INFRASTRUCTURE

Defining Matters

INFRASTRUCTURE

Defining Matters

Co-authors

Dr Larry Beeferman Dr Allan Wain Director Pensions and Capital Stewardship Project Head of MEEMA (Middle East, Emerging Markets, Asia), Labor and Worklife Program, Harvard Law School, Hastings Funds Management Harvard University

Infrastructure | Defining Matters 1

Infrastructure is critical to our economy, our community and our pursuit of a sustainable environment. But what do we FOREWORD mean by the term “infrastructure” and do diff erent understandings of that term confuse our attempts to decide on our future investment and development priorities?

In this important paper “Infrastructure – Defi ning Matters”, Drs Beeferman and Wain explore how we should consider and defi ne “infrastructure”. Th ey focus on enterprise and people and argue that context is critical. It is an important contribution to our thinking on this crucial topic.

Th ey use both formal analysis and practical application to inform this diff erent approach. A number of US Pension Funds contributed to the analysis via a comprehensive survey.

Beeferman and Wain challenge our understanding and defi nition of “infrastructure”. Th ey argue that understanding infrastructure’s important role in our society is key to informed analysis. Th at this provides a context for economic and community analysis in both developed and developing countries.

Th is paper is a very useful contribution to an issue that is increasingly important to economies and communities around the world.

Sir Rod Eddington AO Chairman Infrastructure Australia

Infrastructure | Defining Matters 3 ABOUT THE CO-AUTHORS

Dr Larry Beeferman Dr Allan Wain Dr. Larry Beeferman is the Director of the Pensions & Capital Allan joined Hastings in February 2010 and is a member of the Hastings Stewardship Project at Harvard Law School’s Labor and Worklife Program. Investment Committee. Th e Project addresses key legal, policy, and other practical issues relating Prior to joining Hastings, Allan was an economics and strategy adviser to to strengthening and extending retirement security for more households the Offi ce of the President and Cabinet in the Middle East and the Managing and practices, institutions, and systems of pension fund governance, Director of an investment development company. Previously Allan was at management, and investment that encourage capital markets and BHP Petroleum where he was strategy adviser to the chief executive and corporate policies to work more eff ectively for workers and the health the Principal Economist. In this role Allan was responsible for identifying, and well-being of the larger community. evaluating and fi nancing off shore oil and gas and related infrastructure Th e Project’s publications have included ones concerning pension assets. Allan was also a director of a management consulting fi rm. fund investment in infrastructure, the tools for and practice of taking into Allan has studied at the University of Melbourne, Stanford University, account social factor risks in investment decision-making, labor and private Harvard University and the University of London and has a Master of equity, worker voice and the union role in the management of pension fund Business and PhD degrees, together with postdoctoral, postgraduate, and assets, the Dodd-Frank fi nancial markets reform legislation, and proposals undergraduate qualifi cations in economics, fi nance, and engineering. for automatic enrollment in retirement plans. A forthcoming publication on rethinking fi duciary duty will be part of a collection of essays will be published by Cambridge University Press. Larry W. Beeferman received a juris doctorate from Harvard Law School and a doctorate in applied physics from Harvard University. Prior to leading the Project he was a professor of law at the Massachusetts School of Law and Western New England School of Law, headed up the Asset Development Institute at Brandeis University’s Heller School for Social Policy and Management, and served as Associate Counsel to the Massachusetts Special Commission Concerning State and County Buildings.

4 Infrastructure | Defining Matters INTRODUCTION

5 We believe that pension funds will be better able to meet these dual challenges if they can gain a deeper understanding of fi rst, what infrastructure “is” or might be thought “to be”; and second, the relationship of that understanding to other ways of thinking about infrastructure and how they are ultimately linked to beliefs and contentions about the place of infrastructure investments in their portfolios.

Pension funds are grappling with serious by the second challenge because broadly speaking We believe that pension funds will be better INTRODUCTION challenges. Most immediately they are to invest the enterprises associated with infrastructure able to meet these dual challenges if they can gain fund monies in ways calculated to keep promises are in that regard no diff erent from other kinds a deeper understanding of fi rst, what infrastruc- to pay retirement benefi ts. Some of those promises of enterprises. ture “is” or might be thought “to be”; and second, have ripened with the retirement of certain plan Th at being said, though, discussion about the relationship of that understanding to other participants. Other obligations, based on the infrastructure investment is typically animated ways of thinking about infrastructure and how experience of young, active workers or those who by a belief or perception that infrastructure is they are ultimately linked to beliefs and conten- will become active workers, will mature only many “different.” That is, enterprises associated with tions about the place of infrastructure investments decades – some six, seven, or more – from now. infrastructure diff er from other kinds of enterprises in their portfolios. In the more technical parlance of pension fund in terms of the goods and services they produce, Toward that end, this paper is organized discourse there must ultimately be a “match” in most especially the relative importance of the as follows. time and amount between what can be realized role those goods and services play in the life of a First we take brief note of both historical from investments and (what are, for the most part) society. In turn, there is a sense grounded in some discourse about infrastructure and specific “long-dated liabilities.” measure of historical experience, that precisely contemporary discussion as they pertain to invest- However, the challenge of meeting that ostensi- because enterprises associated with infrastructure ment which in some measure motivates this essay. bly purely fi nancial objective is inevitably linked to are “diff erent” the economic, political, and other More particularly we off er a short description of how enterprises that aff ord the occasion for invest- arrangements according to which those enterprises the origins of the term “infrastructure” and how ment operate and behave in producing goods and might be established and operate are unlike those the nature and reach of the term has changed over services, and the impact of those operations and of others. And, in turn again, there is an impres- the years. We do so to emphasize that the choice of behaviors.1 In other words, the investment choices sion – also grounded to some extent in historical defi nition will be informed by the particular needs, pension funds (and others) make, certainly at an experience – that the fi nancial characteristics of concerns, and circumstances of those who see the aggregate level and in some cases at an individual investments which support, sustain, or drive those term relevant to interpreting their experience. level, inevitably aff ect and are aff ected by the larger arrangements have a distinctive character. Indeed, We then look at the shift ing, in some measure society, perhaps even profoundly so. Awareness the belief oft en is that those characteristics are ad hoc ways in which infrastructure has been of and attention to this second challenge may be distinctive in ways which might be particularly classifi ed in relation to investment. We see these relatively new, but they have grown in importance apposite with the fi nancial needs of pension funds. variations as a signal of the lack of clarity, focus, and likely to increase much further. At the same time, though, the ostensible special or consistency which characterizes the fi eld and Th is paper focuses on investments in infra- nature and important function in society of that needs to be addressed. structure informed by the possibility that they are which is understood to be infrastructure may well Next, we turn to pension funds’ – more one valuable means by which pension funds can engender correspondingly unique problems in particularly U.S. public sector pension funds’ – meet the fi rst challenge. But consideration of such responding to the larger societal implications of experience with the term from several vantage investments in those terms implicates issues posed enterprises associated with infrastructure. points. We describe and strive fairly to interpret

6 Infrastructure | Defining Matters PART 1 | BACKGROUND AND MOTIVATIONS FOR A DEFINITION OF INFRASTRUCTURE

responses from a number of such funds to a survey highlight the importance of the defi nition to each A short history of the term “infrastructure” reconciled bears on whether and by whom that we sent to them which included questions we posed diff erent way of thinking or analysis. To aff ord what enterprise is thought to be fi t for purpose. Defi nitions are important. Th ey lend clarity and as to possible defi nitions of infrastructure, particu- we think could be a useful tool for pension funds For those reasons we start with the curious, focus to discussions. Without such precision and lar instances or examples of infrastructure, putative in their consideration of infrastructure, in the though somewhat uncertain, narrative of the focus participants are likely to speak by one another fi nancial attributes of infrastructure investments, Appendix we distill from detailed analysis of the appearance and evolution of the word infrastruc- or even at cross purposes. If the aim is to make a and how respondents view such investments in main text a series of inter-related questions which ture. Th at history suggests, perhaps not surprisingly, well-considered decision, especially a weighty one, relation to their funds’ strategic objectives. might prove useful to the decision-making process. that which has been associated with the word, clarity of defi nition is essential. Th is is particularly In light of the foregoing we then propose a We conclude with a reprise of the arguments has been informed by the interests, priorities, true for many of those who think about invest- defi nition for infrastructure which we believe offered with the aim of situating the analysis in concerns, etc. of those who have chosen to include ment in infrastructure. Th ere is no widely shared seems to be apt for pension funds. However, while relation to the tasks pension funds have and how it in their vocabulary. Th is evolution evidences in understanding of what infrastructure “is,” why it is that defi nition is targeted enough in those terms they might pursue them. part the adoption (and adaptation) of the word in understood in that way, and the link between how we fashion it broadly to capture meanings for new contexts according to which the associated investors view it in relation to the perspectives of others whose needs, concerns, and circumstances meanings have changed. those who are not investors. Moreover, in some are ones to which pension funds might well need Th e term seems to be of relatively recent measure, defi nitions are in the eyes (or the hands) to be alert. For several reasons, the defi nition vintage. It might have been derived from the word of those who are the beholders. Th at is, the mean- is anchored in a characterization of the kinds spelled the same way in French in the 19th century, ing(s) they attribute to or associate with the word of products and services with which provision perhaps as early as 1875 and may have been iden- refl ect the vantage point from which they view through infrastructure is identifi ed. One is that tified with the military. For example, according or are situated with respect to it. Even within the it is oft en the fi rst and in certain respects easiest to one source, “[t]he earliest use [in English] is in relatively modest compass of this consideration of way for those who venture into the infrastructure 1927 in the Oxford English Dictionary, wherein infrastructure in relation to investment there are space to orient themselves to the subject matter. the term was used to describe ‘the tunnels, bridges, multiple and overlapping perspectives and interests Another is that as just suggested, the uses of those culverts, and ‘infrastructure work generally’ of in play: those of the ultimate users of what infra- goods and services and their impact on others French railroads.”2 Indeed, two contemporary structure aff ords, government offi cials not only will demand the attention of those who enter the definitions of the French word are connected in their own names but also in the name of oth- investment infrastructure space. Nonetheless, of with railroads.3 Usage of the word in that way was ers whose lives might be aff ected by it, those most course, the focus of funds is particularly on the associated with a “descri[ption of] a sub grade, the directly engaged in the construction and operation calculus of fi nancial risk and reward. original material underneath pavement or a railway of an infrastructure enterprise, those involved in In accord with that emphasis, in the next sec- bed. It comes from a combination of the Latin how that enterprise is fi nanced, and those, like tion we identify a series of links and corresponding prefi x ‘infra’, meaning ‘below’ and ‘structure’,”4 pension funds, who choose to be investors in such ways of thinking which connect at one end of In the English-language context, the link to the enterprises. Th e extent to which these diff erent the chain, infrastructure as defi ned, and at the military seems to have been strongly taken up understandings (and what gives rise to them) are other end, that fi nancial calculus. In doing so, we in the early 1950s. An entire chapter in a report

Infrastructure | Defining Matters 7 Defi nitions are important. They lend clarity and focus to discussions. Without such precision and focus participants are likely to speak by one another or even at cross purposes. If the aim is to make a well-considered decision, especially a weighty one, clarity of defi nition is essential. This is particularly true for many of those who think about investment in infrastructure.

assessing NATO’s fi rst fi ve years “referred to [it as] but also shift ed, in part driven by the interests and oversight and/or contractual provisions. In still If seeing this as a confused and problematic state all of the ‘fi xed installations which are necessary incentives of one or another source in advancing other cases, usually involving what is termed social of aff airs is warranted, then funds which seek for the effective deployment and operations of the conversation. Indeed, insofar as those interests infrastructure (such as schools), there may be no a thoughtful and serious consideration of infra- modern armed forces.’”5 However, according to one and incentives have been tied to the promotion of readily identifi able revenue stream such as a user structure – certainly as would-be investors but analysis, other usages emerged, driven by new and investment in infrastructure the understandings fee to make them attractive to would-be investors perhaps equally as providers of means for invest- diff erent concerns or priorities. For example “the promoted have expanded. so it is provided by government. ment – are ill-served by these developments emerging academic discipline of economic devel- Some of the approaches describe infrastruc- An additional way of categorizing infrastruc- Although we believe that the brief portrayal opment” brought attention to the need, especially ture largely in functional terms; that is, in terms ture focuses on phases of the investment life cycle. above was informative we thought it important in low income nations for “the capital base upon of the uses of the facilities and services involved. For example, there are what are referred to as early to ask U.S. pension funds directly how they see which a modern industrial society might fl our- Some analysts use the category of economic stage or greenfi eld investments, such as new road, infrastructure and understand how their views ish.”6 With a recognition that “the challenges of infrastructure in reference to toll-roads, bridges, bridge and tunnel developments for which there shape the infrastructure-related decisions they health, education, and social organization loomed tunnels, airports, seaports, and rail networks, may be no established demand patterns. Th ese in fact make. equally large” came the near “demise[] in the use as well as common utilities such as gas distribu- are thought to provide little or no income from of the word infrastructure.” It was supplanted by tion networks, electricity and renewable energy the asset for some signifi cant period of time, but the term “social overhead capital,” which included production and distribution, and water treatment potentially high returns in the future. By contrast, “economic overhead (i.e., physical facilities) and and distribution facilities. Th ey distinguish those growth stage investments typically are associated social capital (human investment).”7 Still later, from what they term social infrastructure, such as with expansion projects and new privatizations “the term infrastructure in American political schools, health care facilities, prisons and intra-city of existing operating assets. Here, already known discourse” was revived, spurred by a pressing need railroads. By contrast, others divide infrastructure operating track records are believed to auger to maintain and renew existing public sector physical into three categories: transportation, utilities, and attractive growth with a reasonably consistent plant as the basis for faster economic growth.8 social infrastructure.10 yield. Meanwhile what are designated as late stage At the same time, there have been other, much Another method contrasts facilities that can or brownfi eld investments, involve assets that are more wide-ranging defi nitions proposed.9 yield a reasonably privileged income stream with considered mature and proven, seen as off ering those that do not. One factor is whether the facility very predictable income stream derived from What infrastructure “is” for investors today: has a true monopoly or a strongly competitive a combination of monopoly-base provision and an uncertain and moving target position. Another relates to how the infrastructure favorable pricing, particularly in relation to infl a- Pension funds have been introduced to infra- enterprise generates income.11 tion, as a result of government prescription. structure by trade and popular publications (and Yet another slant is based on the amenability Th e proliferation of defi nitions or characteri- perhaps even academic ones), investment con- of the facility to or the extent of privatization. Th is zations – reaching among other things (for some) sultants, asset managers, among others. What might range from outright purchase or acquisition to lotteries and parking lots and meters – has, in these sources have given funds to understand in- of a long-term lease by a private enterprise to the view of one commentator, reduced infrastruc- frastructure to be has not only been quite varied government retention of control through regulatory ture to “just a buzzword, a convenient catch-all.”12

8 Infrastructure | Defining Matters PART 2 | U.S. PENSION FUNDS’ UNDERSTANDING The only defi nition which elicited a unanimous affi rmative response from every OF WHAT INFRASTRUCTURE ‘IS”...AND WHY. person who took the survey was that which provide[s] services and support that are basic to the functioning of a community, organization, or society and crucial to its economic productivity (defi nition (b)).

