Encouraging Pension Fund Investment in Infrastructure

Pensions funds and SWFs seem natural investors in infrastructure, yet as Clark, Monk, Orr and Scott point out, ” variety of constraints are preventing these investors from taking up their theoretical place of prominence in the market for private infrastructure.” 

A recent white paper from the Center for American Progress also discusses this challenge, focusing particularly on U.S. pension funds.  Among the challenges is the  favorable tax treatment of municipal bonds, a benefit that is of no benefit to pensions:

One key factor in the relatively low level of pension-fund engagement in U.S. infrastructure investment is the existence of the robust tax-exempt municipal-bond market, typically referred to as the “muni market.” In 2012 this nearly $400 billion market offered states and localities easy access to low-cost capital for infrastructure projects. Municipal bonds are financially beneficial to investors with tax liabilities. Since pension funds are not taxable entities, infrastructure projects financed with tax-exempt debt don’t offer pension funds a financially attractive vehicle through which to make investment in U.S. infrastructure projects. That’s the reason pension funds don’t enter the muni market. Likewise, neither state and local governments nor quasi-governmental entities such as ports and airports need to engage pension investors because of the strength of the muni market.

The white paper authors also catalog a number of other limiting factors beside the tax treatment of munis:

Beyond the muni market’s effect of crowding out tax-exempt investors, where there are infrastructure investments in the United States that offer a competitive rate of return to pension funds, the funds themselves have confronted significant barriers to investments. These barriers include a lack of experience; lack of investment-review capacity; the paucity of opportunities for investments that align with pension-fund needs and expectations; a mismatch between infrastructure deal structure and size and pension-fund needs and obligations; an aversion to operational and headline risks where there is a possibility of negative publicity associated with the investment; and political conflict and uncertainty where the viability of an investment can become subject to legislative action.


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