Not the Macquarie Model: Using U.S. Sovereign Wealth to Renew America’s Civil Infrastructure

As this paper is written, the United States finds itself at the vortex of multiple converging forces that could change permanently the manner in which the nation’s civil infrastructure is funded and paid for. Simply put, there is recognized need for comprehensive reinvestment in the infrastructure of the United States and the magnitude of the shortfall between needs and spending is daunting. Taken together, annual investment in public and quasi-public infrastructure systems of 4 to 6 per cent of GDP ($500 $700 Billion) will probably be necessary for the foreseeable future. At the same time, no funding source, either dedicated such as the Highway Trust Fund, or general, such as the Budget of the United States, is projected to have the capacity to generate funds sufficient for infrastructure investment at these levels. Private capital, broadly deployed through various forms of public private partnerships (PPP or P3) could address a portion of the shortfall but PPPs have generated considerable opposition in the U.S. and the long-term viability of this model in the face of the on-going financial crisis is unclear. At the same time, there is widespread interest on the part of public and institutional pension funds to invest in revenue-producing infrastructure projects that can generate stable, long-term returns on equity. In a similar vein, there have been numerous proposals to “privatize” social security through the establishment of private investment accounts that would have placed a portion of individual payroll contributions into the equities market as a means of addressing projected shortfalls in revenues versus pay-outs in the future. Although social security privatization never generated substantial political support, it is a fact that returns on social security investments have been several hundred basis points lower than historical returns in the U.S. stock market. This paper attempts to weave together these multiple strands to begin a dialogue on a conceptual approach that appears to have the capacity to supply significant additional capital for infrastructure investment while at the same time addressing the needs of public pension funds and the Social Security Administration to obtain higher returns with minimal risk. The core idea of the proposal is to utilize a combination of public and institutional pension funds, individual retirement accounts, and private equity funds, together with Social Security Trust Funds to provide equity and debt shares to fund projects and programs supported by reliable and sustainable revenue streams generated by user fees. For most of the U.S., this would require the states to impose tolls on at least some of their highways and water and sewer systems to develop rate structures based on sound business and cost recovery models. Revenues thus collected would be used to pay returns to equity for the public pension and other direct investors and interest on loans funded with Social Security Trust Funds. A National Infrastructure Investment Fund (NIIF) could be established within the U.S. Treasury Department to administer such a program. Modeled on the Bureau of the Public Debt, the NIIF would be empowered to invest in financially sound, revenue-backed projects that met pre-determined funding criteria . The National Infrastructure Investment Fund would be managed by an independent board that would hire professional investment counselors and money managers to ensure that all investments met strict funding and performance criteria. Although this administrative structure for the program is briefly discussed later in this paper, the myriad political and legislative issues associated with actually implementing this proposal are not addressed. To try to do so at this stage would deflect any useful discussion of a new and novel way of raising the massive amounts of capital that will be necessary to recapitalize America’s infrastructure.