Infrastructure Direct Investment There is currently an environment of excitement around the prospect of using direct private sector investment,

design, and contracting to offer an alternative delivery method for public infrastructure in the United States. These methods have been used extensively in other countries, and are generally seen as viable solution to the problem of gridlock and underinvestment in public infrastructure development. In CEE 141B&C we have dealt extensively with the details of the processes and methods used to deliver privately financed, designed, and constructed infrastructure. Less central to these courses has been a discussion of potential sources of private financing as well as the incentives that encourage investors to allocate resources and capital into funding public infrastructure development. Some of the largest sources of potential investors for privately financed infrastructure are endowments, sovereign wealth funds, and pensions funds. These funds are attracted to direct investment because of the favorable risk-adjusted returns available through bypassing the traditional fee structure of investment funds, which historically have charged an annual 2% baseline management for all funds under management and a 20% fee for any above market returns. While some endowments, sovereign wealth funds, and pension funds have a long history of direct investment and co-investment in infrastructure projects, these types of transactions have been limited to the largest and most sophisticated funds with unique capabilities and capacity inhouse. To further increase the proportion of capital in these funds that is directly invested in infrastructure three changes must occur. First, the stakeholders in these funds on whose behalf the capital is managedwhether they be public workers, donors, trustees, or future retireesmust set aside their aversion to compensating fund managers at market rates so that these funds can insource the required expertise to find and execute direct infrastructure investments. This is much more cost effective than purchasing the expertise through 3rd party fund management. Second structural reforms must take place to simplify the process by which funds directly invest in infrastructure. A simpler, more standardized process will open these types of investments to smaller funds with less in-house capability and expertise. By implementing these changes, the pool of capital available for private infrastructure finance can be increased dramatically, delivering more high utility projects to the public. Third, goverments and public utilities must set aside their aversion to private financing and recognize situations in which the private sector can offer a lower total project cost than the public sector. This will be of great benefit to both the taxpayer and all users of societal infrastructure. I. Compensation and Insourcing Management Talent There is a long history of pushback toward endowments and pension funds that choose to compensate investment professionals at the market rate. As with recent and vocal criticisms of the management of the Harvard endowment that has made substantial strides in developing deal sourcing capacity in-house by paying market rate salaries, trustees and faculty members have objected to the notion of paying analysts and managers at the endowment substantially better than faculty and researchers, especially after the fallout from the financial crisis in 2008. While these criticisms arise from a well-placed belief that professionals in investment services are universally over compensated relative to their skills and value, endowments and pension funds suffer large economic penalties from trying to correct this systemic issue unilaterally. Instead of reaping the savings from reasonably compensating their investment professionals, these funds

are understaffed, unable to attract top talent, and generally pay large multiples of what even extremely generous compensation would be in fees and other management services, reducing their returns to stakeholders and violating their fiduciary responsibility. . This paradox is clearly evident in the comparison of Canadian public workers pensions, which generally lead the industry in professional compensation and in-house investment sourcing, to that of American public workers pensions. For instance, in 2009 the Canadian Pension Plan Investment Board (CPPIB), which has $124 billion under management paid its CEO $3 million in salary and bonuses. In comparison the California Public Employees Retirement System (CALPERS) with $205 billion under management paid its CEO $370,000 in salary and bonuses. In the same year CALPERS paid $1.5 billion in fees to external fund managers while CIPBB paid only $400 million and had better risk-adjusted returns. It is estimated that high quality external management cost between 5-6% of invested capital while internal management costs only .0015%. In short CALPERS and other US pension funds and endowments aversion to paying investment professionals the market rate on their payroll is penalized in multiples through fees paid to external fund managers. Also, fees aside, internally managed pension funds on average achieve .5% higher annual risk-adjusted returns than their externally managed peers, furthering the argument that internal management is both less costly overall and better for stakeholders. In order to attract top quality, industry leading talent necessary to source direct investment deals in-hours, pension funds and endowments must be willing to pay close to the market rate for these professionals as well as devise clever incentive schemes that align their interest with those of the pension stakeholders. This begins by making the case to the pension and