Survey vestments in the provision of infrastructure as 7. Fund experience with infrastructure invest- Th e two cases in which more than half of those compared to investments in enterprises which ments: Each person surveyed was posed a group surveyed made choices and were nearly unanimous Toward that end, in the late fall of 2011, we sent provide other kinds of goods or services and why. of questions relating to his or her fund’s expe- in the choices involved structures, networks, etc. out an extensive survey to all U.S. public sector 3. Financial characteristics of infrastructure invest- rience with infrastructure, namely: when such which are capital intensive/have high fi xed costs pension funds which we believed had invested in ments: Which among twelve fi nancial character- investment was seriously considered; whether and long economic lives and have strong links to infrastructure or had seriously considered doing istics the respondent thought were accurate or the fund had decided to make such investments economic development, and a tradition of public so. It was directed to all the trustees of the pension inaccurate in describing infrastructure invest- and if so when; the initial commitment (if any) sector involvement. (defi nition g)) or are essential fund board or the members of its advisory board ments and the reasons why. to infrastructure investment and to what type; to driving sustainable economic development and in the case of a sole trustee as well as the top staff 4. Strategic objectives for pension fund investment in the location of the investments in the fund’s growth, lift ing levels of productivity and boosting executive officer of the fund. Responses were infrastructure: Which among twenty-one strate- portfolio; the investments made; the fi nancial employment and critical to encouraging business received from trustees or staff from ten of the funds. gic objectives in relation to investment in in- outcomes of those investments; whether any innovation and improving the global competitiveness Th e survey covered the following topics: frastructure were legitimate ones for a pension changes in policy with respect to infrastructure of enterprises (defi nition (a)). 1. Defi nitions of infrastructure: Which among twelve fund to have and the reasons why; how impor- investment and the person’s views on that; and By contrast, only one defi nition was rejected possible defi nitions off ered to the respondent tant those objectives were on a scale of 0 to 5 (5 any changes the person thought should be made. by all those who made choices – in that instance, most refl ected what he or she understood infra- for the most important). Each person surveyed a slight majority. It referred to structures, networks, structure to be; least refl ected it. Each respond- was invited to propose what he or she thought Survey results and analysis etc. which are key to managing population growth ent was also asked what, if anything he or she were legitimate and important objectives that Defi nitions of infrastructure: Th e only defi nition and meeting current and future environmental would add to or change in the defi nitions to bet- were not included. which elicited a unanimous affi rmative response challenges (defi nition (c)). ter refl ect that person’s understanding of what 5. Impacts of infrastructure and making investment from every person who took the survey was that Th ere were weakly negative reactions – because that individual thought infrastructure to be. decisions. Each respondent was asked if he or she which provide[s] services and support that are ba- a bare majority or fewer made choices and half or 2. Specifi c examples of infrastructure: Which among thought that the impacts of investment in infra- sic to the functioning of a community, organization, fewer made the choice – to structures, networks, fi ft een possible specifi c examples off ered the re- structure were dissimilar enough from those of or society and crucial to its economic productivity etc., that provide a platform for economic devel- spondent would defi nitely include as an illus- other kinds of investments to warrant distinctive (defi nition (b)). Th e only other defi nition which opment, social cohesion and stability (defi nition tration of infrastructure; which he or she would or special consideration, and if so the ways in elicited unanimous support, though from fewer (d)); facilitate the building up and maintenance of defi nitely not include; and which not on the list which the consideration would be diff erent. than all of those who took the survey, referred to the stock of human capital, for example, health and should be included. Each person surveyed was 6. Asset classes and infrastructure: Each respond- what are the basic physical and organizational ca- education (defi nition (i); facilitate the production of asked if he or she thought that the provision of ent was asked how his or her fund characterized, pacities and resources needed for the operation of a goods and services and the distribution of fi nished infrastructure was diff erent in signifi cant ways grouped, or located infrastructure in its port- society or enterprise or are necessary for an economy products to markets (defi nition (l)); provide social from the provision of other kinds of products or folio, for example, among a class termed “real to function” (defi nition (k)). (Th e letter references services and support private sector economic activity services and if so why. We also inquired of the assets,” among a real estate or private equity are those of the survey questions in Appendix A.). (defi nition (f)); and form the underpinnings of a respondents as to whether pension funds should class, etc. and whether that person agreed with nation’s defense, a strong economy, and its health or needed to think diff erently about making in- the characterization. and safety (defi nition (h)).

Infrastructure | Defining Matters 9 Stepping back from these specifi c results it in character in their reference to “society,” though the last, while cast in economic terms, economic activity. For recreational facilities seems that respondents most strongly embraced “community,” and “organization.” has a social and/or individual fl avor to it. the reason may have been because they might choices which characterized infrastructure in If these inferences have merit, the modest Several other comments were concerned not generally be viewed as a matter of private action terms of it being “basic,” “necessary,” or “crucial,” number and 50-50 split of responses to choices with the role or impact of infrastructure but rather and to some degree one of individual provision. or as the “underpinnings” to certain kinds of which included “social services” and “private with where infrastructure was situated in relation Also, they might simply not be considered to be outcomes. Th e choices were a bit weighted to those sector economic activity” might suggest support to markets with it being characterized by “inelastic as especially important, with no obvious or strong of an economic nature. Th at is, they referred to for the latter and lack of it for the former. demand” and being “monopolistic.” Another link to economic impacts. Th ere was also weak “economic productivity,” ”productive activity,” Despite the seeming emphasis on economic deemed infrastructure to (arguably) fulfi ll a role support for post offi ces. While in the United States, ‘”economic growth,” “employment,” “innovation,” outcomes, the somewhat greater number of “too broad or multifaceted for private investment.” the delivery of parcels and letters has historically “competitiveness,” and “reducing production responses but still 50-50 split for production of It is not clear what the intent was here, as an implicit been predominantly public and has been quite and transaction costs,” and a “strong economy.” goods and services and distribution might be expression of the importance of infrastructure important to economic commerce, there are now However, there was some attention to what hinted explained by the lack of reference to infrastructure requiring a dominant or exclusive public role, or major, competing private(ly) operated companies at social outcomes such as the “functioning of the being essential, necessary, crucial, etc., and hence otherwise. Th ere seems to be a strong suggestion and post offi ces may just be seen as “buildings” community, organization, or society,” the ”operation the category being seen as closer to direct involve- of a function which the private sector is incapable without particularly distinctive characteristics. of society,” and more generally, the “public good” ment with traditional private sector activities. of or (likely?) unwilling to fulfi ll. A couple of other Note that the responses may also be colored by which included “public goods and services, It is not clear why the category which included comments referred to the scale of infrastructure as historical/cultural understandings of infrastruc- environment and order and safety.” the diverse sub-categories of “defense” and a a distinguishing characteristic, with reference to it ture, that is, what have historically been seen as However, the somewhat more broadly phrased “strong economy” and the nation’s “health and as “capital intensive” (and having a “long life”) and “public works” or a matter of (large scale?) public and ostensibly non-economic outcomes relating to safety” elicited a relatively weak response. Perhaps, as (a subset of) “capital projects.” provision. In some measure the answers suggest a “population growth” and “environment challenges” there were trade-off s made between economic Specifi c Examples of Infrastructure: The confl ation of, mix-up, and/or overlap of descriptive were strongly rejected. Somewhat similarly, where outcomes with the other ones. choices from among possible specifi c examples or functional understandings of infrastructure “economic development” was included as one of By contrast the freely off ered comments to the of infrastructure were broadly consistent with with economic readings in terms of the role of the two outcomes with “social cohesion and stability,” specifi c questions are revealing about the thinking the reactions to the fi rst set of defi nition ques- market. Th at is they may be implicitly linked to the there was lukewarm support suggesting it was the which informed the responses. More particularly, tions. Th ere was a signifi cant lack of support for importance of infrastructure to certain outcomes, latter which was problematic. only some pertained to the role (and associated housing and recreational facilities. For housing, for example, the monopolistic nature of provision, Along the same lines, the modest support for outcomes) of infrastructure. Th ey referred to that this may have been because in the United States inelastic demand, capital intensity, high barriers to human capital/health and education outcomes which was “essential” and a “broad benefit to it is generally thought of as a matter of private entry, and related views as to the (proper) role of might have been because they might not have society” and that which would “help the nation provision. Another reason could have been that government, include extent of government oversight, been seen as directly economic and perhaps in general, spur economic growth, job creation.” it is seen as a matter of individual supply despite regulation, etc. more social. Also, these outcomes are individual Th ese broadly worded statements are consistent the collective and/or special character of military, Comments were solicited as to why particular in nature whereas the references in the strongly with the strongest responses described above and student, or low-income housing. It also might not examples were or were not deemed to be infrastruc- affi rmative responses noted above are collective “ensur[ing] economic opportunity and mobility” be thought to be (directly) related to productive ture. Most who replied made distinctions not for

10 Infrastructure | Defining Matters There were a wide range of reactions and sharp distinctions among [respondents] with respect to fi nancial characteristics of infrastructure investments.

reasons of their impact on the society but rather for undertaken as a “public good.” However, others Th ere was also an almost unanimous judgment valuations over the long-term) (fi nancial reputational or policy reasons or because of percep- emphasized market-related issues, that is, that the (but with fewer responses overall) that the charac- characteristic (i); and tions about the relative roles of the government and provider enjoys a monopoly or oligopoly position teristics encompassed • evidencing higher risk and more uncertain the private sector. Th us one respondent did remark and that there are few or no substitutes. Still others • higher levels of debt/leverage than non-infra- fi nancial performance (because project success that lotteries and casinos were not essential for pointed to the infrastructure being of large scale structure (because infrastructure cash fl ows are is dependent on multiple assured sources of the economy to function and, hence, were not and its implications, namely that it was associated more certain than for other projects, with the capital, guarantees, and/or subsidies)(fi nancial infrastructure. By contrast, others excluded lot- with signifi cant upfront capital costs and entailed result that sponsors of infrastructure projects characteristic (f)). teries and casinos because of reputation risk; did a longer planning and fi nancing horizon and con- are willing to accept more debt and providers Finally, there was a weak consensus as to the not include communications systems or networks tinuous maintenance and improvements. of capital are willing to issue higher levels characteristics including because they are almost exclusively provided by Financial Characteristics: Th ere were a wide of debt for infrastructure) (fi nancial character- • their being hard to value (because of complexity the private sector; would reject communications range of reactions and sharp distinctions among istic (c)); of documentation, fi nancing, and technical systems or networks, energy facilities, and recre- them with respect to financial characteristics of • returns with a low correlation with other assets details he uncertainty of economic and ational facilities, because they are better handled infrastructure investments. (because infrastructure returns are frequently fi nancial conditions over the long-term, and by the private sector; and would not include On one hand a substantial number of respond- independent of economic conditions such the absence of a market price)(fi nancial char- communications networks or facilities because ents were unanimous in the view that the charac- as infl ation and changes in GDP)(fi nancial acteristic (d)) and they are almost exclusively provided by the private teristics included investments characteristic (j)); and • their likely being held for a longer period than sector. Still others would not include environmen- • being relatively illiquid (because large amounts • risk-return profi les which diff er according to non-infrastructure assets (because non-infra- tal-related facilities because of policies pertaining of capital are required at irregular intervals for whether the infrastructure asset is new (green- structure assets hare a more established sec- to hazardous materials; and would bar recreational these projects, the indivisibility of these pro- fi eld) or existing (brownfi eld) (because risk is ondary market and can be sold and exchanged facilities, public safety-related facilities, and jects, and the absence of an eff ective secondary usually higher during the construction phase more readily)(fi nancial characteristic (e)). housing because they are “outside policy (such as market for them)(fi nancial characteristic (a)); of infrastructure projects than the operating Thus, in terms of anticipated financial out- casinos) or outside policy-approved sectors.” • requiring large investments (because infrastruc- phase)(fi nancial characteristic (l)). comes respondents were of the general view Comments were also sought as to the ways, ture is generally capital intensive, with projects in By contrast, there was no or very modest that infrastructure investments off ered stable, if any, the provision of infrastructure diff ers from their nature being because the facilities or struc- support for the fi nancial characteristics of predictable returns over the long term, returns other forms of provision. Several respondents tures built and operated, such as transportation • there being more possibility of financial which were not very much correlated with the focused on societal impact, referring to infra- energy, communication, and social services, are performance problems with a project (because returns of other assets. At the same time they saw such structure’s role in the supply of services that are large scale) (fi nancial characteristic (b); and infrastructure is long-term and there is greater returns as resulting from the income streams gen- essential or fundamental (that is, they are needed • yielding income which is stable and predictable likelihood of adverse events occurring)(fi nan- erated and not from capital growth. Moreover, for a society to grow and prosper versus products over the long-term (because income is frequently cial characteristic (g); they thought that the profi le of investment risk and or services that are discretionary in nature), inflation-linked, regulated, and protected by • off ering attractive capital growth (because the reward varied with whether the infrastructure was noting the immense (adverse) social impact of government guarantees) (fi nancial character- contracted revenue and costs applied to infra- new or existing. Th eir rejection of the statements failure in provision, alluding to their being works istic (h)). structure projects usually provide enhanced that there might be more of a chance of fi nancial

