Opening the US to non-governmental infrastructure investment would involve reforming tax laws to appeal to foreign institutions and bundling projects into institutional-sized bites, a working group has found.
Treasury Secretary Jack Lew and Department of Transportation chief Anthony Foxx co-chair the interagency commission devoted to making President Obama’s “Build America” initiative effective.
Their report acknowledged that US public pensions lag their European, Canadian, and Australian counterparts in infrastructure exposure and—to an even greater extent—direct investments in the asset class.
As American public funds have long pointed out, that under-allocation has not necessarily been for lack of trying, but rather lack of domestic opportunity.
Lew, Foxx, and their fellow group members have set out to change that.
“Pension funds and other large institutional investors have risk-return preferences and investment horizons that are often well-suited to infrastructure assets, and they represent a significant source of potential funding for domestic infrastructure projects,” the group noted.
One early achievement of the initiative has been California State Teachers’ Retirement System’s plan to develop a multi-billion dollar peer-investing network to finance infrastructure projects.
To further encourage inflow of institutional dollars, the group advised policymakers to expand access to predevelopment funding. While this represents a small portion of most projects’ price tags, the report said, lack of early capital keeps many promising ventures from getting off the ground.
Furthermore, the group felt that streamlining permitting processes and making tax codes foreign-investor friendly would significantly enhance the feasibility of public-private development partnerships.
Risk ought to be shared among the partners, the report noted. “Each partner should assume those risks it can more cost-effectively manage, so that the risk-return tradeoffs are acceptable for both public sponsors and private investors.” Revenue and risk sharing arrangement can run the gamut from “pure user fees, where all the risk is borne by the private investor, to availability payments,” where the government pays out fixed-income style revenue to the investor.
“Innovative incentive structures can increase the universe of acceptable financing options for investors and public sponsors,” the group concluded.
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