endowment stakeholders that it is clearly in their economic best interest to vastly expand the payroll at public pension funds and endowments. Doing so increases the size of their retirement pool over time as well as offers it access to lower volatility asset classes that have the potential to perform substantially better during time of economic crisis. For instance, tariffs paid for electrical transmissions are relatively stable over time independent of market conditions, offering an attractive stabilizer in a pension or endowments portfolio. Furthermore pension fund and endowment stakeholder concerns about the compensation structure of financial professionals can be addressed with far more efficacy if these funds choose to be competitive in their compensation schemes first, in order to attract top talent, and then change the incentive structure through which this compensation is delivered. In Canada this has manifested itself through attracting many senior investment professionals with a combination of close to market rate compensation coupled with a sense of civic duty and responsibility. The $3 million dollars paid to the CEO of CPPIB was still substantially less than he had earned in the private sector in previous years. This sense of civic responsibility can be combined with other ancillary benefits and an innovative compensation structure to make employment at large public pension funds and endowments equally attractive to other financial services roles without matching their compensation structure dollar-per-dollar. One of the most promising classes of these benefits is allowing all levels of investment professionals who choose to work at pension funds and endowments to co-invest on a fee-free basis in any deal sourced in-house. In effect employees of the funds are allowed to speak for portions of the deal, and achieve personal returns identical to those generated by the asset being purchased or invested in. For example if the Stanford endowment was investing $10 million in a toll bridge and the primary analyst on the deal chose to, he could personally speak for $10,000 of the capital invested basically taking a .01% stake fee-free. Over the years to come as the deal

hopefully performed and returns were generated, the analyst would receive .01% of all upside and have his original investment returned to him. These schemes are currently available to employees involved in trades with the public and non-proprietary equity and debt markets, but are usually not implemented for proprietary and non-traditional asset classes. Doing so would offer an attractive employment benefit that could take the place of higher salaries or cash bonuses. Allowing employees at all level of seniority to voluntarily co-invest in deals that they are directly involved in achieves several desirable outcomes. First and foremost it serves as a way to align employee incentives with those of pension fund and endowment stakeholders. With the potential of co-investment upside and downside become aligned, employees have more of a stake in sourcing and completing high risk-adjusted returns because they themselves will gain access to these returns. Conversely, employees will avoid sourcing or pursuing deals that do not offer favorable returns in favor of those that do. Second, by allowing co-investment only on deals sourced in house, pension funds and endowments are incentivizing management to preferentially pursue direct in-house investment instead of 3rd party funds. This type of investment has historically achieved above market risk-adjusted returns and most importantly is substantially lower fee. Another promising use for co-investment is as a tool for delivering bonuses that serve to further align interest. Many traditional financial services firms are known for compensating their employees with large annual cash bonuses. These bonuses are unusually found especially distasteful by pension fund and endowment stakeholders, especially on years where the market underperforms as a whole, giving the impression that financial professionals are being rewarded for failure. Whether or not this is the case, stakeholders are unlikely to approve large cash bonuses for financial professionals even if they are the industry norm and can be shown to align interests. A better and more politically tenable structure for delivering these bonuses is as mandatory stakes in co-investment deals that a given manager is personally involved in. For example instead of awarding a senior manager a several million dollar cash bonus, the manager would be given the option of co-investing a pre-determined bonus amount, based on performance over the previous year, in deals he or she was personally involved in. This would further align the manager with the long-term financial viability and success of these deals as well as serve to distribute performance-based compensation in a non-cash format. B. Building Teams with Expertise While insourcing top management talent through market rate salaries and a sense of civic responsibility, extending co-investment privileges to all levels of employees, and paying bonuses as shares in co-investment are all prudent measures that will serve to narrow the talent gap, other measures are still needed. For pension funds and endowments to truly in-source the talent and capacity they need to compete with traditional, high pay competitors like private equity and hedge funds in alternative asset classes, they need a new sort of management structure that attracts individuals with deep expertise in these asset classes. Historically, pension funds and endowments have been structured like traditional financial management institutions. A small number of top brass partners or executives oversees a comparatively much larger staff of young analysts. These analysts perform financial duediligence on deals that are brought to top brass for consideration. If deals are deemed profitable, they are done. Most strategic and macro research is purchased from 3rd party consultants or taken