Infrastructure | Defining Matters 11 problems with infrastructure projects or that the Strategic Objectives: For the respondents the Th e least important (that is 2.5 or less on a scale • foster the renewal and expansion of infrastruc- evidence higher risk or more uncertain fi nancial most important (that is, more than 4.5 or more on of 5.0) strategic objectives were to ture assets (strategic objective (s))(2.8); performance comports with their confi dence in invest- a scale of 5.0) strategic objectives were to • establish the fund’s reputation as a premier and ments yielding the kinds of returns noted above. • preserve capital (strategic objective (a))(4.5) and infrastructure investment manager and • yield returns that are the result more from With respect to the attributes of the invest- • yield a long-term, high-quality, stable income investors of choice within the investment appreciation in the assets than cash returns, ment vehicles the beliefs were that they require stream, and generate appreciation at least community (strategic objective (q))(1.6) and through operational improvements, best large investments, are relatively illiquid, and entail commensurate with infl ation (strategic objec- • promote the fund’s standing as an investor management techniques and practices, or higher levels of debt/leverage than non-infrastruc- tive (e)) (4.5). who takes legitimate account of stakeholder otherwise (strategic objective (c))(2.6). ture). As noted there was no strong consensus Th ere was fairly strong support (that is, more interests, such as those of members of the In a number of respects the strategic objectives view as to infrastructure assets being hard to value than 3.5 but less than 4.5 on a scale of 5.0) for the communities served and aff ected by the infra- which respondents state they want to advance or that they necessarily have to be held longer than following objectives: structure and workers who build or operate it through infrastructure investments are commen- non-infrastructure assets). • contribute to portfolio diversifi cation (strategic (strategic objective (l))(2.5). surate with the perceptions they articulate about objective (o))(4.4). Th e foregoing being said, the additional Th ere was only somewhat more than majority the fi nancial characteristics of such investments. • yield returns that are stable and high enough comments solicited as to why any of the proff ered support (that is, above 2.5 and 3.5 or below on a For example, the two most strongly embraced in relation to the fund benchmark (strategic characteristics were inaccurate or not, again scale of 5.0) for the following goals: objectives, to yield a long-term, high-quality, stable objective (b)(4.1) largely emphasized that the fi nancial outcomes • provide investment returns which include income stream, and generate appreciation at least • provide downside protection to the investment and attributes varied according to the kind of a substantial cash distribution component commensurate with infl ation (strategic objective fund during equity bear markets (strategic infrastructure which was the object of investment, (strategic objective (f))(3.4); (e)) and to preserve capital (strategic objective (a)) objective (m))(4.0); for example, brownfi eld/core versus greenfi eld. • provide yields that are not only stable but also are broadly apposite with two of the most strongly • hedge against long term liabilities (strategic predictable cash fl ows (strategic objective (g)) Also the few responses to the question which objective (p))(4.0); expressed perceptions about the fi nancial charac- asked about fi nancial characteristics not on the • yield returns that are sufficient on a risk- (3.5); teristics, namely, strong support for the position list did not off er any as such. Rather, a couple took adjusted basis (strategic objective (d))(3.9); • yield respectable rates of return with low risk that infrastructure investments yield income which note of factors which have a bearing on fi nancial • perform well during economic downturns (strategic objective (h))(3.2); is stable and predictable over the long-term (fi nan- outcomes, namely, that the investments involved (strategic objective (u))(3.9); • embody the practice of responsible invest- cial characteristic (i)) and rejection of the view monopolistic assets and price inelasticity driven • reduce the overall portfolio’s volatility (strategic ment, that is, effi cient operation of the asset, that they off er attractive capital growth (fi nancial by the provision of essential services. Another sug- objective (j))(3.8); the delivery of quality services, utilization of characteristic (j)). gested that many infrastructure investments could • aff ord long-term infl ation protection (strategic responsible labor, environmental, etc., practices Note also that several of the fairly strongly be taken public, individually, or in combination objective (n))(3.8); (strategic objective (r))(3.1); expressed opinions on fi nancial characteristics, with other assets. Yet another indirectly alluded to • yield high-quality, long-term, stable income • off er transactions are of signifi cant economic which place an emphasis on returns which are liquidity issues by emphasizing the importance of streams (strategic objective (i))(3.7); and scale and magnitude, allowing an outlay of a stable, and adequate enough by some measure, there being an exit strategy and oft the investment • maintain a low correlation to other asset sizable amount of capital (strategic objective roughly correspond to a couple of the fairly producing a steady stream of cash fl ow. classes (strategic objective (k))(3.6). (t))(2.9); strongly supported strategic objectives, namely

12 Infrastructure | Defining Matters It seems clear how those with responsibility for making investment-related decisions for plans understand what that responsibility entails – whether understood in terms of fi duciary duty or otherwise – is intertwined with how they think about investments in infrastructure (or other kinds of investments for that matter).

to yield returns that are stable and high enough in associated with factors or considerations which precise defi nition of an asset class,” stated that the are not in terms of the investment vehicle. Th at is, relation to the fund benchmark (strategic objective might be associated with the successful operation fund treated infrastructure to be a unique one. they are among those investments which are not (b)) and yield high-quality, long-term, stable income of the infrastructure enterprise – would arguably (However, he added that it was “technically a subset publicly traded equities or bonds. Th e same is true streams (strategic objective (i)). Similarly the hardly be objectionable and, indeed, be thought of private markets or private equity.”) Another with respect to inclusion in the narrow private weakly embraced objective that investments yield to be highly relevant to good fi nancial outcomes. fund apparently kept it under a general alternatives markets or private equity grouping. returns that are the result more from appreciation By contrast, the words of (l) appear to reference category. In several cases infrastructure was linked Th e incorporation of infrastructure among in the assets than cash returns, through operational the advancement of interests of those who are to “real assets.” Th at is, one fund put it in an “alter- so-called real assets is curious because in certain improvements, best management techniques and other than plan members or interests of the plan as natives” portfolio, along with other “real assets”; respects it appears simply to push back and practices, or otherwise (strategic objective (c)) is such which are other than fi nancial. another situated it in a “real assets” grouping complicate the problem of definition further: largely consistent with rejection of the view that Th ese reactions are apposite with several com- along with commodities, oil & gas, farmland, and namely what are real assets? On one view the such investments off er attractive capital growth ments solicited from respondents with regard to precious metals; and a third placed it within an category can be associated with “real returns,” (fi nancial characteristic (i)). which objectives they thought not to be legitimate “infl ation sensitive” cluster along with TIPS, both that is, investment returns adjusted for infl ation. It is in some ways striking that the three strategic and why. Th ose remarks included an (exclusive) of which seemed to fall under a broader “real asset” On another, they may be thought of as “tangible objectives articulated in other than fi nancial terms “focus on the long-term health of the fund and categorization. Two others approached the matter assets.” In the latter sense real assets are said were not among those with signifi cant support. what best serves its active and retired members,” on a more ad hoc basis associated with ostensibly to “include land, property, equipment, raw However, it is worthy of comment that of the three, “investment “for the exclusive benefi t of its partic- new and promising kinds of investments, one materials, infrastructure, intellectual property, there was greater than majority endorsement of ipants and benefi ciaries,” and “the inconsistency of placing infrastructure in an “opportunistic/diversi- and real options.” (Insofar as being “tangible” is embodying the practice of responsible investment, objectives (i) and (q) with fi duciary responsibility.” fying” class and another in an “opportunity funds.” a touchstone for this defi nition, it is not evident that is, effi cient operation of the asset, the delivery (Note, though, one respondent expressed a largely In sum the responses in certain ways refl ected how tangible intellectual property and real options of quality services, utilization of responsible labor, opposing view on these issues.) It seems clear ways thinking about infrastructure linked to are.) Th e counterpart to a real asset in fi nance is environmental, etc., practices (strategic objective how those with responsibility for making invest- categories which we explore in detail below. a fi nancial asset, which is an ownership claim on (r)), by contrast with establishing the fund’s ment-related decisions for plans understand what On one hand, the use of the terms opportunity real assets.13 For example, while CalPERS includes reputation as a premier infrastructure investment that responsibility entails – whether understood and opportunistic suggests a yet to be formulated just real estate, forest land, and infrastructure in manager and investors of choice within the invest- in terms of fi duciary duty or otherwise – is inter- coherent and compelling way to categorize a real assets class for purposes of its investment ment community (strategic objective (q)) and twined with how they think about investments in infrastructure in a non-fi nancial sense; on the policy, the phrase is not defi ned by that policy. promoting the fund’s standing as an investor who infrastructure (or other kinds of investments for other, a strong belief that what are thought to However, the strategic objectives for its program takes legitimate account of stakeholder interests, that matter.) be infrastructure investments have “unique” and are, not surprisingly, specifi ed in fi nancial terms in such as those of members of the communities served Grouping of infrastructure within portfolios: ostensibly attractive fi nancial characteristics (in close relation to real returns, namely “to provide and aff ected by the infrastructure and workers who Th is was quite varied, in ways suggestive of a lack terms of risk and reward). long horizon income return that is less sensitive to build or operate it (strategic objective (l)). It is not of clarity or certainty about how investments in Reference to infrastructure in terms of alter- infl ation risk” and a particular real return related clear why this distinction was made. At fi rst blush infrastructure should be classifi ed. One respondent, native investments simply seems to portray infra- goal.14 In this respect CalSTRS shares similar goals the language of objective (r) – for the most part while acknowledging that it might not “meet the structure investments in relationship to what they with its “infl ation sensitive class.” It is said to be

Infrastructure | Defining Matters 13 To be sure, funds are likely, in the instance, to be drawn to infrastructure spurred by fi nancial concerns. However, the exercise that follows for them ultimately implicates critical matters of provision. That is, it is deeply rooted in what infrastructure provides to or for people, arguably that which is quite important to them and the means by or through which the effort at provision succeeds. Both, in turn, bear considerably upon what funds choose to take on and what they achieve as investor owners or lenders committed to keeping pension promises.

one which strives for a “relatively stable return to factors which required “special evaluation” in for them relatively uncharted waters. Th ey refl ect stream, with a return level between equities and a way which seemed to focus on their bearing the ways in which infrastructure has been spoken fi xed income and an overall higher correlation on ultimate financial outcomes.16 By contrast, of, ranging from the concrete and specifi c roles to infl ation than equity or fi xed income” with an only one of those who replied made (general) it plays in society expressed in everyday words, “initial portfolio will be comprised global infl ation references to looking to return in other than as to the rewards it off ers and risks it poses framed linked bonds/securities and infrastructure invest- fi nancial return, that is, the impact on (domestic) in the language of investment. It is within that ments.”15 By contrast, the fund referred to in the jobs, and the “public good.” context that funds have strived to locate infra- preceding paragraph appears to identify real assets Investments made: Last, there were several structure as an investment within their portfolios in terms of their being “tangible.” questions pertaining to whether and when and sought to situate their decisions in relation to Infrastructure investment warranting diff erent respondents’ funds had actually made invest- their fund’s objectives. In other respects, though, or special consideration: Another group of ques- ments, what those investments were, and what the fi ndings pose a challenge and, in turn, warrant tions sought respondents’ views as to whether the fi nancial outcomes were to date. For all but on the need to go back to basics. By that we mean the kinds of products or services associated with one of the funds, investments had been relatively the following: To be sure, funds are likely, in the infrastructure and their impacts and/or the fi nan- recent and modest in amount. Not surprisingly, instance, to be drawn to infrastructure spurred cial characteristics of infrastructure investments then, there was little said about the track record of by fi nancial concerns. However, the exercise that were dissimilar enough from those identifi ed with those investments. Th e small amount of informa- follows for them ultimately implicates critical other than infrastructure to warrant diff erent or tion aff orded no meaningful opportunity to assess matters of provision. Th at is, it is deeply rooted special consideration, and, if so, why. In certain whether the investments actually made by individ- in what infrastructure provides to or for people, respects these questions were a way to explore ual funds were in fact aligned with respondents’ arguably that which is quite important to them in another way how those surveyed thought perceptions about the putative fi nancial char- and the means by or through which the eff ort at of infrastructure and infrastructure investments. acteristics of infrastructure investments or the provision succeeds. Both, in turn, bear considerably Th e answers were striking. More than a majority of strategic objectives with respect to infrastructure upon what funds choose to take on and what they those who replied found no warrant for diff erent investments they attributed to their funds. achieve as investor owners or lenders committed consideration. Another respondent acknowledged Although the survey was of modest reach, our to keeping pension promises. that the impacts might be diff erent, but said that sense from popular, trade, and other literature, With that task in mind, in the following section it did not aff ect decision-making. A few others reports by U.S. public sector pension funds about we propose a brief and a more elaborated defi nition alluded broadly to attention to the use of sus- their experience, and what we have otherwise of infrastructure and seek to justify the choice with tainable development methods and operational learned directly from fund trustees and staff , is that that goal and those considerations in mind. practices and environmental sustainability though the results are consistent with the ways in which with little indication as to their distinctive relation they think about infrastructure. In certain respects to infrastructure as compared to other kinds of the fi ndings are encouraging and impressive. Th ey investments. However, one respondent referred represent a serious eff ort to navigate in what are

