Canada’s largest pension funds have advice for Justin Trudeau’s government because it prepares to double its infrastructure investments over the next decade: follow the Australian model and think big.
The funds, which manage a lot more than $760 billion in combined assets, say they need large projects like airports, toll roads and ports to justify their time and investment because of so many global assets competing for their cash.
“What exactly are we looking for? We’re searching for projects of scale,” said Mark Wiseman, chief executive officer of Canada Type of pension Investment Board, the country’s largest pension fund with $283 billion in assets.
The Canadian government isn’t expected to provide extensive information on its infrastructure plan within the March 22 budget because it’s still developing a long-term strategy. Federal officials have said an extra $10 billion is going to be made available over the next two years while it crafts a broader strategy to deploy one more $20 billion to every of three silos over the next decade: public transit, green infrastructure, and social infrastructure.
The country’s largest pension funds, including Canada Type of pension, Caisse de Depot et Placement du Quebec, and Ontario Teachers’ Pension Plan, are encouraging the federal government to be ambitious for that longer-term strategy.
Canadian pension funds and cash managers have become global leaders by purchasing ports, toll roads, power plants along with other infrastructure, deploying billions annually because they reduce risk in their portfolio through geographic diversification.
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Home Grown
They’ve become just too large, many have outgrown the opportunities in your own home, presenting a challenge for the Trudeau government as it seeks outside investment. The Canadian government estimates the infrastructure funding gap in the country is more than $150 billion, said Minister of Infrastructure and Communities Amarjeet Sohi.
Sohi is meeting various stakeholders, including mayors, premiers and pension funds, regarding how to bridge that gap.
“A key piece of engaging private investors is really a significant long-term strategy,” he said in an e-mail interview a week ago. “We dedicated to doubling federal investment in infrastructure over the next decade, which supports ensure we have needed funding in place for critical infrastructure.”
Places like Canada are particularly attractive for infrastructure assets, with its strong rule of law, a progressive and predictable regulatory regime, and a talented managerial class, Wiseman said.
Mature Assets
“We’re very thinking about purchasing Canadian infrastructure under the right conditions,” he explained “There’s no better place to invest than close to home.”
Canada Pension, like many other large global investors, would rather acquire mature infrastructure assets than finance new projects because they’re safer, Wiseman said. He encouraged the us government to look to places like Australia or the U.K. as examples of how Ottawa could make use of the capital of those global funds to satisfy its very own infrastructure needs.
There’s no better spot to invest than close to home.
In 2014, the Australian government established its Asset Recycling Initiative, where the federal government grants 15 percent from the sale cost of privatized infrastructure assets to states and territories. The federal funds and proceeds from the sales are utilized to develop new projects.
The Australian government estimates the initiative could spark as much as A$32 billion (US$24 billion) in new infrastructure investment, and global investors took notice.
Last year, US$52 billion was invested in Australian companies from foreign buyers, together with a record US$16.4 billion from Canadian investors, based on data compiled by Bloomberg. Canada Pension was part of a group that decided to buy Asciano Ltd. in a deal announced Tuesday valuing the Australian port and rail operator at A$9.05 billion.
Quebec Model
Montreal-based Caisse, Canada’s second-largest pension fund, led a consortium last November to acquire Transgrid, a network of high-voltage utility lines, from the State of recent South Wales for US$7.4 billion.
The challenge for bigger funds to invest in traditional public-private-partnerships would be that the equity stake – and in turn the reward – is often not big enough for them to pursue, said Andrew Claerhout, head from the infrastructure group for Ontario Teachers’.
Projects like the Gordie Howe International Bridge in Windsor, Ontario may cost billions to construct but only require an equity investment of $150 million or less since the private partners can load their investments up with debt with the government’s support, he explained.
“If we would do that to deploy $150 million that means we wouldn’t be able to perform a bunch of other things. So you’ve to consider returns on effort and on capital,” he said.
Ring Road
Canadian projects that might attract interest incorporate a possible ring road around Toronto, he explained. Another example would be the Metro Toronto Convention Centre, based on Michael Latimer, leader of the Ontario Municipal Employees Retirement System.
Michael Sabia, CEO from the Caisse, said he’d like to see the government follow his lead. This past year, the Caisse struck an offer to construct and run infrastructure projects that Quebec is ill- equipped to finance itself.
The Caisse is working on two projects in Montreal, together with a light-rail corridor around the new Champlain Bridge and a riding on the bus system linking downtown to Trudeau International Airport and West Island. The combined worth of those projects is estimated to be about $5 billion.
“We think that’s a creative way for the federal government to purchase infrastructure as well as in wherein makes it fiscally manageable,” Sabia told reporters earlier this month.
The authorities has outlined some broad strokes of its plan, including developing an Infrastructure Bank that will hand out loans having its government credit score.
Sohi said it’s too soon to say whether he’d eventually adopt a broader strategy, such as the Australia model, to draw in global pension and sovereign-wealth funds.
“We are inside a consultation phase and aren’t ruling out any option,” he explained.
Bloomberg News
