Direct Bilateral Transactions: A Localized Approach to American Infrastructure Finance and Public Pension Fund Investment

Abstract

Two of the most difficult economic issues facing the United States are the relatively poor quality of American infrastructure and the funding inadequacy of many public pension plans. Because both public pensions and most infrastructure projects are the responsibility of U.S. state and local governments, they will frequently compete for funding from the same limited annual budget, leading to difficult trade-offs and suboptimal choices. In response to this situation, many state and local governments are looking to private investment for infrastructure projects through public–private partnerships (PPPs) and similar structures as an alternative to direct procurement. But proposed transactions that involve user fees are frequently met with fierce local resistance. At the same time, local public pension plans are often seeking to mitigate their funding gap and reduce required contributions by sourcing long-term investments in infrastructure project debt and equity. But the supply of domestically sourced infrastructure investments arising from U.S. PPPs is very limited, due mainly to widespread resistance. In theory, the dynamics of these two apparently separate issues—resistance to private infrastructure investors in a local project and the lack of infrastructure investment opportunities for a local pension plan—can be connected in particular cases. If the right basic facts are present, a local government planning an infrastructure project as a PPP could turn to the local public pension plan for financing on a direct bilateral basis. Because the pension plan is clearly a local investor (on behalf of local beneficiaries for whom the local government is responsible), resistance to the project might be reduced. For the pension plan, direct investment in a local infrastructure project could offer superior investment opportunities.

TOPICS: Pension funds, other real assets, project finance, legal/regulatory/public policy