U.S. portfolio for $1.8 billion ($1 billion above the previous valuation) to three public pension funds, two Australian and one Canadian.Â On December 18th, CDPQ the adventurous Quebec pension fund announced an investment of $1 billion in Invenergy Renewables, the largest solar and wind project owner/operator in North America.Â Note: in March CDPQ also purchased 36 North American civil and social infrastructure projects from Australiaâ€™s Plenary group. Â
These were timely events, not because pensioners in Canada and Australia are making big bets on U.S. infrastructure, but because it reminds us of the stark fact that U.S. pension funds are not even in the market – our market, the largest infrastructure market in the world.Â Itâ€™s as if other countries pension funds are playing an infrastructure game that weâ€™re not seeing.
If U.S. pension funds entered our infrastructure market, it would be utterly transformative in terms of the strategic options for our country, and for the incoming Biden Administration. The projects we envision, the velocity ofÂ the market itself, and the valuation – and capabilities – of the companies driving an entirely new infrastructure ecosystem, would be transformed.Â It would open up new funding channels, everything from land value capture, to long-term lease and concessions. And it would also be timely, given the urgency – and the promise – of the coming 5G productivity boom. Â
Certainly the U.S. infrastructure industry agrees.Â In a CG/LA survey conducted in early November 88% of infrastructure executives said that the next Administration should encourage U.S. pension fund investment in infrastructure projects. Â
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U.S. Pension Funds in Infrastructure – The Dry Powder Thought Experiment.Â By just making available ten percent of the now $33 billion in U.S. pension fund assets we could double U.S. infrastructure investment without raising taxes, or building more debt, and we could get that done in a predictable and sustainable way for ten years or longer. Â This would mean that we would be investing in assets that drive economic growth, opportunity creation and equity, like the Brent Spence Bridge, solar and wind energy energy, ultra-efficient transmission lines, or the coming wave of municipal investments in 5G-enabled smart city infrastructure.Â It would also – and this is critical – bring our country together around a culture of infrastructure asset ownership. Â
The timing is right – not just because its the beginning of a new Administration, but because public pension funds in the U.S. are dramaticallyÂ underinvested and desperately in search of yield.Â Over the last twenty years, as assets under management have exploded, going from 70% of GDP to over 120% of GDP. During that same period, obligations coverage has gone from over 95% all the way down to red alert levels of less than 70%.Â And its getting worse: in 2020 the average public pension fund will undershoot their 7% actuarial returns target by 4-5%.Â CDPQ, by contrast, projects a 10.4% return in 2020 â€” thanks, in part to the 16% of assets it invests in infrastructure.
So its both timely and necessary that pension funds invest in our infrastructure. Three additional advantages:Â first, on the environmental side, these would be the most conscientious – not to mention diligent – investors in the world, arguably alleviating some of pressure on our current regulatory structure;Â second, pension fund investments would engage all of as as owners in infrastructure – imagine that power to bring us together in common cause; and, third, funding would be essentially unlimited – at a reasonable level of 10%, this would create an investment pool – call it the U.S. Aggregated Sovereign Wealth Fund – of $3.3 trillion.
There is no alternative, so perhaps we will do the right thing in the end.Â U.S. public pension funds have only three choices going forward:Â cut benefits, which they cannot do;Â increase contributions, which is nearly impossible to do; or seek higher returns.Â
Turning the World Upside Down – Creating Project Pipelines.Â Houston, we have a chicken and egg problem.Â The public – and politicians generally – believe that we lack investment funds, and so our infrastructure market has become episodic.Â There is something to this, when the average highway project takes 9.5 years to move through the approval process, and a lock and dam project budgeted in 1987 at three years, and $750 million, takes 30 years and $3 billion to complete, then something is terribly wrong. Â
Now look through the other end of the binoculars. Infrastructure investors see things very differently: they have access to plenty of money, there just arenâ€™t enough projects – whether brownfield, greenfield, or new infrastructure, or whether transport, energy, water or digital – to invest in.Â The challenge is to create a machine that produces a steady stream of high quality, bankable projects, that emerge for investment on a regular, predictable basis. Â
This means wrenching change, a recognition that the current infrastructure market – 84% ring-fenced from pension fund investment, too slow for for the speed of technology, old and increasingly obsolete, fueled by taxes and municipal bonds – wonâ€™t meet the challenges of our future.Â The infrastructure market – the institution of the market – lacks capability. It also needs to be moved, a bit, enabling the public sector to make quick decisions, and to manage risk with the us (the owners of pension fund assets).
