Although historically the investment profile for pension funds has focused on established brownfields assets, the Canadian Pension Plan Investment Board (CPPIB) has recently invested $525 million AUD into the greenfields NorthConnex road tunnel in Sydney, Australia in partnership with experienced road operator Transurban and the Queensland Investment Corporation (QIC). CPPIB’s investment comes hot on the heels of the Dallas Police and Fire Pension System’s (DPFPS) 2010 equity investment in Texas’ LBJ Freeway (I‐635) managed lanes toll-road, among other projects, and may suggest an increased willingness for pension and infrastructure funds to invest in greenfield projects.
It’s no secret that the US P3 infrastructure market is growing, resulting in an increased appetite for infrastructure investment, so what might it take to develop investment by pension and infrastructure funds in US greenfields P3 projects?
Increase investment in infrastructure by relevant funds. For the better part of the last decade, the US market has heard of an intention within pension funds to increase investment to infrastructure – usually to around 3% of the total fund investment. We have also seen an increase in the number of US funds specifically geared towards infrastructure investment and many examples of fund investment into de-risked projects (eg Teachers Insurance and Annuity Association – College Retirement Equities Fund acquisition of half of Actividades de Construcción y Services’ stake in Florida’s I-595 Corridor P3 project). If, however, infrastructure fund investment is to truly play a pivotal role in solving the US’s current infrastructure challenges, then there is no doubt the total investment percentage should continue to increase to match international fund investment leaders such as Canada (5%) and Australia (6%).
Return on investment for shareholders. The primary responsibility of any institutional investor is to provide a return on investment to their members. Although infrastructure funds have historically preferred brownfield assets with guaranteed income streams (and therefore lower risk), the opportunity to invest in greenfield projects with significantly higher returns (albeit greater risks) is not unprecedented. CPPIB’s investment in NorthConnex is an example of this with the funding for the capital works being provided by an innovative financing structure that leverages enhancements to the existing M7 concession including extension of the existing concession, higher truck tolls and additional gearing with the private sector party maintaining demand risk. Although the bundling of the existing toll revenue stream from the operational M7 concession differentiates NorthConnex from a pure greenfields transaction, it is likely that significant due diligence was required to ensure lessons learned from perceived failed deals where demand risk has been transferred to the private sector (eg Lane Cove Tunnel in Australia and South Bay Expressway in the United States) were adopted to ensure a robust investment.
Increase knowledge base and resourcing within pension funds. Over the years, sophisticated infrastructure investors in Canada and Australia to a lesser extent have developed in-house expertise to allow direct investment in resources rather than being reliant on financiers or external consultants. This increased expertise allows these investors to take lead roles in consortiums bidding on transactions from the outset and to exercise a greater degree of control over design, construction, operation, maintenance and long term participation in the asset. The development of this kind of in-house expertise is critical to developing a stable platform for infrastructure fund investment.
Political stability and development of a pipeline. Given the long term nature of a P3 investment, political and regulatory stability is essential to encouraging investment. For overseas investors in the US market, this will require confidence that there is political and public acceptance of private sector investment in infrastructure. For domestic and international investors, they will require certainty that a P3 pipeline will be developed and appropriately structured so as to foster private sector investment in projects deemed suitable for P3 delivery. For the latter reason, it seems no coincidence that the investments made by PSPIB and DPFPS were in Indiana and Texas, both States who have been progressive and consistent in development of a P3 program.
When considering whether CPPIB’s Australian investment, PSPIB’s investment in Indiana and DPFPS’s investment in Texas might spark a trend towards greater investment in US greenfields P3 projects, it is probably too early to tell. Given the investment strategy of pension funds is well aligned with a robust P3 model, there will likely be continued investment in brownfields projects (including where the project is de-risked after completion). The opportunity for greenfields P3 investment will continue to depend on the private sectors appetite for risk (including transfer of demand risk), the ability for the private sector to properly assess the likely return on investment through thorough due diligence, the nature of the asset proposed to be delivered, the level of political certainty surrounding the project and the availability within the fund to take on a higher risk investment to balance its portfolio. Watch this space…
For more than a decade, Elizabeth Cousins has served as a key advisor on an array of important infrastructure projects delivered through public-private partnerships (P3s) and other alternative delivery methods.
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