from market consensus. This model is great for minimizing overhead, and perfectly adequate for allocating pension or endowment funds between different professionally managed investment vehicles. However with the previously discussed external to internal fee multiple on the order of 3000%, the potential gains from minimizing overhead are negligible compared to the upside from converting 3rd party fees into internal payroll. To achieve this upside the type of expertise in-sourced by large pension funds and endowments like Stanford and CALPERS needs to be diversified. Experienced professional with deep expertise in industries of interest for the funds along with ties to the stakeholders the funds service, whether or not they have previous financial services experience should be the first priority. This is especially important in non-traditional investment classes like infrastructure because the market for investment is so specialized and illiquid. There may only be a handful of potential projects fit for investment in any given year, and most of them will likely not solicit investment directly from interested pension funds and endowments. While the total number of projects is small, they represent a huge potential sink for capital. For example, the 100 largest strategic infrastructure projects underway in 2013 have a total combined capital cost of $650 billion. This is especially attractive for large pension funds like CALPERS because of the scale at which they must invest to allocate the entirety of their funds. While the potential for large-scale investment is large, infrastructure projects as a class are incredibly diverse and fragmented. The similarities between a runway extension at a major airport and an electric transmission line or high-speed rail transport system are not clearly similar. However, each of these asset classes individually made up more than $100 billion of spending in projects currently underway in 2013. This is why funds should look to on board individuals with deep expertise in airport or electric transmission development first, and look for experience in a traditional investment and asset management second. As long as the current professional asset managers are kept on board and sufficient technical financial expertise is maintained, pensions and endowments have nothing but upside to gain from hiring non-traditional employees with deep expertise in alternative asset classes. These new employees can lead efforts to pro-actively source these new asset classes. With an understanding of the global market conditions in their field of expertise, infrastructure professionals who choose to finish their careers at public pension funds or endowments can serve simultaneously as sources of knowledge for those funds and advocates of private infrastructure finance. A critical mass of former professionals in the field, with access to large sources of cost competitive funds and well as a deep understanding of the benefits of alternative infrastructure delivery processes could turn the tide permanently toward privately financed and delivered infrastructure. II. Structural Changes Even if the compensation structure for pension and endowment fund managers can be changed to be competitive with similar professions in the market and the necessary expertise to source, evaluate, and complete large direct-investment infrastructure transactions can be acquired, these types of deals will still be the purview of the most sophisticated and capable funds with the capacity to hire the needed expertise. This is because most infrastructure direct-investment projects are highly complex, one-off transactions that have limited similarities to previous transactions. Non-standard due diligence must be performed, one-off legal arrangements drafted, edited, and approved. Then as is prudent with most large investments conducted by fiduciary

fund managers, one-off risk mitigation services must be procured which would likely require further independent 3rd party due diligence to be performed. All of these complexities raise the transactional cost to direct-investment in nontraditional asset classes, especially infrastructure. With high transactional cost, the scale of project needed to profitably overcome these costs also increases, making these types of projects the exclusive purview of the worlds largest pension funds and endowments that choose to build expertise and capacity in house. This is a small proportion of the total capital that is available and could be invested in infrastructure in a way that is beneficial both to the project participants and investors. A. Joint Ventures One potential solution to the issue of transactional cost and capacity would be to allow and encourage pension funds to form non-adversarial collaborative advisories that could source infrastructure direct investment projects on behalf of several different funds. For example several pension funds could easily collaborate to finance a fully staffed rail transportation directinvestment advisory. This advisory would be formatted as not-for-profit institution and could be staffed by professionals with deep expertise in large rail infrastructure development. It would serve to gather information industry wide about potential direct investment projects as well as manage relationships with transportation development authorities worldwide. Once a promising project was found, it would be referred to the collaborating pension funds for further due diligence and study. The funds