14 Infrastructure | Defining Matters PART 3 | A DEFINITION OF INFRASTRUCTURE ... AND WHY

We propose two defi nitions, a shorter and a longer, • Th eir ability to communicate or share informa- • Th eir ready access to means by which they roles in diverse spheres of collective activity, writ more detailed one. tion with others in person or at a distance. can be kept safe from violence, disorder, or small or large, within their society. Th ose spheres Defi nition – Short • Th eir ability to move physical objects from one depredation by others to their persons or may well diff er in nature and importance but the Facilities, structures, equipment, or similar place to another. possessions – whether within or from without social, economic, political, civic or communal, and physical assets – and the enterprises that employ • Th eir ability to establish, operate, and expand their society. household or familial spheres are illustrative and them – that are vitally important, if not absolutely enterprises that make physical objects or provide • Th eir ready access to sources of energy suffi cient typical of most if not all societies with which we essential, to people having the capabilities to services whether for sale or for use; and perhaps to engage in or benefi t from any of the foregoing would be concerned. In all events, the vitality of thrive as individuals and participate in social, as well to do so more effi ciently and/or at lower activities. a society is contingent upon individuals within it economic, political, civic or communal, household costs. There are several reasons for our choice of having the capabilities of fulfi lling the roles which or familial, and other roles in ways critical to their • Th eir ability to engage in familial or house- these defi nitions. are part and parcel of activities within those spheres. own well-being and that of their society, and the hold, social, communal or civic, or religious First, we squarely place the focus on people Th ird, and related, while it might be possible material and other conditions which enable them activities, some of which may be critical for because the production of goods and services of to frame all needs in purely individual terms it to exercise those capabilities to the fullest. social cohesion and stability. whatever kind is ostensibly to meet people’s needs. is probably more useful to distinguish between Defi nition – Long • Th eir ready access to suffi cient potable water. Whatever the modalities for such production and ones that are more a matter of satisfaction on an Facilities, structures, networks, systems, plant, • Th eir ready access to suffi cient nourishing food. the fi nancial or other circumstances under which essentially solely individual basis and others that property, equipment, or physical assets – and the • Th eir ready access to shelter which is safe, that production takes place, if the result does not are addressed in a shared or collective context. It is enterprises that employ them – that are vitally comfortable, and conducive to the activities meet those needs, then broadly speaking it is a fail- in the latter sense that we refer to the material and important, if not absolutely essential, to people which occur within it. ure. Of course, there are needs of diff erent kinds other conditions which enable people to exercise having the capabilities to thrive as individuals and • Th eir ready access to means by which their (as well as diverse wants perhaps more loosely their capabilities. For example, a water treatment participate in social, economic, political civic or health can be preserved and improved. connected to needs). It seems clear that central plant enables individual access to potable water for communal, household or familial and other roles • Th eir ready access to means by which to enjoy to the topic of infrastructure investment are the consumption on an individual basis. A highway – for example, as a citizen, worker, friend, neigh- their presence in the physical environment. very important, if not absolutely essential, needs of course aff ords individuals a person means of bor, family or household member, or customer or • Th eir ready access to means to be kept safe of people which “infrastructure” is associated movement but it is part of a network of transpor- consumer – in ways critical to their own well-be- from harm from the physical environment – with meeting. tation links which enable the interconnection of ing and that of their society, and the material and whether caused by human or other hazardous Second, we believe that needs have to be people/bind people together on a collective basis. other conditions which enable them to exercise or toxic wastes, pollution from human activi- understood on both an individual and a collective Fourth, the historical origins of and playing those capabilities to the fullest. Whether people ties, the eff ects of process operating within the basis. Obviously, people have physical needs which out of defi nitions and our brief characterization can so thrive and participate depends, among natural environment, or otherwise. must be satisfi ed to survive in a very basic individ- of what may have stirred interest in infrastructure other things, on: • Th eir ready access to means by which to increase ual sense; they have other needs which, if met, can investment, facilities, structures, equipment, • Th eir ability to travel from one geographic place their knowledge, competencies, abilities, skills, enable them to develop and exercise a wide range or similar physical assets – particularly ones of to another. or experience needed to more fully participate of capabilities to live fuller, richer lives – “thrive” great scale in a material sense and in terms of the in the social or economic life of the society. – on an individual basis but equally so to play economic resources required to create them – have

Infrastructure | Defining Matters 15 [W]e think it is a mistake to focus exclusively on the physical assets themselves. Rather, in the defi nitions we refer to the enterprises to which those physical assets are central in the actual meeting of the kinds of needs delineated.

loomed large both literally and fi guratively. We have be less important or perhaps not even pertinent assets to the enterprise, it is the enterprise’s success suggested that in some measure this outcome is depending upon the context. Th e defi nitions are in provision which is key. By that we mean success the consequence of their creation being essential to craft ed to allow for this wide range of possibilities both in terms of provision literally as well as with the means by which universal or nigh unto universal even though the kinds of infrastructure for which respect to fi nancial outcomes from an investment needs which are extremely important can be fully there would be interest in making investments perspective. Th at success depends on how well the and eff ectively met. are might be of a sort identifi ed with relatively enterprise functions. And that, in turn, is based on Fift h, the defi nitions are informed by the “advanced” economies. a host of considerations internal as well as external notion that the concern at its core is for people Sixth, even though it is quite easy – perhaps to the enterprise. Th ese connections arise because, being able to thrive with their society as it is and as almost “natural” – and typical to do so, we think of necessity, the infrastructure-associated enter- they might make it to be. Th ey are also grounded it is a mistake to focus exclusively on the physical prise involves and aff ects people on an individual in the premise that realization of that possibility assets themselves. Rather, in the definitions we basis as well as a collective one – in the form of rests on people having the capabilities – and the refer to the enterprises to which those physical families or households, other enterprises, social, means or conditions for exercising them – that are assets are central in the actual meeting of the political, civic or communal organizations, or critical to their individual well being and that of kinds of needs delineated. (Typically if not almost government. In many respects those involvements their larger society. Certainly, what enables people certainly those assets are of a large scale in a and eff ects are intimately bound up with the chain to gain those capabilities and exercise of them physical sense and have been created at the cost of of factors detailed in the next section which link would entail a lengthy, perhaps complex, and likely considerable economic resources.) By enterprise at one end, provision by means of a particular contested discussion. For the purposes of this we do not necessarily mean businesses in their kind of infrastructure and at the other, the fi nan- paper we start from the modest idea that among conventional sense. Rather we refer more generally cial performance of investments in enterprises the array of things are certain “physical assets” to organized undertakings of diverse sorts which engaged in such provision. Moreover, because of – which are “vitally important, if not absolutely have the goal of producing goods and services the potentially wide-ranging implications of these essential” in that regard. We do so alert to the fact of innumerable kinds. Th ey may be for profi t or connections, they must of necessity be attended that while in some not inconsiderable measure not, they be “private” or “public” or something to not only in fi nancial terms but also arguably in what capabilities – or what means or conditions in-between, the needs to be met might have a more normative ones as well. We discuss these associations for exercising them – are required might well be social, or economic, or political, or other character and their outcomes at greater length below. common to many societies, there could be great or not, etc. diff erences within and across societies in both Th e critical point of the reference to enterprise space and time. To be sure, among the list (in the is that from both a general perspective and the longer defi nition) of things upon which people’s narrower, though important vantage point of ability to thrive rests, access to suffi cient potable investment, the concern is with the endeavors by water cuts across all societies whereas certain or through which particular needs are met. In means for transport or for communication might all events whatever the centrality of the physical

16 Infrastructure | Defining Matters PART 4 | LINKS WHICH CONNECT A DEFINITION From a practical perspective, any potential investment in an enterprise and OF INFRASTRUCTURE TO A DECISION TO INVEST its calculus of fi nancial risk and reward are ultimately linked through a chain IN INFRASTRUCTURE of factors or considerations to the particular goods and services that are produced and the means for doing so.

From a practical perspective, any potential invest- factors or considerations in the chain and at diff erent not be entirely helpful or may even be confusing in commitments of materials, labor, and economic ment in an enterprise and its calculus of fi nancial levels of generality along it. For example, if one assessing potential investments in infrastructure. resources required to create them. risk and reward are ultimately linked through a focuses fi rst on modalities for investment one can We have seen in our review of the survey responses Categories based on broad-gauge societal impact chain of factors or considerations to the particu- organize them based on whether they are publicly how the answers to the questions about fi nancial One intermediate step in eff ect builds upon, lar goods and services that are produced and the traded shares in corporations. Th en one can consider characteristics refl ect such interpenetration. adapts, or organizes individual examples according means for doing so. Here, of course, the special subgroups such as publicly traded shares of cor- In the text which follows we detail a series of to an articulation of the broad gauge impact or focus of our attention is on infrastructure-related porations which are engaged in the provision of major links which connect what is understood functional role that infrastructure associated goods and services. what in the fi rst instance might be characterized as to be infrastructure with outcomes identified enterprises of a certain kind are projected or Among the factors or considerations are ones infrastructure understood in terms of the needs for with investment in infrastructure. At one end of thought to have. For example, some are concerned related to (1) the nature of those goods and services; goods or services that might be met. However, one the chain is a defi nition (or characterization) of with allocative effi ciency through the direct reduc- (2) the current and projected need for them; can alternatively fi rst consider provision of what infrastructure grounded in certain kinds of needs tion of enterprises’ production and transaction (3) the current or envisioned modes for their pro- are thought to be diff erent kinds of infrastructure which are thought vital to meet, a defi nition such costs. Th at could take a variety of forms ranging vision (involving material, machines, technology, in terms of the needs for goods or services that as the one we propose. from the provision of new or less costly sources of etc.); (4) the possible economic arrangements by might be met. Th en one can specify subgroups of Individual Instances/suggestive or illustrative energy, or means for the delivery of materials for which such product or service would or might be diff erent ways to r invest in those enterprises, that is, examples production or distribution of fi nished products, supplied; (5) the amenability of any mode of pro- public traded shares, partnership interests, debt, etc. As noted above, typical discussions about infra- to ways by which to communicate or exchange in- duction to those arrangements; (6) the sources and However, because of the interrelationships structure focus in the fi rst instance not on individ- formation within the enterprise or with those who mechanisms for allocating resources to produc- among the factors or considerations it may not uals and the important needs of theirs to be met supply it or those who benefi t from that which the tion; (7) the costs identifi ed with production that be easy or even possible to sharply distinguish but rather on certain kinds of facilities, structures, enterprise produces. Yet another outcome or func- are borne by recipients of provision; (8) the ability between or among them. Hence the groupings etc., which as a matter of experience – oft en pop- tion concerns the indirect impact on allocative of recipients to bear those costs on their own terms may refl ect a combination of factors (or an inter- ular or everyday experience – are associated with efficiency through better or superior framework as well as in relation to the costs of benefi ting from penetration of categories, so-to-say). Th e kind the satisfaction of those needs. In many respects conditions for productive activity, oft en associat- other forms of provision; (9) the costs borne by of conventional or everyday (in a broad sense) this result is not surprising. Th e latter are physical ed with “public goods.”17 Among them could be others on their own terms and in relation to costs understandings about infrastructure to which we rather than abstract in nature. Th ey are distinctive facilities, structures, and perhaps equipment used of other kinds of provision they may choose or be refer above very likely refl ect such a combination or specifi c, not broad or diff use or vague. Th e facil- in connection with national defense or the main- required to bear; (10) the claims for recompense or interpenetration. So as intimated before, layper- ities or structures are typically large and dramatic tenance of safety and order, the provision of or more by those who allocate resources to sons’ or even investors’ initial thinking about the in appearance, perhaps even imposing. Th ey are general public services, and environmental production; (11) and externalities associated with subject might well entail terming something to be likely to already be in place and thus familiarly protection. A fourth might pertain to social provision and by whom, to what extent, and in what infrastructure in light of the role it plays in meeting present in people’s lives; or if not in place, read- welfare, sometimes identifi ed with redistribution, manner those externalities are borne. a particular (important) need, the scale at which it ily envisioned to be so. Th eir current or project- and social protection, housing, and recreation. Investments may be grouped based on their operates, whether it has been publicly provided or ed presence is or will seem to be enduring. Th ey A fi ft h might have a direct or an indirect impact on shared characteristics according to the diff erent not, etc. Such understandings are useful but may garner great attention because of the typically vast social cohesion ranging from courts to community