Words matter, and I have the feeling that politicians are trapped in a public works world, while the rest of us – certainly the technology community, and the rest of us in terms of aspirations – see infrastructure as strategic. Just look at the fact that we have no Department of Infrastructure, and no infrastructure budget, and certainly no infrastructure office in the White House, while all of us talk – and think – in terms of strategic infrastructure. Word frequency agrees with us, as you can see in the graph below from Googleâ€™s GOOG marvelous NGram Viewer. The Senate Committee on Environment and Public Works doesnâ€™t, nor does the House Committee on Transportation and Infrastructure (leaving out electric everything).
The infrastructure market needs at least two new institutional capabilities to guarantee that it produces the products that pension funds want to buy (invest in).
First, we need to fund the creation of a steady stream of high quality projects.Â In infrastructure, this means feasibility study funding at an industrial scale, across all fifty states – prioritizing projects critical for local users.Â A model already exists.Â The U.S. Trade & Development Agency, launched during the Carter Administration – and robustly surviving with bipartisan support ever since – performs exactly this function, spending on projects in foreign countries $500,000 to $1,000,000 each to design bankable projects. These are projects, by the way, that then buy U.S. goods and services, the exact same kind of market creation that would be caused domestically.Â The set-up cost would be no more than $50 million.Â Firms like Kiewit, Aecom, Parsons, Xylem, Ameresco and Quanta would see an explosion in backlog as feasibility studies came on line, and visionary projects drove productivity, equity and opportunity.
Second, infrastructure as a product is different – more like airplanes, for example, or the assets that 5G is meant to optimize. Pension funds would require a means of managing the performance of these strategic assets for 30+ years.Â Luckily this too exists, in Europe, Australia and Canada, where private managers have become highly regarded caretakers of public assets for more than thirty years. This is not a public function – it is a private function, that will vigorously emerge as a vital component of the new infrastructure ecosystem. These firms would cover all fifty states, would specialize project classes large and small, and would also focus on on asset classes from wind and solar to smart cities, and autonomous vehicle lanes along the Eisenhower interstate highway system. Â
This New Market is Ideal for Fourth Industrial Revolution Infrastructure? Â Imagineâ€¦ the digitized infrastructure ecosystem – revitalizing brownfield assets, creating new classes of greenfield projects, and creating new digital infrastructure – that needs to be created over the next ten years.Â As the 5G economy revs up, focused on machine to machine interaction (very different from the 4G machine to consumer ecosystem) new companies will emerge, boutique companies (Synaptics SYNA comes to mind) will grow into giants, and workers – and manager – will learn entirely new skill sets to drive our economy.Â
Take a step back:Â Fluor FLR , one of the leading U.S. engineering/construction companies, had a market cap of $8.75 billion on January 11th, 2010, and – just over ten years later – its market cap was less than 1/4 of that, at $2.18 billion (December 14th, 2020). The perennial giant Exxon suffered a similar fate, declining from a market cap of $326 billion on January 11, 2010 to $182 billion just ten years later, a decline of 55%.Â Apple AAPL , on the other hand, one of the most successful riders of the 4G consumer wave went from a market cap of $186 billion on January 11, 2010 to a market cap today over 2.18 trillion, a greater than 11 times increase. Â The pace of change is accelerating.
Imagine if Apple had to wait 9.5 years on average for the approval of its next iPhone?Â The 5G infrastructure world will not move at the pace of the current infrastructure market.Â If we invest in that market – our pension funds, our savings, an avalanche of patient long-term capital – you can only imagine the extraordinary wealth creation that weâ€™d see as a country, and that weâ€™d see individually. Do we have the will – and the stomach – to navigate this level of necessary disruption?