NORTH AMERICA - A programme set up by the California Public Employees' Retirement System (CalPERS) to invest in infrastructure in its home state will struggle to compete with cheaper finance offered by tax-exempt bonds, according to a report on four roundtables held by the $241bn (€183.8bn) pension scheme.

CalPERs agreed last September to invest $800m over three years in California infrastructure.

But a report published this week suggested the pension fund faced significant barriers to investment, including cheaper alternative finance, a lack of projects with the appropriate investment "fit" and the potential for reputational risk over its involvement with unpopular projects.

According to roundtable participants, the scheme would be better off targeting smaller agencies with limited access to low-cost tax-exempt debt.

Although some public sector bodies are still able to finance infrastructure projects via tax-exempt bonds, the report believes pressure on public-sector budgets could make issuing bonds more difficult, even if measures aimed at deficit reduction fail to eliminate them altogether.

Yet the pension fund is likely to benefit from public discomfort over the involvement of private equity in public assets.

Public pension schemes could be perceived as "better aligned" and "more appropriate" partners than private sector investors, the report said.

Assuming sufficient demand from suitable agencies, the pension fund will find it difficult to deploy capital in a market characterised by small-scale projects. 

In transport - identified by CalPERS as a likely target because state legislation explicitly encourages public-private partnerships - 60% of an annual 2,000 projects require less than $5m.

In any case, the pension scheme is likely to shun transportation and water assets because of potentially unpopular charges. 

It will focus instead on energy, ports and rail assets.

The report said: "CalPERS may be more comfortable - in its return-seeking role - with investing in industry-facing infrastructure than in assets patronised and directly relied upon by the general public."

Yet at least in the energy sector, regulation and lengthy licensing processes have proved a disincentive to investors.

"Investment capital is likely to seek the least risky investment opportunities," said the report, which urged regulators to develop an alternative risk-sharing framework.

One way of accessing appropriate projects would be to bypass the "time-consuming and costly" public tender process.

CalPERS will consider exerting its muscle to engage in bilateral negotiations with public agencies.