Infrastructure bill features first-of-its-kind P3 asset recycling requirement

The infrastructure bill that won Congressional approval last week may encourage the nascent sectors of asset recycling and public pension fund direct investment in infrastructure.

The Infrastructure Investment and Jobs Act requires the Secretary of Transportation to submit an asset recycling report to Congress by 2024. The young sector – which describes when a state or local government privatizes an existing asset and then puts the proceeds back into infrastructure – is closely watched by infrastructure investors.

“The asset recycling provision in the IIJA is the first instance where asset recycling has been called out in U.S. federal legislation,” said Tom Osborne, executive director of infrastructure at IFM Investors, an Australian-based fund manager owned by a group of pensions.

"That’s a really important opportunity to help the government understand the benefits that P3s can bring and the measures that can be taken to facilitate those relationships," he said.

When Indiana leased its toll road in 2005 for 75 years, the state used the proceeds to finance a 10-year transportation program in a prime example of asset recycling that is promoted in the new infrastructure legislation.
Credit: ITR Concession Company LLC

The asset recycling requirement marks one of several P3-friendly provisions in the bill that could bring into play U.S. infrastructure ranging from airports, utilities, toll roads, ports and inland waterways. And that may open up investment opportunities for US public pension funds, which lag other countries in direct infrastructure investment, experts said.

The asset-recycling provision calls for the transportation secretary to analyze impediments to increased use of public-private partnerships and private investment in transportation improvements and make proposals “for approaches that address those impediments while continuing to protect the public interest and any public investment in transportation improvements.”

Though the provision only encompasses a report, it “creates an interesting opportunity to advocate for a program of infrastructure investment incentive grants,” said Osborne, referring to federal incentives for state and local governments to reinvest proceeds from leases of existing assets into infrastructure.

If government-owned assets come into play, U.S. public pension funds make natural investors, said Clive Lipshitz, managing partner of Tradewind Interstate Advisors, a consultant to alternative investment management firms, and author of the book Bridging the Gaps: Public Pension Funds and Infrastructure Finance.

U.S. public pension funds are "very friendly investors" for infrastructure assets, said Clive Lipshitz, managing partner of Tradewind Interstate Advisors, a consultant to alternative investment management firms who writes about US pension funds investing in infrastructure.

In Canada and Australia, pension funds generally have about 10% of their portfolios invested in infrastructure, but in the U.S., it’s only around 2%, Lipshitz said. Impediments in the U.S. include relatively cheap capital through the municipal bond market and federal grant programs like TIFIA and WIFIA.

But despite those markets, the country faces a massive infrastructure backlog that’s ripe for pension investment, Lipshitz said.

“Pensions are very friendly investors for infrastructure,” Lipshitz said. Among the affinities: the long-term nature of the assets and liabilities; a generally stable cash flow; and a “virtuous circle” wherein the well-being of one sector fosters the well-being of another. For example, better-funded pensions creates more money for infrastructure, which contributes to a stronger local economy that boosts pension contributions, he said.

The Indiana Toll Road stands as a chief example of asset recycling and pension fund investment. In 2005, the state leased the 157-mile toll road for 75 years to ITR Concession Co. for $3.8 billion. Then-Gov. Mitch Daniels plowed most of the proceeds into a 10-year transportation infrastructure program, relieving the state from paying for road projects for the next decade. In 2014, ITRCC declared bankruptcy, and in 2015, IFM Investors purchased it for $5.73 billion. In 2016, the California Public Employees’ Retirement System acquired a 10% stake, marking the largest U.S. public pension fund investment in a direct infrastructure asset to date.

The purchase was CalPERS first transportation investment for its infrastructure portfolio, part of its $44 billion Real Assets Fund.

“This solid, long-term investment represents our first foray into a transportation asset in the United States,” Paul Mouchakkaa, managing investment director for CalPERS' real assets program said in a news release at the time. "We continue to make progress building up this important program, and the ITRCC aligns well with our recently adopted strategic plan for real assets."

A CalPERS spokesperson declined comment.

Most pension funds don’t have the resources to hire big infrastructure teams and when they do invest, it tends to be as co-investors instead of as deal leaders, Lipshitz said, adding that he’s pushing for a U.S.-based IFM-type consortium made up of pension funds that would pursue infrastructure investments.

“In my conversations with pension trustees and treasurers, there is receptivity to these ideas,” he said. “There is so much interest in this country in getting things working again but people need to look at state and local government finances and this virtuous circle,” he said. “The [infrastructure] bill can be the catalyst.”

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Infrastructure Washington DC Biden Administration Joe Biden Public-private partnership
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