could then make the decision to either invest or not invest individually within their management boards. The funds that chose to invest would then split the cost of the advisory billable to the individual project as a transactional cost. In this way the overhead of building expertise, even in small or esoteric sectors, could be shared between a much larger pool of capital, reducing the transactional cost substantially for each individual fund involved. If this model proved effective, the services provided by the shared advisory could be expanded and capacity could be built. Databases of potential projects, partners, and a detailed knowledge of their past performance would all help reduce transactional cost and risk. Furthermore as more deals were done, the advisory could build in-house knowledge to reduce the transactional complexity. A legal team and risk mitigation team could both be added to make acquiring these services in a cost effective and time efficient manner more realistic. All of these efforts to make it less transactionaly expensive and capacity intensive to invest in infrastructure directly would lower the hurdle to entry, allowing smaller pension funds, endowments, and even family investment offices to join in. The logical conclusion of this model is a scenario in which the advisory becomes a sort of shared infrastructure fund that provides management at cost to member funds. Funds would allocate a certain amount of capital to the advisory up-front, and would gain voting rights and representation proportional to the capital they contributed. In this way smaller funds without the scale to justify building their own deal capacity in house could join on, increasing the pool of capital available for infrastructure spending. B. Toward Open Standards Another important step to reducing the transactional cost of non-traditional asset classes and minimizing the capacity required for direct investment is to build open and consistent standards. The use of the phrase non-traditional as an identifier of infrastructure investments as

a class is in and of itself telling as to the problem. Because every infrastructure investment is a one off deal, tasks that are repetitive and standard for other investment classes such as negotiating the deal format, drafting legal documents, contracting 3rd party due diligence, and acquiring risk mitigation services must all be performed on a one off basis. Here again there is much potential for a collaborative approach where the cost of standardizing these practices is shared among many different investors. The same advisory organization that was previously proposed could be further utilized to build an open set of direct investment standard for both project developers and pension funds. Language and structure could be standardized for across project type and financing model. For example instead of having to format language for a project that would be financed via a toll concession, standard form agreements could be put in place that could serve to speed the process. After a project is completed using the standardized agreement, the advisory could dispatch staff to capture lessons learned and begin to build industry wide best practices. This methodology could also be extended into the assessment of liability. If this market grew to be large enough, it could justify creating a new independent organization that serves to assess the fitness of infrastructure investment. Firms like Norsk Veritas could serve as models and likely already engage in similar lines of work. This would help bring finance inline with the long historical precedent for risk and liability assessment by independent and not-for-profit organizations, instead of for profit rating agencies. These services would greatly aide firms in their efforts to accurately account for risk, and to procure insurance and other financial risk mitigation services. This would further lower the transactional cost of investing in infrastructure and make it easier for investment boards to consider diverse and non-traditional assets because they would be presented in a more standardized format. The ultimate goal would be to have internationally recognized norms for infrastructure investment similar to ISO or other standards. C. Other Incentives and Ancillary Benefits Infrastructure projects also offer many other potential benefits as alternative asset classes. First and foremost they are usually undergone because they deliver large amount of utility and usefulness that improves peoples lives. On top of this utility and usefulness, infrastructure projects can often time deliver large environmental benefits. Allowing pension funds and endowments to capture these benefits, both in direct and indirect terms, and share them with stakeholders could further increase the attractiveness of these types of investment and potentially further reduce the rates of return at which large capital funds find infrastructure projects appealing. In terms of direct benefits, there may be large synergies associated with the packaging of capital investment with other non-monetary benefits. Whether it be tax credits, carbon offsets, or renewable energy products, capital funds are likely to pay a premium for the right to acquire these instruments from projects they are intimately involved with. This is especially true of endowments, which are more likely to try to invest with the values of the institutions they represent. Take for instance the recent campaign for the endowments of several large universities, including Stanford, to divest from all funds that involve fossil fuel or fossil energy products. These universities would likely find it advantageous to be able to respond to these types of campaigns by directly investing in infrastructure projects with known environmental benefits, such as high-speed rail or electrical transmission, especially if these investments generated adequate levels of financial return to the endowment. Even more advantageous would be if endowments could bring the environmental benefits of these projects onto their books, as a type

