As of March 31st 2011, the various types of pension plans (public and private pensions and superannuation schemes) accounted for approximately 40% of all investors in the infrastructure asset class (7) , excluding projects directly funded and developed by governments and public authorities which still account for the bulk of infrastructure investments. Three Canadian public pension funds (OMERS, CPP, OTPP), one Australian superannuation scheme (AustralianSuper) one US private pension fund (TIAA-CREF), and only one sovereign wealth fund (Malaysia's Khazanah Nasional) are among the ten largest infrastructure investors globally (excluding governments and public authorities). But the values of sovereign wealth fund investments in infrastructure are probably under-accounted as many of them (notably in Asia and the MENA area) don't disclose their holdings.
The preeminence of Canadian and Australian players is due to historical and geographic factors: the development of these very large, resource-rich, and under-populated countries has required massive infrastructure spending since the mid-19th century, thus familiarizing public decision makers and private sector investors early on with the complex financial, technological and legal processes underpinning infrastructure investments" In June 2010, the British government, through state-owned London & Continental Railways, announced the start of a competition to sell a 30-year concession to own and operate the 67 mile HS1, the high speed line that connects the UK's Channel Tunnel to London, viewed by many as "the crown jewel of British infrastructure". After a five-month long highly competitive tender process, it was announced UK High Speed 1 had been sold to two Canadian institutional investors- Ontario Teachers' Pension Plan (OTPP) and Borealis, the infrastructure investment arm of the Ontario Municipal Employees Retirement System (OMERS) (8) . Disgruntled UK and European bidders had to recognize the ascendancy of foreign pension investors in their home turf: with dedicated infrastructure teams comprising tens of highly specialized professionals (financial analysts, fund managers, but also lawyers, actuaries and civil engineering experts) based in Toronto, Montreal and Sidney, Canadian and Australian pension funds and the local investment banks and law firms who advise them have acquired a leading position in the field.
Infrastructure investments are usually categorized along risk/return/lifecycle lines: the less risky "Core and Core Plus" (bridges, tunnels, toll roads, energy transmission and distribution, water and waste-water systems), the intermediary "Value Added" (airports, seaports, rail links, contracted power generation) and the more risky "Opportunistic" (development projects, satellite networks, merchant power generation or any investments in non-investment grade countries and/or countries with insufficient legal security) (9) , with total returns deriving from a combination of long-term capital appreciation and recurrent cash income. But one has to keep in mind that the above-described risk/return categorization and other project-specific considerations actually come after the choice of country, which constitutes the key factor in any infrastructure investment decision, as the economic assessment (GDP growth outlook, monetary stability, government finances) will determine the expected rate of utilization of all infrastructure assets in a given country and the expected inflation-adjusted revenues derived from them, and, more importantly, the political/legal assessment (independence and efficiency of court system, fair treatment of private foreign investors, stability of regulatory environment, government payment/repatriation") will give investors the required levels of confidence and legal security necessary to invest.
Infrastructures are expensive, complex investments: they include large chunks of national assets "stripped away" from the state's direct control for a long period of time (concession contracts duration can be superior to 25 years). In that perspective, the government can act simultaneously as asset owner/landlord, co-investor and co-manager ( in the case of public-private partnerships ), sector regulator, client, policy maker, and, in case of litigation, (often) judge of last resort! This is why legal security and evenhandedness are critical for pension investors: governments (at federal, state/provincial and municipal levels) really have to walk the extra mile for economic fairness, legal stability and regulatory efficiency if they wish to attract and retain pension investment money. To understand how pension funds and SWFs view prospective host countries where they might invest in infrastructure assets, we've used the bi-annual Euromoney Country Risk (ECR) survey (to which the authors of this article are regular contributors), focusing on two key factors: "Economic Assessment' and "Political/Legal Assessment'... For instance for the CEE and Balkans area, the data tells us (among other things) that a former Soviet republic such as Estonia is now viewed as having very attractive traits in terms of political/legal development and economic dynamism, whereas its Baltic neighbors Lithuania and Latvia are lagging behind on both fronts, or that large institutional investors will prefer Cyprus and Turkey over other South Eastern European states, with Greece and Romania at the bottom of the group" etc.
Infrastructure as Economic Driver vs. the "Washington Consensus'
In the past, Latin American countries fell behind the rest of the world with roughly 2% of GDP invested in infrastructure in the 1990s and 2000s, whereas most of the emerging economies of Asia invested 5% of their GDP on average in infrastructure throughout the period- the figure reaching 9% in China in recent years (10) , thus allowing the Chinese economy to grow at near optimal conditions while many South American economies suffered from various development bottlenecks (poor transportation networks, ageing power grids, mediocre schools"). This development gap was due largely to ideological motives, with US and IMF experts advising Latin American governments not to invest "excessively" in infrastructure projects while Asian "state capitalists" embarked on ambitious infrastructure modernization projects aimed at helping private sector companies operate more efficiently (high-speed rails across industrial regions, huge logistical hubs connecting highways to key ports and airports") and innovate (new schools, universities, and hospitals fostering the development of high-tech and biotech industries) : "The well-rehearsed argument that what is needed is yet more of the same sounds increasingly hollow. Maybe the Washington Consensus [the dominant neo-liberal doctrine] is just one of the many heaps of ideological recipes still waiting for a proper theory (or a fire...); how can it explain that so many in Asia do things "wrong' (sometimes very "wrong') but develop fast, while Latin America does almost everything "right' but can only achieve a low intensity growth dynamic that the "invisible hand' does not know how to break?". (11)
Last year, California Governor Arnold Schwarzenegger said he was hoping for some financial and technical assistance from China to help lower construction costs and develop his state's proposed high-speed rail project. (12) The US has practically no high-speed rail expertise whereas infrastructure-savvy China is the world's leader in the field, with a high-speed rail network of 4,300 miles (6,920 kilometers). The US and other G7 countries are not alone in trying to lure China's superior infrastructure investment and civil engineering capabilities. Tellingly, the Aquino administration sent its chief economic decision maker, Finance Minister Cesar V. Purisima accompanied by half of the Filipino Cabinet and the Governor of the Central Bank on a weeklong investment bank-style road show in Beijing and Shanghai earlier this year (13) , to drum up interests among Chinese pensions, sovereign wealth funds (notably SAFE and the China Investment Corp.) and Chinese banks for the Philippines's ambition infrastructure plan: "We want to encourage Chinese investors to put their money in the Philippines and invest in our infrastructure projects. We want to deliver the message that the Aquino administration is committed to transparent negotiations with them unlike before ["] [Infrastructure investments constitute] the Aquino administration economic centerpiece""
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