Infrastructure | Defining Matters 17 The economic, social, environmental, or other footprint of the enterprise, especially if it is a large, geographically concentrated one, might have potentially signifi cant impacts on people and the communities in which they live or work. If so, those potentially affected might insist on a greater, dominant, or exclusive governmental role.

meeting facilities and libraries broadly understood more likely that government would play a signif- to legitimate or justify the decision in terms of the they might enjoy beyond that. Th ese beliefs or per- to be certain kinds of structured public spaces. icant role in satisfying it. Th e role might be that similarity of the arrangements to those claimed ceptions inform judgments about how individuals’ A sixth could be the indirect or long term eff ect much greater if there are high barriers to entry to be historically typical (as described above). socio-economic status bears on their access to the of facilitating the maintenance or accumulation of because of the large scale/high capital costs of In addition, the concerns of those who are not users good or service, especially when access is condi- human capital viewed broadly, ranging from the the infrastructure enterprise or because there are or consumers of the product or service as such may tioned on some payment by them for it. Th ere are, public schools, colleges and universities, technical potentially large economies of scale in provision. come into play. Th e economic, social, environmen- of course, fears about wasteful consumption if the training institutes, and the like. Here the eff ects are Th ere might be a similar eff ect as a result of there tal, or other footprint of the enterprise, especially if good or service is not priced in suffi cient measure of a more individual nature. Whether and how an being limited or no competitive or substitute means it is a large, geographically concentrated one, might to individual consumers, worries about moral enterprise might be seen to fall within or straddle by which the needs served by this particular kind have potentially signifi cant impacts on people and hazard insofar as individuals are not suffi ciently one of these categories is likely to have a bearing – of infrastructure enterprise can be met. For want the communities in which they live or work. If so, encouraged or required to provide for themselves, in some cases, a signifi cant one – on whether it is of a better phrase we refer to these factors or those potentially aff ected might insist on a greater, etc. Also implicated are views as to the legitimacy seen as infrastructure in the fi rst instance. Beyond considerations which come into play primarily dominant, or exclusive governmental role, perhaps of and necessity for the larger society shouldering that its placement might well color judgments as to by virtue of the good or service and the material on the premise that government might more read- the costs of meeting such needs, though this posi- its importance, the legitimate or feasible ways by conditions for its provisions as “endogenous con- ily be held accountable for interruptions in supply tion is typically expressed in terms of government which provision is thought properly or best to be straints on competition or markets” or failure to avert harmful secondary impacts than policy, government as such bearing the burden, etc. organized, the fi nancial and other terms according Th e phrasing is meant to distinguish it from private enterprises. In that sense, positions as to the extent to which to which it is operated, and correspondingly, the “exogenous constraints on competition or markets.” Demand, Prices, and Payment the burden might be borne in that way may well possibilities for and attributes of investment.18 By that we largely refer to such limits as govern- Th e factors here have two interrelated aspects. be in tension with stances taken on the necessary Th e economic basis for provision ment places on whatever market-based provision One concerns the extent to which those who are limits on government fi nances in general and the Here, the focus is typically on factors or consid- might otherwise be conceivable given the nature the users/consumers of the infrastructure-related relative priority of meeting competing demands erations that bear upon the amenability of the of the particular infrastructure enterprise.19 products or services directly bear the cost of it as on government, some perhaps equally a vital, infrastructure enterprise to some form of mar- Th at is, government could require some form of provided to them. The other pertains to who in particular. ket-based provision. At one extreme government monopoly provision, whether by itself or a private ultimately in some measure bears the cost of In certain respects the tension depends upon could be the sole supplier and provide the product enterprise, retain ownership of the enterprise enjoyment by others of the benefi t of that which what in some measure might be the overlapping or service on other than the basis of price to the but grant a concession for provision by one or infrastructure aff ords. and confl icting beliefs of diff erent “publics” – of user or consumer. At the other, there could be a just a few private enterprises, etc. Alternatively it Th e precise allocation between the two is in users of the goods or services, of the citizenry as competitive market in which only private enterprises might allow for competition solely among private part driven by several kinds of considerations, a whole, and of particular segments of the society, participate with government playing a very limited providers but heavily regulate it. At any given time key ones of which resonate with the terms of our whether as individuals or organized as enterprises, regulatory role with regard to the extent, quality, the decisions in this regard will be colored by the defi nition. In particular, they include beliefs or civic associations, etc. – each with distinctive and price of provision. history of involvement of government and private perceptions as to how important access to a good interests apart from those relating to the good or It seems that the more important the need parties in infrastructure-related enterprises of the or service is to the minimum requirements for service. So, for example, provision through a health which an enterprise is thought to help meet the kind in question. Th at is, relevant parties will strive individuals’ well-being and to the quality of life care facility of a basic diet of food or immunizations

18 Infrastructure | Defining Matters [The tension among the need for, the pricing, and the forms of payment] depends upon what in some measure might be the overlapping and confl icting beliefs of different “publics” – of users of the goods or services, of the citizenry as a whole, and of particular segments of the society, whether as individuals or organized as enterprises, civic associations, etc. – each with distinctive interests apart from those relating to the good or service.

might be thought to be so important that it should For example, monies could, as in the United States, scenarios might well be greater. In all events, how importance of that which certain infrastructure be supported entirely from government revenues. be collected from a tax on the cost of motor vehicle those tensions are resolved are of considerable related enterprises supply, concern about the By contrast urban mass transit might be priced to fuel. In that case, the government would take in signifi cance to assessments of the risk of investing potentially dire consequences of a lack of supply users in a way which aff ords broad but not entirely money from those who travel by motor vehicle in the enterprise. Depending upon the scenario provides an impetus for government retaining free access. By contrast with the latter, the need on roads other than the ones for which the use of it might be associated with what some refer to as ownership rights and the typical associated powers for potable water might be believed to require which is subsidized. political, legal, or perhaps even contractual risk. of ultimate control. For example, the government’s relatively greater ease of – if not an absolute right Clearly, then, an ostensible general commit- Supply and Enterprise Ownership and ability to act quickly under such circumstances of – access, communication by telephone less so, ment to the meeting of infrastructure-related Organization by taking over roles that a private entity has been energy from electricity power sources even less so, needs requires specifi c judgments as to the terms In this and the following sub-section the focus assigned might well aff ord the requisite comfort or and means of transport by air, likely not at all.20 under which individuals might in reality enjoy is on the intertwined factors and considerations confi dence. Insofar as the ultimate user or consumer access. As discussed in greater detail below, the which bear upon first, who owns the enterprise In all events, whether the government or a does not pay the full cost of the good or service, calculus according to which an infrastructure-related and the organizational and operational means by private entity assumes such roles depends upon questions remain as to the government’s role in enterprise is fi nanced will be shaped by those which the enterprise supplies the good or service factors noted in the previous sections as well as determining who nominally and who ultimately judgments. Th is is because they are very likely to and second, how the enterprise is fi nanced. Th ey other ones. For example, if satisfying a particular bears the cost. For example it can set the price at bear heavily on the nature and extent of the fl ow are intertwined because the ability and willingness need is vitally important, so then confi dence in the less than the full cost or even zero regardless of of revenues required to sustain the enterprise. of relevant parties to take on a fi nancial stake in enterprise’s ongoing ability to supply it might war- who the user or consumer is and pay the diff erence In turn, they greatly infl uence possible modes of the enterprise is tied to such ownership rights and rant a dominant or exclusive role by government to the infrastructure enterprise. It can prescribe a investment in the enterprise and the prospects interests as they might have and the fi nancial and simply because such arrangements might be seen lower than full cost price, the precise amount of for fi nancial reward from it. Moreover, how those other terms under which they assume such role as as ultimately more stable or enduring than most which varies according to the user’s or consumer’s judgments are reached – and how enduring they they might have in the actual supply of the good any private enterprise. Such worry about a threat socio-economic status (where practicable). Th e are – will refl ect the ways in which the tensions or service. to provision is heightened if other factors point subsidy could be given at any level of consumption referred to above have been resolved. For example, Th e precise roles which might be played will toward it being on a monopolistic rather than a or use by an individual, up to a specifi c amount, over time the prospect of changes in pricing to the vary according to the nature of the need being met competitive basis. Th is is true especially if a large or perhaps graduated according to the extent of user or consumer or absent that, adjustments to and the particular technical and other means by and sustained commitment of economic resources it. Th e subsidy would be nominally governmental the level of any government subsidy (or whoever which the product or service is provided. Among is required in that connection. Of course the sheer in that the monies come directly from govern- ultimately pays for it) may re-ignite tensions, the roles which are oft en the subject of considera- fact of government having played that role as an ment coff ers. However, who ultimately bears the infl ame existing ones, or drive them to a breaking tion are ones which involve planning or designing historical matter bears upon the judgment. expense of the subsidy depends upon where the point in ways that threaten the enterprise or the the enterprise (if it is a new one), building it, and However, these kinds of considerations are monies drawn from government coff ers originate. terms under which it operates. Arguably, insofar managing, operating, or maintaining it in whole or generally not dispositive. Clearly there are percep- Th e expenditures might be made without regard as the nature of the enterprise and other factors part. It is important here to distinguish ownership, tions or beliefs as to how able private enterprises to how the revenues come into such coffers. result in the choice of monopoly provision and/or perhaps as a formal matter, from one or another are to effi ciently and eff ectively serve in one or Or there could be a direct link to specifi c sources. heavily regulated provision, the occasion for such of these operational roles. Given the extreme more of those roles as compared to government.

Infrastructure | Defining Matters 19 The precise roles which might be played [by the public and private sector] will vary according to the nature of the need being met and the particular technical and other means by which the product or service is provided.

In many respects this might be thought to be a inhabitants of the community in which it is equity or debt – at risk is tied, among other things, the costs nominally and ultimately fall. Decisions purely empirical question the answer to which located and perhaps abutting or even more distant to the character and extent of the revenue stream about the application of revenues on the demand would be found in a body of evidence of compar- communities. Th is is would be true at least insofar from which it can, fi rst cover its debt service and side may be more visible than on the supply side in ative performance. In reality, such comparisons as it is thought that in playing a particular role, the operating costs and second, return projected that they directly relate to the ability of those who are diffi cult and fraught with problems. Moreover, government or a private entity might be less likely profi ts. Th at stream could be based on an agreed benefi t from the good or service provided to gain lurking behind assertions about effi ciency and to cause the harms, be responsive to impacted upon schedule of user fees – presumably set in access to it. eff ectiveness are the means by which they are communities, ameliorate problems caused in a light of the entity’s expectations as to the extent of Th e preceding discussion has focused on achieved. Th at is, ultimately the effi ciency and more timely and comprehensive way, etc. use – with government payments based on use, on particular infrastructure-related enterprises which eff ectiveness of the enterprise as a whole (or an Th e choice of ownership structure and assign- availability for use, etc. By contrast, In the case of meet specifi c needs and how they might be organization which plays a role in relation to ment of roles is, of course, likely to be tied to how turnkey operations, a private entity might design fi nanced in light of expectations on the part of the enterprise) in meeting a need – and how it the enterprise is fi nanced, particularly insofar as and build a facility, fi nance all or just some of the private entities as to the risks and rewards of the is achieved – rests on the people who constitute fulfi llment of the role is bound up with one or expense, and recoup its costs and earn a profi t by respective fi nancial and/or operational roles they it. Certainly, judgments as to the appropriateness another mechanism for fi nance. For example, in an agreed upon transfer of the enterprise to the and government would play in provision. Such of private and governmental roles with regard to cases in which the private role is solely in operations government aft er completion. discussion is closely, perhaps even very directly, a particular infrastructure related enterprise rest and maintenance there may be little place for the We will not here canvas the large number of related to how pension funds might see investment on how actions by and relations among the people private participation in fi nance. Similarly, where possible variations along these lines. Suffice it in infrastructure. In the fi rst instance, their view of who constitute it are linked to notions of effi ciency the entity’s responsibilities include designing and to say that the possible calculus which informs such investment – as described in our analysis of and eff ectiveness. (By use of the word “constitute” building facilities, structures, etc., they might be expectations about the fi nancial risks and rewards the results of our survey – is shaped in fundamen- we primarily mean those who are employed by the fi nanced by government and with government associated with the private entity’s role in the tal ways by what their funds’ strategic objectives enterprise though it might extend to others who retaining ownership and ultimate management enterprise will not only refl ect its ability to raise are. (We discuss what these might be below.) Next serve it on a contract basis, supply it with key goods control of the enterprise. However, the arrange- equity and debt capital for the enterprise, and the is how apposite those objectives are with what or services, etc.) For example, the tasks and the ments could involve a role for the private entity in terms for doing so but also bear the imprint of the might be expected from the particular means by terms according to which they are to be fulfi lled fi nance. Arguably it might be solely private fi nance kinds of factors and considerations noted above. which funds might make an investment. depend upon the character of the relationships of or government could provide a direct infusion of For example, the perceived importance of the need For example, at one extreme a (presumably such people to the enterprise, the nature of their funds, lend money to the entity, perhaps at lower to be met will spur (or not) such agreement as is experienced and well resourced) pension fund work within or with respect to it, the conditions than market rates, provide tax subsidies such as needed from government to allow the enterprise might in eff ect be the private entity which could under which they do their work, and the rewards treating interest as a deductible business expense to be established in the fi rst place. Given fi nite play an ostensibly direct role with respect to an they gain from it. or not tax interest income to lenders, guarantee government revenues, government’s willingness to infrastructure-related enterprise. We say ostensibly Similar concerns might apply with respect to loans by others to the enterprise, or make an allocate them to the enterprise on the supply side because as a practical matter the fund, not having others who are aff ected by the enterprise insofar as in-kind contribution (such as land). or on the demand side – and how – will depend the relevant expertise in-house, would no doubt it displaces or aff ects the quality of life – whether In all events, the willingness and degree to on judgments as to the relative importance of this contract for a wide range of the management and in a social, environmental, or other sense – of which the entity puts its money – in the form of particular need in relation to others and on whom other services it requires eff ectively to fulfi ll the