of offset for other real or perceived environmental harm caused by their investments or the operations of the institution they represent. On an indirect level, endowments and pension funds could gain much publicity and good will from investing in high impact infrastructure projects. Being listed as a lead investor and project partner could become a requirement for investment, and the perception that large pension funds and endowments were putting their reservoir of capital to societally beneficial use can only be positive on a long term basis. Short-term, this publicity and good will could be useful in explaining to stakeholders why the choice was made to increase overhead as well as the compensation of management. III. Governmental and Public Utility Reform The changes that have been previously proposed have dealt with process and structural reforms that can take place from the investor side to increase the attractiveness of private infrastructure investments. While these changes would likely improve the prospects of these types of investments, unilateral change can only accomplish so much. Governments, public utilities, and development agencies must also reform their processes and practices in order to realize the full array of benefits brought on by further involving the private sector in infrastructure finance and delivery. Requiring the government to compete for project delivery in methods similar to those required of the private sector can do this. A. In House Competition In many jurisdictions including California before Senate Bill 4, there are or recently have been restrictions that prevent any delivery mechanism other than design-bid-build from being considered. First and foremost these restrictions ought to be removed to allow for a more competitive landscape. There is a large body of evidence that points to this being of great benefit to the taxpayer. For example private delivery saved an estimated $135 million in the Presidio Parkway project. To realize these savings on a larger scale, a potential mechanism would be requiring government run development agencies to compete for large-scale infrastructure projects alongside private firms. To accomplish this all program management should be removed from state agencies that take other more in-depth roles in infrastructure design, construction, and maintenance. For example in California Caltrans simultaneously performs both program management as well as long term planning, engineering, and a host of other infrastructure related services in house. This prevents them from soliciting competitive pricing from the market that could potentially perform many of these services at a much lower cost. Furthermore because most of the expense is planned and non-discretionary, pay roll decisions are made years in advance and employment with the state is very permanent, in-house services provided by organizations like Caltrans act as an implicit subsidy to traditionally financed and delivered infrastructure. While policy makers may consider these costs to be sunk, they occur at a large expense to the taxpayer. Instead if Caltrans and other similar agencies long-term planning and program management capacities were organizationally separate from the in-house design, project management, and maintenance capacities more competition could occur. While a strong argument could likely be made for the State of California to no longer maintain the capacity to engineer large infrastructure projects in house, it seems that dispatching with this capacity before the engineers involved are ready to retire is economically infeasible. In the interim these

engineering services should be made to compete in an open and market based format with the private sector. This process could function as follows. First the program management and long term planning offices at the infrastructure development agency would formulate a set of desired project goals, outcomes, and other guiding principles. Before any design work in performed in house at an infrastructure development agency takes place, a public RFP should be issued to all interested parties to submit proposals to achieve the previously devised project goals and outcomes. If the development agency possessed in-house engineering, that team should be made to submit a proposal as though it were a third party, and the total cost of all engineering services should be directly attributed to the project and made clear in the proposal. In-house engineering offices at public infrastructure agencies would have the opportunity to join with 3rd party design, engineering, and construction firms in submitting proposals and could explore being a part of alternative delivery processes. However, for the sake of transparency and to prevent any perception of corruption or price fixing, one traditional bid-build proposal should always be submitted from the public designers if they intend to compete for the project. Ideally proposals for all types of delivery processes would be submitted with all different mixes of public, private, and direct institutional investment. Once all proposals are submitted, an independent infrastructure commission comprised of professionals should assess all proposals on their merits, especially their ability to achieve the program and minimize total lifecycle cost to tax payers. For practical reasons, the commission should only directly assess proposals for large-scale mega