I’m reminded daily of the decrepit state of New York infrastructure – the delayed subway trains and shabby stations, the broken water mains, the decaying bridges, and the ugly and dysfunctional airports. It’s not much different in the rest of the US. But it feels bizarre in a city that is supposedly the world center of creative finance.
Most US infrastructure was built in the 1930s and 1950s and has been poorly maintained. The American Society of Engineers estimates that between 2013 and 2020 the average family will lose $28,000 from ailing and inadequate infrastructure.
The problem with infrastructure projects is that costs are mostly upfront while the payback period is often in decades. Investors are nervous because they think governments will change the rules over this horizon altering the returns – and they have done so many times. Once the construction is done, the investors can be held hostage. Big infrastructure construction projects are often controversial and risky and getting pricing of services right over the long haul is very tricky. So while there are huge lists of projects and many long term investors such as pension funds wanting the steady returns that infrastructure should be able to provide, few projects get private sector funding.
Canada is experimenting with a new public-private partnership model where projects are run by pension funds. The key idea is that the pricing will be less controversial if the public who pays the fees also benefit from the returns, so they are less likely to lobby for politicians to change the rules.. The head of the Canadian venture explains:
““The person getting on a tram or crossing a bridge and paying a toll is now paying a contribution towards their pension when they do that,” he says. “That’s a different thing — from a political perspective — than someone paying a fare to the Morgan Stanley infrastructure fund or whoever.””