20 Infrastructure | Defining Matters Clearly there are perceptions or beliefs as to how able private enterprises are to effi ciently and effectively serve in one or more of those roles as compared to government. In many respects this might be thought to be a purely empirical question the answer to which would be found in a body of evidence of comparative performance. In reality, such comparisons are diffi cult and fraught with problems.

role it has assumed. In that case its assessment In between these two extremes are a poten- this occurs), the profi le of risk and reward of the e. Yield a long-term, high-quality, stable income of the risks and rewards of making the fi nancial tially wide variety of vehicles for investment in limited partnership will likely look quite diff erent stream, and generate appreciation at least com- investment which is a concomitant of that role will infrastructure-related enterprises. For example, from that of any of the individual enterprises in the mensurate with infl ation entail its evaluation of the factors and considera- there are limited partnerships in private equity portfolio. More generally, of course, the fi nancial f. Provide investment returns which include tions discussed above. fund-like vehicles, with the general partner play- outcomes for any particular vehicle through which a substantial cash distribution component At the other extreme, the fund might be many ing whatever direct role it has as a concomitant a pension fund invests are rooted, among other g. Provide yields that are not only stable but steps removed from direct involvement. On the of the investment it has made in the enterprises things, the vehicle manager’s criteria for craft ing also predictable cash fl ows equity side of the equation it might purchase pub- in the portfolio it assembles and manages. Here the portfolio, its particular choices of enterprises h. Yield respectable rates of return with low risk licly traded shares in a company whose business it the pension fund will be concerned with whether to include in it, the attributes of the ones it selects, i. Yield high-quality, long-term, stable income is to play a role in perhaps a numerous and chang- or not the risks and rewards of investing through the manager’s role with respect to the operation streams ing array of infrastructure related enterprises. In this partnership are apposite with its strategic of those enterprises, and its ongoing oversight of j. Reduce the overall portfolio’s volatility that case the fund is far distant from any actual role objectives. It would do so with an understanding the portfolio. k. Maintain a low correlation to other asset classes in relation to any of those enterprises. Th e calculus that the character of those risks and rewards are Strategic Objectives l. Promote the fund’s standing as an investor who of risk and reward for it as a shareholder derives, determined not only by those of the particular As noted above, possible pension fund invest- takes legitimate account of stakeholder inter- among other things, from the anticipated risk and enterprises in the partnership’s portfolio but also ments in infrastructure must be in accord with the ests, such as those of members of the commu- reward of the individual enterprises, how well the by the following: the quality of the judgments of the fund’s investment policy and advance the strategic nities served and aff ected by the infrastructure company chooses which enterprises in which it is general partner in choosing to invest monies and objectives which inform that policy. Discourse and workers who build or operate it involved, the terms on which it does so, the risks eff ectively fulfi ll certain roles with respect those about which strategic objectives investments in m. Provide downside protection to the investment and rewards associated with those enterprises in enterprises, its ability to manage the ensemble of infrastructure might help to achieve includes fund during equity bear markets light of that role, how it manages overall the array those investments and roles, the fees and other reference to several or even many of the following n. Aff ord long-term infl ation protection of businesses, and its judgments of the market costs that are paid to the general partner for doing (which were included in the survey reviewed o. Contribute to portfolio diversifi cation value for the company’s shares. On the debt side it so, and the various ways one or another aspect of might purchase a bond issued by the enterprise. In the principal-agent relationship between limited earlier in this paper): p. Hedge against long term liabilities that case the fund has essential no role at all in its pension fund partners and the general partner a. To preserve capital q. Establish the fund’s reputation as premier infra- operation except insofar as the terms for lending play out. (If they play out badly the consequences b. Yield returns that are stable and high enough structure investment manager and investors of bear upon it in the future. Th e risk and reward of can be costly and perhaps even devastating.) in relation to the fund benchmark return choice within the investment community the investment in a fi nancial sense are defi ned by Unless the partnership focuses on a relatively c. Yield returns that are the result more from r. Embody the practice of responsible investment, the terms of the bond subject to the expectation narrow and homogeneous category of enterprises appreciation in the assets than cash returns, that is, effi cient operation of the asset, the deliv- of interest and principal being paid in a timely in terms of the infrastructure related product or through operational improvements, best man- ery of quality services, utilization of responsible and full fashion. An estimate of that prospect, of service being provided and the geographic area agement techniques and practices, or otherwise labor, environmental, etc., practices course, depends upon an assessment of factors and where it is supplied (and correspondingly the eco- d. Yield returns that are sufficient on a risk- s. Foster the renewal and expansion of infrastruc- considerations of the kind discussed above. nomic, political, social, etc. environment in which adjusted basis ture assets

Infrastructure | Defining Matters 21 [T]he array of objectives thought to be achievable by means of infrastructure investment is fairly broad.

t. Off er transactions are of signifi cant economic Second, not surprisingly, among the objectives quite plausibly and legitimately is indicative of the that larger community and hence its “license to scale and magnitude, allowing an outlay of a are some which might be thought to be advanced central task of pension funds of investing in ways do business.” sizable amount of capital by other kinds of investments. It is unremarkable suitably calculated to ensure that pension payment In addition, though, major failures in those u. Perform well during economic downturns because the range of features is rather large so that promises are kept. As such, the focus is intensely other spheres will in specifi c instances hardly go It is worth taking note of certain characteristics there are likely non-infrastructure related invest- (and for some perhaps exclusively) on the very unnoticed for at least two kinds of reasons. Th e of these goals. ments which might well be thought to evidence end of the chain, the fi nancial characteristics of an shortcomings will in the end almost certainly have First, the array of objectives thought to be some of them. investment in a particular infrastructure-related negative financial consequences as the result of achievable by means of infrastructure investment Third, some objectives overlap with one enterprise. (As noted, in practice, the focus may misjudgments about and/or realization of risks is fairly broad. Th ere are probably several reasons another. In part this is because some goals are well be on the fi nancial characteristics of invest- associated with one or another of the linked for this breadth. In some measure it simply refl ects almost synonymous with others and in part, ment by means of a particular investment vehicle. stages to which we have referred. But behind the uncertainty as to what is understood to be that because some might well appear to be achieved Th at vehicle has fi nancial characteristics rooted in descriptive language for each cast in terms of risk infrastructure which is an object of investment. in tandem with others, that is if one is present, those of the infrastructure-related enterprises with lie the needs, concerns, and aspirations of those It may be so because a potentially wide variety the other is likely to be as well. respect to which it makes investments.) who have that direct stake in or who experience an of such objectives might be thought to fall under Fourth, in certain respects, some goals confl ict However, other objectives (such as l, q, r, and s) impact from the infrastructure-related enterprise, the same rubric but be associated with an ability with others. Th is is in part because the aims place manifest awareness that pension fund investments Of course, the immediate object of criticism will to advance diverse goals. In certain respects it a different emphasis on aspects of reward and are a potential subject of intense scrutiny by plan be the enterprise as such. But the greater and mirrors the variety of outcomes some promoters dimensions of risk. Insofar as there are connections members and in many cases by the larger public as potentially more visible a pension fund’s role as of infrastructure investment have asserted might between reward and risk, then the ability to well. Of course, that close attention may be spurred an investor in relation to the enterprise the more be achieved. To some degree it simply is a conse- achieve one objective necessarily implies a lesser by the fi nancial outcomes of investment decisions likely it might become an object of disapproval or quence of vagueness about what are the putative ability to attain another. (especially large, adverse ones). But there is also even censure as well. financial attributes of even relatively narrow Fift h, while a good many purposes are cast a recognition – indeed, a growing one – among Moreover, in making decisions calculated to categories of infrastructure investment. To be in terms of financial outcomes some appear to pension funds (and other institutional investors) ensure keeping pension extending far into the sure, this is likely to be in part an artifact of the relate to other sorts of results or consequences. that serious inquiry may or even must be made not future, requires funds to have clearly in mind what lack of data in scope and quality as to outcomes Th e inclusion of these other kinds of outcomes only into the fi nancial attributes of the enterprises the state of world will be and how that should shape of such investments. But as suggested by the text has its origin in the diff erent points of intersection in which they invest, but also into how well they its decisions over the long term. Stakeholders in above, the multiplicity of links which connect between what is thought to be the pension fund’s succeed in the production of goods and services as and those impacted by the enterprises that are the such categories ultimately to the characteristics of overarching mission with one or more of the stages such and the nature and quality of the relationships objects of investment are likely to vigorously artic- what are typically seen as of most importance to which link the needs which are met by infrastruc- they maintain with those who have a direct stake ulate what are apt to be strongly held views about pension funds and the array of factors and consid- ture-related enterprises to the ostensible fi nancial in the enterprise or are otherwise aff ected by it. the how enterprise acts in response to their needs, erations which constitute the ties at each stage of outcomes of an investment in a particular kind In part this is simply a matter – though a very concerns, and aspirations. Th ose demonstrations connection, make for a potentially wide range of of such enterprise. Th e large number of fi nancial critical matter – of the fund’s reputation in a of disappointment, dismay, anger, and the like characteristics being identifi ed with that category. characteristics in the list of strategic objectives general sense in the eyes of its members and may be manifest openly. Th ey may be expressed

22 Infrastructure | Defining Matters [W]e believe and hope that the defi nition we propose, the modes of thinking about infrastructure so defi ned, and the interrelated aspects of the process for deciding upon investment in enterprises associated with provision of infrastructure so understood will prove valuable to what funds choose do. We say hopeful because a necessary if not suffi cient condition for prudent decisions … is being fully alert to all the implications of what those decisions entail.

silently through a holding back of purchases of a matter of provision of extraordinary importance. cause some good or benefi t? Th is poses disputed Th at being said, we off er in Appendix B a series products and services, concerted action within Of necessity then, it may well require especially questions as to whether regardless of such norms of related questions which funds might address the enterprise, or organized eff orts in the civic or informed and thoughtful judgments about whether or values, account has to be taken of those harms in their decisions about whether to invest in even in the public sphere (leading to legislative and how a fund makes an investment decision with and benefi ts because over the nearer or longer infrastructure and if so, how. Seeking answers to or regulatory action). In a number of these cases respect to infrastructure. term they may imperil what pension funds need these questions might spur alertness to the factors those expressions are signals of the occurrence of We think there is warrant for our narrative and hope to achieve, or because the larger society, and considerations we have discussed at some important and perhaps even fundamental changes of the series of connections which link provision sooner or later, may simply not tolerate the ways length above. In turn, that may serve as a useful in the world as people experience and understand associated with the infrastructure ultimately to funds’ decisions may implicate them in having tool for funds’ thinking comprehensively and or anticipate them. As such they may off er critical fi nancial decisions about investment in enterprises caused those harms or having failed to produce cogently on the subject. We note that the focus insights into the world of the future to which engaged in provision. If so, then even the seemingly that good. of the schematic process is essentially on relevant pension funds as long term investors must be alert more straightforward task of reaching a conclusion We do not here take on the task of offering substantive criteria. But decision-making is about and for which they must plan. based on a credible and perhaps even convincing a prescription for the decisions which any par- not only such criteria but also the institutions and How, precisely, any particular pension fund pure calculus of fi nancial risk and reward requires ticular pension fund might make in light of that processes by which judgments are made. Th at is, takes account of these considerations will be a mat- careful examination and serious refl ection. But at debate. As a practical matter what any given fund investors need to consider fi rst how attending to ter of judgments made in light of an ongoing debate least such an exercise has a familiar feel. Rather chooses to do will be determined by the terms of certain issues is embedded in their own processes about a fund’s proper role and responsibilities. more challenging is whether and how the calculus its own plan, the expectations and perhaps even for decision-making and second, whether and In the fi rst instance they concern plan members’ of decision needs to be diff erent, perhaps broader the demands of members, and what the fund how stakeholders and others aff ected by the interest in receiving promised benefi ts. But how- or richer in character.21 We do not here off er a understands its place to be within the larger com- enterprise are engaged or otherwise brought into ever important those benefi ts are to plan members prescription for what any given fund should do. munity which mandates and/or sanctions its very that process.22 Indeed, this position is arguably they have other interests – some quite important Th e debate to which we refer may be serious but existence and the standards that community sets true both for the individuals in whose names or ones – which extend beyond those critical benefi ts. confi ned to largely traditional discourse, confront- for the fund’s conduct. However, we believe and on whose behalf investments are made (to keep Moreover, as should be implicit from the preceding ing established views about how fi nancial markets hope that the defi nition we propose, the modes pension promises) and for those whose needs are narrative, most likely any pension fund investment function in general, the ways in which certain ones of thinking about infrastructure so defi ned, and met by the enterprises in which those investments in most any form of provision has potentially operate in particular, and the actions of pension the interrelated aspects of the process for deciding are made and how those enterprises act in meeting serious import not only for the interests of the funds within and on those markets. However, the upon investment in enterprises associated with that need.23 immediate recipients of provision but also for those arguments to which we refer extend further to provision of infrastructure so understood will engaged in the enterprise and aff ected by it. In some contested claims about whether decisions need to prove valuable to what funds choose do. We say cases that import may readily be evident and have be informed by certain norms or values whether hopeful because a necessary if not sufficient consequences only in the distant future. But insofar embodied on understandings of fi duciary duty or condition for prudent decisions – in the sense of as judgments are made in relation to what is under- otherwise and if so, in what ways. For example, decisions with foresight and judgment – is being stood to be infrastructure, if the defi nitions we off er should or must funds follow the dictum to strive fully alert to all the implications of what those above are of merit they suggest that infrastructure is to “do no harm” or go further and act to create or decisions entail.

