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DISCUSSION PAPER PI-0906

Pension Fund Investment in Infrastructure

George Inderst

As the need for investment in infrastructure continues to grow ,
private sector financing for infrastructure projects has developed
around the world. Given the long-term growth and (potentially) low
correlation aspects of infrastructure investments, pension funds have
also shown interest in increasing their exposure to this area, along with
their move into alternative assets. Such investments cover a wide
spectrum of projects – from economic infrastructure such as transport,
to social projects such as hospitals – and involve different forms of
financing (primary vs. secondary, debt vs. equity, private vs. listed, direct
vs. indirect). Data explaining the size, risk, return and correlations of this
diverse asset class is therefore limited, which may be making pension fund
investors cautious. Given investing in such assets also involves new types
of investment vehicles and risk for pension funds to manage – such as
exposure to leverage, legal and ownership issues, environmental risks as
well as regulatory and political challenges – such caution may well be justified.
However, if governments wish to help infrastructure developers tap into
potentially important sources of financing such as pension funds, certain
steps can be taken.

This paper is designed as an overview piece, discussing if pension funds
should invest in infrastructure on a theoretical basis, whether they do in
practice, and, if not, how (and if) regulators can encourage and
assist them to do so.