I’ve got a fervent interest - that my wife not-so-subtly implies is an obsession - in understanding how we can facilitate more investing by pension funds in infrastructure assets. Why does this topic fascinate me so? Because pension funds want to buy infrastructure assets (they’re a good match for long-dated liabilities), and cash-strapped governments need to find new sources of capital to fund much needed infrastructure development and upgrades. So it should be a no-brainer... but it’s not.
Put simply, the existing institutions and intermediaries of finance, investment and government all conspire to make this sort of investment enormously challenging for all parties. So, at Stanford, that's what we're working on. I’m looking at the investment side of things, while my colleagues look at the government side of things. Watch this space.
Anyway, it’s with this context that I'd like to direct you to some interesting news coming out of the California State Teachers' Retirement System (CalSTRS): The $150 billion pension fund is in the process of scaling up its local investments in infrastructure. It has apparently participated in some well known PPPs in the State (such as the Presidio Parkway in SF and the Courthouse in Long Beach) as well as some big construction projects (a solar-electric plant outside of Sacramento and a “gas-fired Crockett power plant” near Oakland). Interesting.
I'd be very curious to understand the impetus and motivation for such a program. And for some more background, here’s Chairman of the CalSTRS Investment Committee Harry Keiley:
"These investments reflect CalSTRS' commitment to the California economy and our willingness to contribute to it in a way that helps our state and offers the fund long-term, steady cash flows. The construction projects, in particular, will put more than 600 Californians to work...”
So, as you may have suspected, there’s a ‘double bottom line’ approach being taken here. By that I mean that the fund is trying to achieve its rate-of-return objective, while also trying to catalyze broader economic grown. The question then is whether that's a wise thing to do. It's hard enough for these funds to meet their return objectives before adding in some 'extra-financial' criteria into the investment decision-making mix. Moreover, without a sound governance structure, I question the ability of any fund to withstand the influence of politicians (and their bridges to nowhere).
But there's also a side of me that wonders if this isn't in fact wise. Interestingly, in South Africa the Government Employees Pension Fund makes a credible case for combining broad economic objectives with its institutional goals:
"...the GEPF staunchly defends the notion that making money over the long term will require spurring growth in the local economy. In other words, meeting pension liabilities in the long-term requires thinking about more than just pension liabilities today. As such, it takes an active role in supporting local firms and projects."
What do you think? Can CalSTRS do the same?