Infrastructure | Defining Matters 23 APPENDIX A

24 Defi nitions of infrastructure posed in survey: i. facilitate the building up and maintenance of d. Educational facilities, such as schools, colleges, APPENDIX A the stock of human capital, for example, health or universities, or libraries Facilities, structures, networks, systems, plant, and education e. Environmental-related facilities, such as for property, equipment, or assets that j. create the framework conditions for productive hazardous or toxic waste storage and disposal a. are essential to driving sustainable economic activity, public good: defense, general public f. Public buildings, development and growth, lift ing levels of goods or services, environment, and order g. Water-related facilities, such as for storage, productivity and boosting employment and and safety or have direct impact by reducing purifi cation/treatment, and distribution; waste critical to encouraging business innovation enterprises’ production and transaction costs water collection, desalinization and improving the global competitiveness k. are the basic physical and organizational h. Water control-related facilities, such as dams of enterprises capacities and resources needed for the and levees b. provide services and support that are basic to the operation of a society or enterprise or are i. Solid waste collection and disposal facilities functioning of a community, organization, or necessary for an economy to function j. Post offi ces society and crucial to its economic productivity l. facilitate the production of goods and services and k. Recreational facilities, such as parks, bike c. are key to managing population growth and the distribution of fi nished products to markets or running pathways, stadiums, lotteries, meeting current and future environmental casinos, lotteries challenges. Specifi c examples of infrastructure posed in survey l. Health facilities, such as hospitals and health d. provide a platform for economic development, a. Transportation-related systems, such as tunnels care centers social cohesion and stability. and bridge, road systems, intercity and metro m. Public safety facilities, such as police and fi re e. provide primary services which are crucial rail systems, railway rolling stock, airports, and military stations to the success of economic development in seaports, terminals, and barges; traffi c control n. Public safety-related facilities such as prisons/ society in that their absence or their less than facilities; parking garages or metered parking correctional institutions or facilities optimal performance would severely hamper b. Communications systems or networks, such o. Housing, such as military, student, and its productivity and growth. as TV/telephone transmitters, satellites, cable low-income/”public” housing f. provide social services and support private or broadband networks; wire or wireless phone sector economic activity. Financial characteristics of infrastructure towers; fi ber optic or copper cable g. are capital intensive/have high fixed costs posed in survey: c. Energy facilities, such as energy storage and long economic lives and have strong links facilities for natural gas and oil, facilities for a. Relatively illiquid, because large amounts to economic development, and a tradition of power, i.e., hydrocarbon, gas, geothermal, of capital are required at irregular intervals public sector involvement. wind-generated, water-generated, and nuclear for these projects, the indivisibility of these h. form the underpinnings of a nation’s defense, energy, transmission and distribution; projects, and the absence of an eff ective a strong economy, and its health and safety renewable/clean energy projects secondary market for them.

Infrastructure | Defining Matters 25 b. Require large investments, because h. Yields income which is stable and predictable infrastructure is generally capital intensive, over the long-term, because income is frequently with projects in their nature being because the inflation-linked, regulated, and protected facilities or structures built and operated, such by government guarantees. as transportation, energy, communication, and i. Off ers capital growth which is attractive, because social services, are large scale. the contracted revenue and costs applied to c. Higher levels of debt/leverage than non- infrastructure projects usually provide enhanced infrastructure projects, because infrastructure valuations over the long-term. cash-fl ows are more certain than for other j. Returns with a low correlation with other assets, projects, with the result that sponsors of because infrastructure returns are frequently infrastructure projects are willing to accept independent of economic conditions such as more debt and providers of capital are willing infl ation and changes in GDP. to issue higher levels of debt for infrastructure. k. Returns that are lower than for infrastructure d. Relatively hard to value, because of the investment but still acceptable and also less complexity of documentation, fi nancing, and volatile, because revenues are usually regulated technical details, the uncertainty of economic and infl ation-linked. and fi nancial conditions over the long-term, l. Risk-return profi les which diff er according and the absence of a market price. to whether the infrastructure asset is new e. Investments are likely to be held for a longer (greenfi eld) or existing (brownfi eld), because period than for non-infrastructure assets, risk is usually higher during the construction because non-infrastructure projects have a phase of infrastructure projects than the more established secondary market and can operating phase. be sold and exchanged more readily. f. Higher risk and more uncertain fi nancial NOTE: Th ere was an error in the phrasing of performance, because project success is choice “k” so even though many respondents dependent on multiple assured sources of appear to have understood its intent results for capital, guarantees, and/or subsidies. responses were not tabulated. g. More possibility of fi nancial performance problems with a project, because infrastructure is long-term and there is greater likelihood of adverse events occurring.

26 Infrastructure | Defining Matters APPENDIX B

27 Questions pension funds need to address Th at process could be described in the fi nancial sense. A highway would be large APPENDIX B in making decisions about investments in following terms: scale with the possibility of being able to bar infrastructure at the enterprise level 1. What need for the infrastructure-related good access to it. By contrast, the benefi t (in terms or service does the enterprise which is the of quality) of a new or improved large scale Ultimately, pension funds are about making the ultimate object of investment ostensibly meet water purification works would be available best decisions not only in light of their most or satisfy? to all (who otherwise had access to the water immediate task of keeping pension promises but 2. How important is meeting that need to the supply). Th e clean air benefi t of a wind-farm also in view of the roles they must or choose to people who would benefi t from its provision in the place of a dirty coal fi red plant would take on as investor owners of and/or lenders to by the enterprise? go to all who lived in the vicinity; access to the enterprises in pursuit of that goal. Th ose roles 3. How is the nature of that need understood in energy supplied would be a diff erent story.) also require thoughtful decisions in other terms broad societal terms by elected offi cials and 6. What is the physical footprint of the enterprise because, of necessity, they are closely linked not other governmental policy makers? By others that provides or is envisioned to provide the only to whether those enterprises succeed in the who might have a signifi cant interest arising good or service? At that scale what are the provision of that which is important in people’s from provision to meet it? How important is to actual or projected demands or impacts on the lives but also to how they succeed in doing so. them that it be met and in what ways? enterprise in full operation on the natural We off er below what might be termed a 4. What is the nature and size of the population environment? On communities in proximity series of suggestive and in some measure stylized that currently has a need for this particular to the enterprise? questions that are important to making those good or service? How might that population 7. What is the footprint of the enterprise in terms decisions. Th ey are suggestive because we do not and its need in that regard change in the future? of the resources – material, fi nancial, and presume to have the defi nitive answers to all the 5. Is provision of the good or service individual otherwise – which must be amassed, organized questions which the main text poses for thinking or collective? Th at is, does each individual and applied to establish the enterprise? Insofar about what infrastructure “is” and how precisely receive or get the benefi t of his or her own as that is translated into a cost to establish the that should inform what might be done. They good or service or do many individuals get enterprise, what is it? are stylized because the particular process will access to or the benefi t of the same good or 8. What are the ongoing resources required depend on how any individual fund views its service? (Th is is arguably just a diff erent way of for the ongoing operation of the enterprise? responsibilities to plan members and others. referring to whether the benefi t takes the form Insofar as they are translated into the ongoing A decision-making process for a pension fund of a public good in that enjoying the benefi t cost of it operation, what is the cost? considering investment in what might be deemed of the good or service by one individual does 9. What is the total cost of provision at diff erent to be an infrastructure-related enterprise can be not reduce availability of it for consumption levels of operation of the enterprise? formulated in a way guided by the chain of linked by others. Whether it is non-excludible as well 10. How might the cost change with time whether sets of factors and considerations detailed above.24 is another issue. The former is likely to by virtue of the expense of fi nance, supplies, bear on questions of scale in a physical and labor, ongoing maintenance and repair, etc.?

28 Infrastructure | Defining Matters 11. In light of the need for the good or service and 14. To what extent does the enterprise as it operates Note that the degree to which the enterprise other considerations, or as it is to be built and operated have a direct must or can elect to internalize such impacts will a. Will it be provided for free or will those and potentially negative economic, social, depend upon at least two things. One is whether who benefi t from provision bear some or environmental, or other adverse impact as a matter of law it is obliged or permitted to do all of the costs of such provision? on those with a direct or other stake in the so. Another is whether by virtue of the identity of b. If those who benefi t will bear some of the enterprise such as the investor in the enterprise it must or might do cost, how much of it and how? a. Th ose who ostensibly are the object of so. Th e identity of the investor refers to situations c. Insofar as some or all of the cost of provision provision of the product or service? in which the decision maker acts on behalf of will be borne by those who benefi t, how will b. Th ose who work in the enterprise which others who are the ultimate source of the monies demand for it change with the cost borne produces the product or service? for investment and who ultimately enjoy the in that way and other considerations (such c. Th ose who are suppliers to the enterprise? fi nancial rewards and bear the fi nancial risks of as the cost and necessity of other goods and d. Th ose who live or work near the enterprise? the decisions. Th ese situations are two-fold: fi rst, services, substitutes, if any, for the particular e. Th ose who do or might provide a while benefi ciaries might benefi t in a fi nancial good or service, etc.)? competing or substitute product or service? sense, as workers in or suppliers to the enterprise, 12. By reason of its scale and cost or other reasons, 15. Insofar as the government assumes some or all as residents in the community of the enterprise, by reason of law or otherwise, is this good or of the cost of establishing the enterprise or the etc., they would suff er harms from establishment service being provided by or will this good or costs that otherwise might be borne by those or operation of the enterprise. Second, those who service be provided by a single enterprise or who are the object of provision of the good are not benefi ciaries, in any of the same roles or more than one. If the latter, how many? On or service, who, by virtue of that government circumstances, suff er the harm. what permissible or mandatory terms? role, ultimately bear the cost? 13. What are the precise roles of the government and 16. To what extent must or might the enterprise the private sector in relation to the enterprise? be required to “internalize” any of the negative For example, what are their role(s) in impacts referred to above? a. Owning it? 17. Insofar as the enterprise is or may be required b. Building it? to internalize such negative impacts what are c. Operating it? the consequences, fi nancial or otherwise, for the d. Maintaining it? establishment or operation of the enterprise? e. Regulating it? f. Financing it? g. Bearing the costs of provision that might otherwise be borne by those who benefi t? h. Otherwise?

