President Trump, in his address this week to Congress, promised to invest $1 trillion in rebuilding our nation's infrastructure. After bemoaning our crumbling infrastructure, which includes falling bridges and dangerous tunnels, Trump said: "To launch our national rebuilding, I will be asking the Congress to approve legislation that produces a $1 trillion investment in the infrastructure of the United States -- financed through both public and private capital -- creating millions of new jobs. This effort will be guided by two core principles: Buy American, and Hire American."
As a recent Gallup Poll announced, "Two-third of American (69%) say it is "very important" for President-elect Donald Trump to keep his campaign promise to enact major spending on infrastructure renew." As we noted in our recent Responsible Investor Handbook, published by Greenleaf Publishing (2016) infrastructure represents the "basic physical systems of a business or nation." Infrastructure investments can be grouped into the following broad categories: energy, transportation, water, communication, social infrastructure (schools, hospitals, social housing).
We have long advocated for public investments in infrastructure, utilizing the decades-long, low-cost, reliable infrastructure bonds approach. Aside from fixed-income offerings, project finance is another strategy for capitalizing long-term infrastructure investments, including renewable energy and energy retrofit projects. The project finance structure is "based upon a non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cash flow generated by the project" (Investopedia, 2015).
Trump's push for public-private partnerships (which might include pension investments) in infrastructure represents both an opportunity and threat. For one, there are institutional investors, including CalPERS and Canadian pension plans (such as the CPPIB, OMERS, and OTPP), which have made many direct infrastructure investments that also included an assessment of ESG factors during the investment due diligence and monitoring process. Some institutional investors have incorporated anti-privatization measures and truly abide by "responsible contractor policies," which ensure that current and future workers are treated fairly.
A downside of some PPPs (public-private-partnerships) are demonstrated in some of the privatization horror stories that abound (think Indiana Toll Road, which bankrupted, and the Chicago parking meters). Infrastructure investments by Wall Street can be botched by private equity-style high fees and short holding periods that are a mismatch with the long-term nature of projects (and pension funds). In future editions, we will highlight successful responsible infrastructure funds in the U.S.A., Australia, and Canada that have primarily been born out of a demand by pension funds.
The following articles by the Roosevelt Institute CEO Felicia Wong and report by Damon Silver, Eric Harris Bernstein and Dominic Russell entitled Transformative Infrastructure and the UN-PRI on their Infrastrcture Workstream provide some important policy frameworks going forward.
The Heartland Thursday Espresso has been featuring, over the years, a huge number of stories about renewable energy investments. That’s because the energy sector, and especially green energy, has become one of the largest drivers of new infrastructure investments in this hybrid-finance space. Needless to say, if the new Administration's first idea for infrastructure is building a "Great Wall" dividing our country with our southern neighbor, then we've failed miserably. Our basic message: repair first, (re)build bridges not walls, and do it responsibly.