One way or another, large-scale infrastructure renewal and development will need to be a feature of the US economic landscape over the next decade. This widespread observation is fundamentally not a matter of political policy or economic theory – it is based on simple physical facts like increasing inefficiency, obsolescence, the effects of deferred maintenance, and the tendency of broken things to fall down.
But politics and economics are very much central to the question of how to pay for it all. There’s a broad consensus among policymakers in the US that private-sector capital will be a necessary part of the solution. The idea is frequently invoked by politicians across the spectrum. But specific proposals often hit walls of fierce local resistance.
A common theme to such resistance is an appeal to a simplistic principle: private-sector financial investors are predatory outsiders who can’t be trusted, and new or increased tolls or user-fees associated with infrastructure financing will mostly go to boost unfair profits. And so these walls become apparently immovable objects, impervious to logic or persuasion.
Yet in many of the same places, something like an unstoppable force is developing in the form of unfunded public pension plan liabilities. The size of these funding gaps is mind-boggling, and the potential impact is severe, near-term – and almost completely localized.
At the US state level alone, the Center for Retirement Research at Boston College estimates that when a realistic discount rate of 5 percent is used, state public pension unfunded liabilities are close to $2.7 trillion. Moody’s, using a similarly realistic discount rates, estimates that state pension plans are only 48 percent funded.
Worse, in many places large pension funding gaps exist in an overall context of severe pressure on public sector budgets. The recent bankruptcy of Detroit may be an extreme case, and public pension plans are only a part of its problems, but the example serves to concentrate other minds wonderfully.
Down Under Success – Social Privatization
Here’s a thought experiment: could the force of the funding gap issue, if channeled into infrastructure-based financing transactions, also help break down resistance to non-traditional forms of infrastructure financing?
Recent experience from Australia, a leader in infrastructure private-sector finance, shows a possible path. The New South Wales government recently sold off 99-year leases to major port facilities to a private-sector consortium of local pension fund managers led by Industry Funds Management (IFM) in a $5.3 billion privatization transaction. To overcome initial resistance from the public, IFM successfully characterized its acquisition of the port infrastructure as ‘social privatization’, where the investment returns benefited Australian retirees – not (as Infrastructure Investor put it, on When antonyms collide) ‘faceless, greedy fat-cats’.
Perhaps the same concept, when connected to the force of a serious funding gap issue, could work to overcome resistance in this country. If explicitly designed and advertised as social privatization, the sale of local infrastructure assets to local public pension funds in exchange for cancellation of some local public-sector liability seems less far-fetched. Yes, there will be new or higher user-fees on that infrastructure – but the payers will know that the transaction reduced their own public-sector liability, that their public services will be preserved, and that the user-fees are ultimately going to themselves or their neighbors.