The need for an infrastructure plan seems to be one of the few points of agreement between the new Democratic Congress and the White House. There is debate about raising the tax on gas to pay for the much-needed infrastructure improvements; selling off $1 trillion in federal property is another proposal. But again, agreement that U.S. infrastructure is in a critical state and needs improvement is no longer in question.
Coming out of a decade of economic post-recession struggle, the U.S. is ready to place many projects back on the drawing board. While talk of infrastructure is still at the macro scale of roads and bridges, airports and mass transit, and public utilities works, we believe that ultimately each of these projects reflects on a region or area that will benefit from an investment in its revitalized future. Some innovative financial mechanisms will need to kick in for any of these localized dreams to be realized. Concurrently, the deployment of such capital will result not only in a return on it, but in a net gain for individuals participating in the ecosystem where that increased economic activity is taking place.
Here are three key lessons we’ve learned from infrastructure projects we’ve been working on in the U.K., all applicable to the U.S.
Identifying Pools of Capital Invisible to the Naked Eye
Our stateside investments include roads in the Midwest, gas plants in California, a campus expansion in California, and solar power generation installations in Massachusetts and New Jersey. Last year, in the role of primary funder, our firm increased our U.K. direct infrastructure investment to around $20 billion.
Our involvement in U.S. projects, usually fill-in debt, happens on the coattails of a project sponsor. Issuing from the project sponsor will be an equity component, and oftentimes, a tax-free debt component. This latter would be the result of a local government issuing municipal bonds. The remainder of the financing needs to be filled in with straight commercial debt—and that’s where we play a role.
Private sector funding is cheap and plentiful right now. Though they have begun to creep up, interest rates have been at historic lows, resulting in a buildup of discrete pools of private capital that collectively amount to a huge amount of money looking to be invested. But these investments need to make a decent return. This is where we have some insight—we know where these pools of capital exist, and we can access them; and there are a few key working approaches to maximizing the return on those capital investments.
In the United States, for example, there’s almost $4 trillion in defined benefit pensions, many of which are underfunded by their issuing companies and thus are under pressure when it comes to meeting future obligations to pensioned employees. For a large insurer with longevity and investment expertise, taking over the liabilities and assets of underfunded pensions and administering them to deliver the benefits promised to their members also represents an opportunity to provide long-term investment for infrastructure projects. Thus, the cash flow from the infrastructure asset can be used to pay the pension obligations over a long period of time – perhaps forty or fifty years out. This is just one possible underpinning for private financing. There are others.
Seeing Projects or Locations In Their Entirety
In our experience, in terms of project selection and whether or not to get behind it, it’s important to think about a location holistically. For a renewal project in or around a struggling city, for example, in order to make the place start to thrive, several economic drivers must be in place—housing, connected infrastructure, and so on. Our approach in several cities has been to take our cues from the vision of the local civic leadership, who tend to be better informed about what will make a town or city work better. We’ve found that when you’re trying to deliver local prosperity, usually it doesn’t matter whether local authorities are on the right or left, politically—or a mixture of both. Civic pride usually beats politics.
For example, we started a regeneration project in Newcastle, England by talking to the chief executive of the local city council—a politically neutral civil servant. We encouraged the city to make their case to the central government, which was then under a right-wing finance minister, to try and garner a devolution deal that would grant the city greater powers and more money. As a next step, we engaged with the mayor of Newcastle and the leader of the council, a Labor Party member whose viewpoint would put place him on the political left. In practice, these political disparities didn’t make any difference, because the parties shared a collective vision—making Newcastle a better place.
It’s More About Partnerships Than Bidding
Finally, there’s a third principle that drives our decision-making process, especially our thinking about how we choose where to invest—the location, the site itself and the context. We prioritize partnership with the city we’re working with above bidding on particular projects. We’ve found that our offer of very long-dated patient capital usually paves the way to a successful debt financial deal—projects tend to fund themselves with this approach.
To show how this works, I’ll take a different city. It’s possible—and sometimes advisable—to get involved on many different levels. In Leeds, England, we’re funding a large chunk of high-end rental accommodations as well as a business park that will provide 13,500 jobs. To connect this infrastructure, it’s necessary—in the U.K., at least—to have a railway, which we’re funding, and a road, which we’re also funding. In Leeds we’re also appealing to civic pride by refurbishing a well-known and beloved cricket ground. All of these things add up to about £650 million (roughly $900 million) of investment in Leeds. While there are actually five discrete projects, it’s as if we’ve become a partner with the entire city.
The key difference between projects in the U.K. and here in the U.S. is one of sheer scale. Distances between cities in the U.S. are vast; here there is the luxury of urban sprawl. So for Americans, the word ‘infrastructure’ probably conjures something big and impersonal—gigantic bridge and highway projects, water service to entire, vast regions. Nonetheless, most infrastructure issues are exactly the same both here and across the Atlantic: we all live somewhere. Everyone needs decent living conditions, clean water, living-wage jobs and a way to get to them. One level up, people also need to feel pride in their town or city, in order to be invested in it as a community member.
The structures that were originally put in place to answer to these needs, particularly in smaller cities, have begun to wear out, become overloaded, or at best have grown outdated. It’s time for the world’s biggest financial companies to step in and get involved in financing the renewal of our towns, cities, and larger infrastructure—possibly by using some of these approaches we’ve discussed. What could be a better application of inclusive capital than improving the lives of regular people?