projects above a certain cost, and leave the assessment of smaller scale projects to the discretion of the independent program managers on a case-by-case basis. In the early days of the structural change, before program managers are fully independent the commission of professionals to insure that there isnt a carryover bias against private delivery should conduct frequent review of these decisions. In this competitive, market driven environment, public infrastructure development agencies would hopefully continue to provide high value cost effective solutions to smaller scale transportation infrastructure needs. However, these solutions would be constantly tested against the market and its ability to provide more efficient alternatives. Ultimately, the aim of this proposal is to give all infrastructure projects in general more legitimacy for achieving efficiencies and increase the publics willingness to invest in essential infrastructure. B. Tolling and Pay-Per-Use This is a very important and often overlooked component of infrastructure development. In the United States there is a unique skepticism towards infrastructure investment that is fueled primarily by founded or unfounded fears of corruption or excess spending that only benefits a small cross section of society. The corruption issue is best addressed through transparency, consistent and fair processes, and by shifting large decisions to professional, independent commissions without political or economic interest in the decision. This is largely being done in the United States and public infrastructure is seen as far less corrupt than it has been in the past. While corruption issues have waned, they have been replaced with concerns over access, excess, and prudence. Mainly whether or not a given project is actually a justifiable expense for the taxpayer that delivers broad societal returns rather than benefits to a given group or party. These questions are very hard to address when the funding source for a project is general or excise tax revenues. They are much easier to address when infrastructure is paid for by those who use it regularly and is transparently subsidized when its value is widespread. The pay for

use model also lends itself particularly well to privately financed infrastructure because there is a clear way to evaluate future project revenues. This is already commonplace in bridge tolling projects in the United States and is becoming more prevalent with new expressways and other roadways. Furthermore with the wide spread adoption of persistent monitoring techniques the payper-use revenue model is likely to become a more widespread method of offsetting the capital investment and ongoing maintenance costs associated with infrastructure. Currently the large overhead costs associated with tolling make it so that it is only a practical solution when a large enough toll, for example for a bridge crossing, is to be imposed justifying the transactional costs. This means that the investment for toll revenue model is only applicable to projects with a clear linear path of travel where the users can pay the toll revenue. However, fastrack and licensed base tolling could make it possible to make any road a toll road and bill users based on mileage traveled. If this leads to pushback from motorists, then persistent monitoring can still be used to pay private and institutional investors on a per vehicle basis even if the costs isnt directly passed along to the user. This leads to the logical conclusion of private infrastructure finance, direct lease back of private and institutionally financed assets by governments from the investors. This may prove politically less tenable the transferring the direct payments from infrastructure users to the investors because it can be construed as using public means to enrich private investors. However, these risks can be managed with transparency and non-political decision-making. While this may be one of the primary explanatory factors for this method being under utilized in the United States it has shown great promise in other countries where private finance has in effect levelized the governments infrastructure costs across the entire lifespan of the required assets, increasing solvency and reducing debt. Take for instance the complexity of a large cities public transportation infrastructure with subways, light commuter rail, and bus rapid transit. All three of these services receive rider tariff based support but are still likely to be subsidized by local, state, and potentially federal authorities. This generates enormous complexity and a general lack of transparency in discussions about who is paying for what, when. On top of the uncertainty surrounding the source of funding, there is both a short-termequipment such as buses and rail cars and personnelas well as long termtracks, lanes, rail, and employee pensionsplanning horizons. This means that funds are being allocated in a number of different magnitudes, by several agencies, on multiple timelines. This coupled with fundamental uncertainty in ridership and energy costs makes it very difficult to assess what the levelized annual cost assessed to the governments involved should be. Without an accurate levelized annual cost it is almost impossible to authoritatively and truthfully deliver the actual and total costs of the system to tax payers. Furthermore because there is likely not any one agency that is solely tasked with knowing let alone managing the total all-in system cost, it is difficult to assess the cost and benefit of any given decision, whether it be as small as raising fares marginally or as large as building a new line. In short, in the typical regional infrastructure system in the US there is no central agency with responsibility for managing costs and uncertainty as one central issue. Instead of bearing all of this uncertainty directlyas government currently typically do while they expend limited resources trying to inadequately manage and mitigate it governments can instead shift the planning burden into the private sector. The market is uniquely qualified to optimize complex problems such as these by allowing competition as well as

