A second paper to emerge from a series of joint studies between Harvard University and Melbourne-based Hastings Funds Management suggests that the $14 billion US pension industry could best achieve the returns and stability it seeks from infrastructure investment by defining assets as “essential to community”.
Through a series of surveys and a case study of how the California Public Employees Retirement System (CalPERS) categorises its infrastructure allocation, the report finds that not all US pensions pay due attention to the underlying essentials of their infrastructure investments, and thus sometimes class as “infrastructure” what can be better understood as a private equity or business investment.
In order to focus on both the risk profile and potential return range that infrastructure investments can offer, the report proposed this definition for US pension funds to follow: “Facilities, structures, equipment, or similar physical assets – and the enterprises that employ them – that are vitally important, if not absolutely essential, to people having the capabilities to thrive as individuals and participate in… [roles] critical to their well-being and that of their society.”
The emphasis on people’s needs is critical, the paper claims, “because meeting them is the ultimate end in relation to which finance is a means”. The report also cautioned against a definition solely in financial terms, as it “too easily risks losing sight of the real world enterprise which gives rise to those [financial] attributes”. A clear-cut definition of the asset class remains tricky, even for CalPERS, which instead relies on non-exhaustive lists of examples. Thus, few of the fund’s infrastructure investments’ risk rankings could be categorically defended.
To frame risk more quantitatively, the paper suggests looking at 15 aspects of an infrastructure asset/investment, including demand, constraints on supply and competition, the form of payment, pricing, the public sector’s role, and business/enterprise models.
Applying this model to a few of CalPERS’ investments “poses questions… as to whether and how this array of investments… is apposite with CalPERS’ overarching goals and its more specific standards and criteria for achieving them”.
The report suggests that a more detailed analysis of each investment could better help US pension funds meet their 4 percent overall return goal for infrastructure.