The Inflation Reduction Act will reshape the physical and economic landscape of the United States over the next decade, including in ways that might surprise a lot of people.
Anyone keen to understand how should look at Brookfield Renewable Partners’ recent investment of up to $2 billion in Scout Clean Energy and Standard Solar. B.R.P. is a vehicle of Brookfield Asset Management, a leading global asset-management firm with around $800 billion of assets under management, and it purchased two American developers and owner-operators of wind and solar power-generating facilities. This took place six weeks after President Biden signed the I.R.A. into law.
The I.R.A. will help accelerate the growing private ownership of U.S. infrastructure, and in particular its concentration among a handful of global asset managers like Brookfield. This is taking the United States into risky territory. The consequences for the public at large, whose well-being depends on the quality and cost of a host of infrastructure-based services, from energy to transportation, are unlikely to be positive.
A common belief about both the I.R.A. and 2021’s Infrastructure Investment and Jobs Act, President Biden’s other key legislation for infrastructure investment, is that they represent a renewal of President Franklin Roosevelt’s New Deal infrastructure programs of the 1930s. This is wrong. The signature feature of the New Deal was public ownership: Even as private firms carried out many of the tens of thousands of construction projects, almost all of the new infrastructure was funded and owned publicly. These were public works. Public ownership of major infrastructure has remained an American mainstay ever since.
Biden’s laws will radically overhaul this culture. Informed by what Brian Alexander, a writer for The Atlantic, in 2017 described as a profound recent change in philosophy among U.S. policymakers about “how to build and maintain America’s stuff,” the modus operandi of both statutes is principally to subsidize and catalyze private-sector infrastructure investment. Such a subsidy was explicitly factored into the aforementioned Brookfield investment in solar and wind power.
So it would be truer to say that in political-economic terms Mr. Biden, far from assuming Roosevelt’s mantle, has actually been dismantling the Rooseveltian legacy. The ultimate upshot will be a wholesale transformation of the national landscape of infrastructure ownership and associated service delivery.
It is true, as many have observed, that the I.R.A. allows for public investment in and ownership of clean-energy assets through its direct-pay provisions, which enable entities without tax liabilities, including nontaxable bodies such as public agencies, to benefit from the tax credits it makes available. But this presupposes that public entities are actually willing and institutionally capable of taking advantage of those provisions, which is anything but a given.
It took over two years of dogged campaigning for supporters of publicly owned U.S. solar and wind power to achieve a relatively modest victory — the requirement that the New York Power Authority build new renewable capacity if private-sector developers fall behind state targets for renewable penetration. If revivified public ownership cannot be readily effectuated in New York, of all places, it will be an extremely tall order elsewhere in the country.
Asset-management firms are likely to step in. A 2016 article in this paper examined fledgling asset-manager investment in U.S. municipal water systems and presciently described it as the “leading edge of the industry’s profound expansion into public services.” At that time, the industry globally featured less than 100 infrastructure funds (which are the main vehicle through which asset managers invest in infrastructure). By 2020, there were over 250, the total amount of investor capital held in such funds for investment in infrastructure having quintupled since 2009.
Other parts of the world have been experiencing large-scale asset-manager investment in infrastructure for decades. Led by Macquarie, the Australian financial services group that is the sector pioneer, asset managers began investing substantially in Asian and European infrastructure in the early 1990s. Today, in countries ranging from South Korea to Britain, infrastructure funds are the leading owners of major infrastructure assets in a range of sectors, among them energy, transportation and water.
The story of asset manager-led infrastructure investment is overwhelmingly a negative one. Asset managers are focused on optimizing returns on the assets they control by maximizing the income they generate while minimizing both operating and capital costs. Many users of infrastructure that has come under asset-manager ownership have suffered, as service rates have risen quickly and service quality has deteriorated.
Nowhere is this better illustrated than in Britain. There, numerous types of infrastructure have come substantially under asset-manager ownership. This has led to consistently negative outcomes in, for example, care facilities, schools and water supply. Many observers have concluded that essential infrastructure and asset-manager ownership simply don’t mix.
And in South Korea, Macquarie’s eight-year investment in Metro Line 9, part of the Seoul subway system, involved a bitter spat with the local metropolitan government over a proposal to hike fares by nearly 50 percent. That led Macquarie and other shareholders in 2013 to unceremoniously sell their stake, in what commuters came to call the subway line “from hell.”
Local critics charged Macquarie with taking excessive profits without assuming any risk, an accusation that has been a consistent drumbeat accompanying the phenomenon of asset-manager infrastructure investment around the world. Macquarie said that it is committed to its operations in Korea and said its Korean infrastructure fund is a “passive financial investor” that has cooperated fully with the city of Seoul.
The story has been much the same when housing is owned by asset managers. There have been allegations of skimped maintenance and egregious eviction practices in some areas. Such outcomes have been reported in Spain, for example, a notable hot spot of asset-manager investment in housing since the global financial crisis, by a series of academic researchers.
If the United States has been a relative laggard in asset-manager-owned infrastructure, it has been in the vanguard of asset-manager-owned housing.
The detrimental impact of asset-manager ownership of housing appears to be a general problem, but it is not evenly distributed. In the United States, for instance, the Sun Belt has been severely affected; increased eviction rates have been the most troubling outcome. Fred Tuomi, a veteran of asset-manager investment in U.S. single-family housing, once described the region’s housing market as an asset manager “strike zone.”
The Biden administration has taken a step freighted with peril by hitching the future of U.S. infrastructure provision to the private sector in general — and (by implication, if not intent) to asset-management firms in particular. Brookfield and its peers will be undoubted beneficiaries. It seems unlikely that the American people also will.
Brett Christophers is professor at Uppsala University, Sweden. His most recent book is “Our Lives in Their Portfolios: Why Asset Managers Own the World.”
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