bringing the full force of the financial system to bear in finding the lowest cost instruments for managing systemic risk. Even if these functions are devolved from the state to the private sector, there is still an important role for strong oversight and direction from public authorities. These authorities are essential for establishing overarching goals and long term planning guidelines, in effect insuring that the publics interest are met by privately financed infrastructure. This type of system of PPP infrastructure deals can take a complex, high-risk infrastructure program and transform it into a guaranteed stream of payments on the part of the government to private sector organizations that have priced and mitigated the uncertainty on the open market. This almost invariably saves the public money over the long run, and the savings can be used to better maintain existing infrastructure or procure new assets. However, regardless of the magnitude of realized savings there is a strong moral and ethical imperative that strongly favors levelizing infrastructure costs, regardless of the means. It is a more transparent way to deliver projects. It is always better to be contractually bound to pay a given fee for thirty years with strong protections against over paying than loosely project that the levelized cost of a project will be a given amount, especially considering the ability to always cover cost over runs from the tax payer. Conclusion Direct infrastructure investment represents an enormous win-win proposition for pension funds, project developers, and society as a whole. For pension funds direct investment offers an opportunity to bypass the tradition fund management fee structure and achieve similar riskadjusted returns at a fraction of the cost in terms of management fees paid per dollar invested. The savings generated can then be partially shared with infrastructure developers, giving them access to larger sources of competitive capital, which decreases the cost of funding a project and removes much of the burden from municipalities and their taxpayers. This decreased project funding cost along with the lower friction, funding pipeline increases the rate of infrastructure expenditure, to the general benefit of society. While this is a straightforward process on paper, realizing these benefits has historically been a challenge. This is because in the past the funds that are best matched to directly invest in infrastructure projects have lacked the internal capabilities to do so. Canadian pension funds lead the way in building this capability, and have done so by paying close to market rate for experienced financial managers. For direct infrastructure investment to continue to expand, this practice must expand as well along with new innovative bonus compensation schemes to align employee interest to stakeholder interest. The best candidate for doing so appears to be both allowing co-investment by employees at all levels in direct investment deals that they are involved in as well as paying bonuses in shares of co-investment instead of cash. Beyond simply attracting better talent through more generous compensation scheme, pension funds and endowments should draw on a sense of civic duty in professionals to attract them. This is especially true of non-traditional investment professionals who could bring deep expertise in a given asset class to the fund. With internal capacity building and more direct investment taken place, funds must then turn to the problem of high transactional cost associated with one off transactions. Pooling resources and collaborating with a multi-fund advisory, both to source infrastructure deals as well as standardize the way in which they are packaged as investments, can reduce these costs.

All of these changes would do much to increase the private capital flowing into infrastructure investments. However, this flow would be greatly increased in public agencies simultaneously underwent the structural reforms necessary to reap the full benefits of private infrastructure delivery. If laws against private delivery were struck, public agencies were required to accurately represent their costs and compete, and use based revenue schemes were made more universal a full on private infrastructure renaissance could likely occur.

Works Cited Canadian pension funds plan investment splurge, http://www.theaustralian.com.au/business/companies/canadian-pension-funds-plan-investmentsplurge/story-fn91v9q3-1226558541369 Canada's pension funds: stronger returns, at a cost, http://m.theglobeandmail.com/report-onbusiness/canadas-pension-funds-stronger-returns-at-a-cost/article4189019/?service=mobile Fossil Free Stanford campaigns for divestment, http://www.stanforddaily.com/2013/05/19/fossilfree-stanford-campaigns-for-divestment/ Pensions bypass funds as direct investment grows, http://www.ft.com/cms/s/0/1e872a5c-1a9611e0-b100-00144feab49a.html Policy and Planning for Large Infrastructure Projects: Problems, Causes, Cures, https://openknowledge.worldbank.org/bitstream/handle/10986/8579/wps3781.pdf?sequence=1 The Preliminary Strategic 100, http://www.atelier.net/sites/default/files/gilf6_prelimstrategic100.pdf Analysis of Delivery Options for the Presidio Parkway Project, http://www.presidioparkway.org/project_docs/files/presidio_prkwy_prjct_bsnss_case.pdf