Infrastructure | Defining Matters 29 ENDNOTES

1 Here we use the word “enterprise” for the most part in the 4 http://www.answers.com/topic/infrastructure#History_of_ wires. It is by defi nition invisible, part of the background electricity generation and transmission, gas and water broad sense articulated by the (online) Oxford dictionary the_term (Accessed: February 20, 2012). for other kinds of work” it “is a fundamentally relational distribution, sewage treatment, broadcast and wireless towers, defi nition of an enterprise, which refers to it as a “project 5 See Batt, supra, at p. 2 referring to the chapter on “NATO concept, becoming real infrastructure in relation to telecommunication, cable networks, and satellite networks. or undertaking, especially a bold or complex one” and as common Infrastructure” in NATO: Th e First Five Years organized practices” and goes on to defi ne in terms of Th e third covers courthouses, hospitals, schools, correctional a word having its origin in “late Middle English: from Old 1949-1954.) variety of properties including the following among others): facilities, stadiums, and subsidized housing. French, ‘something undertaken’”. http://oxforddictionaries. A recent defi nition of infrastructure by the U.S. military is as “embeddedness,” that is, “[i]nfrastrucure is sunk into 11 For example, some projects derive revenues from user-based com/defi nition/enterprise (Accessed April 2, 2012). Th at is, follows: “All building and permanent installations necessary and inside of other structures, social arrangements, and fees linked to benefi ts provided and costs incurred. In other infrastructure is associated with a project or undertaking for the support, redeployment, and military forces operations technologies”; “transparency,” that is, “[i]nfrastructure is cases, tax revenues or subsidies may be part of the mix. which entails the creation or construction of certain physical (e.g., barracks, headquarters, airfi elds, communications, transparent to use, in the sense that it does not have to be 12 “Th e defi nition of infrastructure is being applied to a structures, facilities, etc. in connection with commencing facilities, stores, port installations, and maintenance stations). reinvented each time or assembled for each task, but invisibly broader range of assets, many with a tenuous link, such as and operating an ongoing endeavor to provide particular Department of Defense Dictionary of Military and Associated supports those tasks”; and “links with conventions of practice,” airports and German service stations.” “Infrastructure at important products and services. As suggested in the Terms, Joint Publication 1-02, Joint Chiefs of Staff , Th e that is, “[i]nfrastructure both shapes and is shaped by the Crossroads,” by Ian Fraser, Financial News Online, May 14, foregoing text, such an endeavor is typically of large scale Pentagon, Washington, DC, April 12, 2001 (As Amended conventions of a community of practice.” “Th e Ethnography 2008. Available at http://www.ianfraser.org/infrastructure-at- and complex. As such, the defi nition is largely neutral or Th rough August 31, 2005). of Infrastructure,” by Susan Leigh Star, American Behavioral crossroads/ (Accessed July 20, 2012). “‘Th e original concept indiff erent to the particular organizational form the endeavor Scientists, Vol. 3, No. 3, November/December 1999, pp. 377- http://www.dtic.mil/cgi-bin/GetTRDoc?AD= of infrastructure investment meant investment in individual might take, whether for profi t or not, where involving solely 391, at 380-381. http://abs.sagepub.com/content/43/3/377.full. ADA439918&Location=U2&doc=GetTRDoc.pdf projects – such as roads, bridges, and tunnels – that have governmental action or one or another mix of roles for private pdf+html (Accessed February 21, 2012). (Accessed February 17, 2012). clear sources of revenue.’ Th at has been broadened to public and governmental action, the particular forms of each form of Also, one recent dictionary entry off ers one more narrow, 6 “Infrastructure: Etymology and Import,” by H. William Batt, private partnerships – schools, prisons and hospitals – and action, for example, action by an arm of government, an semi- traditional defi nition and another more general and expansive Journal of Professional Issues in Engineering Education and latterly into quoted companies that are not involved in single autonomous agency created by government, a corporation, one: “Th e basic facilities, services, and installations needed Practice, Volume 110, Issue 1, January 1984, p. 2. projects or even baskets of projects. My worry is that it partnership, etc. for the functioning of a community or society, such as has become just a buzzword, a convenient catch-all.” 7 Id. at 3-4. 2 “Infrastructure: Etymology and Import,” by H. William Batt, transportation and communications systems, water and power Id. (quoting Nicola Ralston, director of consulting fi rm 8 Journal of Professional Issues in Engineering Education and Id. at 4. lines, and public institutions including schools, post offi ces, Liability Solutions, Ltd.) See also “Th e Next Asset Bubble,” 9 Practice, Volume 110, Issue 1, January 1984, p. 2. See also For example in a U.S. government supported study on what and prisons” and “An underlying base or foundation especially by Kit R. Roane, Portfolio.com, February 4, 2008. Available at NATO: the First Five Years 1949-1954 by Lord Ismay, NATO, was referred to as “public works infrastructure,” the authors for an organization or system,” respectively. In its discussion http://upstart.bizjournals.com/news-markets/national-news/ November, 1954 (“Th e word ‘infrastructure’ comes from asserted that of usage it adds: portfolio/2008/02/04/Infrastructure-Investment-Bubble.html France, where it has long been used to denote all the work “[a] comprehension of infrastructure spans not only these Perhaps because of the word’s technical sound, people (Accessed July 20, 2012) that is necessary before a railway track can be laid, such as public works facilities, but also the operating procedures, now use infrastructure to refer to any substructure or (noting the “fl ood” of new infrastructure funds and “new embankments, bridges, tunnels, etc.”) http://www.nato.int/ management practices, and development policies that underlying system. Big corporations are said to have ideas [that] involve less-traditional assets like lotteries, gas archives/1st5years/chapters/10.htm (Accessed on interact together with societal demand and the physical their own fi nancial infrastructure of smaller businesses, stations, and old folks homes”) February 20, 2012). world to facilitate the transport o people and goods, for example, and political organizations to have their 13 “REAL ASSETS IN INSTITUTIONAL PORTFOLIOS: THE 3 See the following current defi nition of the word infrastructure provision of water for drinking and a variety of other uses, infrastructure of groups, committees, and admirers. ROLE OF COMMODITIES,” ALTERNATIVE INVESTMENT in French: safe disposal of society’s waste products, provision of energy Th e latter sense may have originated during the Vietnam ANALYTICS LLC, December 10, 2007, p. 5. 1. ensemble des travaux nécessaires pour créer la plate-forme where it is needed, and transmission of information within War in the use of the word by military intelligence offi cers, http://www.bache.com/media/managed/RealAssetsin d’une voie de chemin de fer ou d’une route and between communities.” whose task it was to delineate the structure of the enemy’s InstitutionalPortfolios.pdf (Accessed March 19, 2012). 2. ensemble des installations nécessaires au fonctionnement Infrastructure for the 21st Century: Framework for a Research shadowy organizations. 14 “CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT d’un service de transport Agenda, Th e National Academy of Sciences, 1987. Note 1, Th e American Heritage® Dictionary of the English Language, SYSTEM STATEMENT OF INVESTMENT POLICY FOR 3. ensemble des équipements économiques et techniques p. 4. (http://www.nap.edu/catalog.php?record_id=798#toc Fourth Edition, Houghton Miffl in Company, Updated in REAL ASSETS,” August 15, 2011, p. 1. http://www.calpers. d’une société (Accessed February 21, 2012). 2009. http://education.yahoo.com/reference/dictionary/ ca.gov/eip-docs/investments/policies/inv-asset-classes/real- 4. ce qui sous-tend quelque chose de visible entry/infrastructure (Accessed February 21, 2012). According to an even more expansive approach to estate/real-assets-full-policy.pdf (Accessed March 19, 2012). http://dictionary.reverso.net/french-defi nition/infrastructure infrastructure note that although “[p]eople commonly 10 Th e fi rst category includes toll roads, bridges, tunnels, (Accessed February 17, 2012). envision infrastructure as a system of substrates – railroad parking facilities, railroads, rapid transit links, airports, lines, pipes and plumbing, electrical power plants , and refueling facilities, seaports. Th e second encompasses

30 Infrastructure | Defining Matters 15 “Teachers’ Retirement Board Policy Manual,” CalSTRS, the borrower will not or is unable to comply with their “About Us,” Principles for Responsible Investment (bold italics Harvard Law School, January 2012. (describing key (Updated February 2012), p. A-15. http://www.calstrs. respective social and environmental policies and procedures added) http://www.unpri.org/about/ (Accessed April 15, 2012) performance indicator that “[Supplier] Company Affi liate com/about%20calstrs/Teachers%20Retirement%20Board/ that implement the EPs. (bold italics added). establishes and maintains relationships with labor non- BoardPolicyManual.pdf (Accessed March 19, 2012). Here At the outset these principles are described as Th e same sentiments are refl ected in the opening paragraph governmental organizations, trade unions and other civil commodities appear to be located in a distinct, “innovative a credit risk management framework for determining, of the Principles: society institutions”). http://www.law.harvard.edu/programs/ Policy Portfolio.” akin to the opportunity/opportunistic assessing and managing environmental and social risk As institutional investors, we have a duty to act in the best lwp/pensions/publications/FINAL%20Summary%20 categories referred to in the main text. Id. at O-2. in project fi nance transactions...Th e EPs are primarily long-term interests of our benefi ciaries. In this fi duciary Report%20Dec%202011.pdf (Accessed April 15, 2012). 16 Th at respondent stated that “environmental/climate impact, intended to provide a minimum standard for due diligence role, we believe that environmental, social, and corporate See also “In China, Human Costs Are Built Into an iPad,” local job creation, cultural legal; diff erences, reputational risk, to support responsible risk decision-making. governance (ESG) issues can aff ect the performance of by Charles Duhigg and David Barboza, Th e New York Times, January 25, 2012. http://www.nytimes.com/2012/01/26/ political risk, and the long-term nature of the transaction “About the Equator Principles” (bold italics added) http:// investment portfolios (to varying degrees across companies, business/ieconomy-apples-ipad-and-the-human-costs- requires special evaluation.” www.equator-principles.com/index.php/about-ep/about. sectors, regions, asset classes and through time). We also 17 for-workers-in-china.html?pagewanted=all (Accessed Th at is, goods – sometimes referred to as non-excludible (Accessed April 15, 2012)(bold italics added). By contrast recognise that applying these Principles may better align April 16, 2012) goods – which are of such a nature that aff ording access to the 2006 preamble to the Equator Principle states that they investors with broader objectives of society.” 23 them to any individual necessarily entails providing access have been adopted “Th e Principles for Responsible Investment,” Principles for Precisely how to attend to both matters is hardly clear or without controversy. With respect to the latter and pension to any other individual. in order to ensure that the projects we fi nance are Responsible Investment,” http://www.unpri.org/principles/ 18 funds it concerns in part the importance of plan member Th is discussion is informed by “Composition of government developed in a manner that is socially responsible and (Accessed April 15, 2012)(bold italics added). representation in the governing structure and/or consultation investment in Europe: Some forensic Evidence,” by Juan refl ect sound environmental management practices. By In other words, for both, the principles are broadly speaking a with members. (Th e matter of consultation is discussed Gonzalez Alegre, Andreas Kappeler, Atanas Kolev, and Timo doing so, negative impacts on project-aff ected ecosystems means of risk management, in the service of better investment at some length in “From Fiduciary Duties to Fiduciary Välilä in “Infrastructure investment, growth and cohesion and communities should be avoided where possible, and decision-making from a fi nancial perspective but with (1) Relationships for Socially Responsible Investing: Responding Public investment: Composition, growth eff ects and fi scal if these impacts are unavoidable, they should be reduced, a recognition that decisions so made might be thought to be to the Will of Benefi ciaries” by Benjamin J. Richardson, constraints,” European Investment Bank Papers Volume 13. mitigated and/or compensated for appropriately. We believe “responsible” in that it refl ects awareness of and takes account Journal of Sustainable Finance & Investment, Vol. 1, No. 1, No. 1, 2008, pp. 26-27. http://www.eib.org/attachments/efs/ that adoption of and adherence to these Principles off ers of the import of those decisions for other than investors and pp. 5-19. http://docserver.ingentaconnect.com/deliver/ eibpapers/eibpapers_2008_v13_n01_en.pdf (Accessed signifi cant benefi ts to ourselves, our borrowers and local (2) an acknowledgment that it does not necessarily imply that connect/earthscan/20430795/v1n1/s2.pdf?expires= March 23, 2012). stakeholders through our borrowers’ engagement with such decisions are fully aligned with larger social objectives. 1334591169&id=68319092&titleid=75007106& 19 Despite the distinction this is not to ignore the reality that locally aff ected communities. We therefore recognise that 22 For example, the standards of the International Finance accname=Harvard+University&checksum= markets themselves are enabled and constituted by various our role as fi nanciers aff ords us opportunities to promote Corporation which inform the practices of those who CBE85F5ED8A142141D1E947551AB2228 forms of social action, including by government (through law responsible environmental stewardship and socially commit to abide by the Equator Principles, stresses the (Accessed April 15, 2012) and other means). And, of course, even where market-based responsible development. “importance of ....eff ective community engagement 24 Note, here we almost exclusively focus on decision-making provision might seem both feasible and appropriate, certain “Th e Equator Principles, June 2006,” Equator Principles. through disclosure of project-related information and at the enterprise level, that is, with respect to any particular market participants might fi nd it in their interest to limit or http://www.equator-principles.com/resources/equator_ consultation with local communities on matters that directly infrastructure-related enterprise. As the main text emphasizes, skew competition. principles.pdf (Accessed April 15, 2012)(bold italics added). aff ect them.” “Performance Standards on Environmental there are a host of additional considerations at the level of 20 With regard water as a human right, see “More Th an a and Social Sustainability,” International Finance Th e other, the Principles for Responsible Investment, any investment vehicle through or by which a pension fund Resource: Water, Business, and Human Right,” Institute Corporation, January 1, 2012, p. i. http://www1.ifc.org/ is a broader voluntary endeavor by investors informed might make an investment, a vehicle which might entail for Human Rights and Business, August 2011. http://www. wps/wcm/connect/115482804a0255db96fb ff d1a5d13d27/ by the view that environmental, social and corporate investment with respect to a multiplicity of infrastructure- ihrb.org/pdf/More_than_a_resource_Water_business_and_ PS_English_2012_Full-Document.pdf?MOD=AJPERES governance (ESG) issues can aff ect the performance related enterprises. human_rights.pdf (Accessed July 19, 2012). of investment portfolios and therefore must be given (Accessed April 15, 2012). A similar theme is clear in the 21 Two major and important initiatives provide examples of appropriate consideration by investors if they are to related but very diff erent context of investments with regard investors taking on these issues, though eff orts which refl ect fulfi ll their fi duciary (or equivalent) duty” and off ers to manufacturing supply chain issues whch has received the challenge they face in specifying the precise rationale for “a voluntary framework by which all investors can a great deal of attention. See “Key Performance Indicator the approaches being taken. incorporate ESG issues into their decision-making and for Investors to Assess Labor & Human Rights Risks Faced One, the Equator Principles (EP) are standards voluntarily ownership practices and so better align their objectives by Global Corporations in Supply chains: Stage 1 Report,” adopted by Equator Principles Financial Institutions with those of society at large.” Th e Fair Labor Association and Th e Pensions and Capital (EPFIs) commit to not providing loans to projects where Stewardship Project, School, Labor and Worklife Program,

Infrastructure | Defining Matters 31 Contact: Larry W. Beeferman, Director, Pensions and Capital Stewardship Project Labor and Worklife Program Harvard Law School Tel: 617.495.9265; Fax: 617.496.7359 Email: [email protected]

32 Infrastructure | Defining Matters