Weekend Reading

Ashby Monk

Brookings recently released a report entitled “Rebuilding America: The Role of Foreign Capital and Global Public Investors.” It’s a very welcome intervention into the infrastructure financing debate that has been going on in the US, as it recognizes the beneficial role that global investors (and in particular sovereign funds) could play in helping to finance some much-needed infrastructure.

Now, frequent readers of this blog may find the first 15 pages a bit frustrating, as the authors use a style and tone that is reminiscent of 2008, focusing on SWF “myths”, “misperceptions”, “anxiety”, and “worry”. My assumption (and hope) is that my readers graduated from fearing SWFs long ago, so the report’s focus on dispelling SWF fears may be slightly tedious for you.

However, to be fair to the authors, this report isn’t written for us. It’s written for US policymakers. And, given the kinds of crazy reports that still pop up in the US, I can fully appreciate why the Brookings folks adopted this approach. Bottom line: there are still a lot of policymakers in this country with xenophobic views on SWFs that push these funds away. For some in Washington, perceptions haven’t changed since 2008; rather, people just got distracted by other more pressing things, which left the impression that SWFs were no longer an area of concern. I’m sorry to say that’s not necessarily the case, so reports like this one are still necessary and important in the US policymaking context.

In any case, for those who don’t need an SWF refresher course, the Brookings report gets interesting on page 16 when the authors offer some useful insights into how SWFs might be deployed (and incentivized) in the US context. Here are some of the interesting bits:

“There are different mechanisms to facilitate the flow of foreign capital into the United States to support the enterprise of infrastructure renewal that are consistent with legitimate concerns about national security and the perceived political risk of foreign investment in assets considered critical and essential to the American economy. If properly designed and with necessary controls, foreign capital represents a viable pathway for the United States to obtain the resources necessary for a program of infrastructure enhancement that will pay significant long-term dividends for U.S. competitiveness.”

“U.S. policymakers can look to other developed economies, such as Canada and the United Kingdom, which rely extensively on outside investor capital for infrastructure development, for model best practices to guide a comparable American program.  The specific legal and financial structures through which such capital is invested vary depending on the sponsoring government and the nature of the asset.  However, nearly all such arrangements involve three factors:  (i) an upfront investment of outside investor capital, (ii) the expectation of a financial return to the investors over time, and (iii) the transfer of at least some of the risks and rewards of ownership from the government to the investors.”

“Current models suggest the possibility of a national infrastructure investment vehicle for the United States that could be structured as a peer institutional investor to domestic public pension funds. Sovereign Wealth Funds and other Global Public Investors could be limited partners, with no single fund or group of investment entities of a single country permitted to hold a controlling share. No foreign investor would exercise decision-making authority about the operation or management of infrastructure assets. Beyond the decision to invest-and the customary right to serve on an investment committee-all foreign entities would be passive minority shareholders. Through such a deliberate and transparent structure, an investment pool of limited partners with both defined rights and restrictions could decisively mitigate the risks of foreign investment in U.S. infrastructure assets.”

I hope the Brookings report leads to some SWF converts in the Congress. We could use some new bridges, roads, ports, levies, etc., etc., etc.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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