Governments around the world face an infrastructure challenge. Ontario is no different.
In this province, the infrastructure gap has been estimated to be north of $100-billion at a time when Ontario is effectively broke. President Obama, British Prime Minister Cameron, and Ontario’s Leader of the Opposition, Tim Hudak, are all part of a small but growing group recognizing the potential value of institutional investors, such as pension funds and sovereign wealth funds. The cooperation of these funds can be enormously beneficial in developing large infrastructure assets that have high barriers to entry due to size, long-term time horizons and illiquidity at exit.
In fact, Ontario is a world leader in what is called “Direct Investment Programs.” This is the ability of institutional investors to have large in-house teams with the expertise to invest directly in large infrastructure assets (such as Borealis). This is an expensive and difficult capability to build up.
Fortunately, Canadian pension funds have been pioneers in this area. The OTPP ($130-billion), OMERS ($60-billion), CPPIB ($170-billion), and CDPQ ($170-billion) to name just the largest, have capabilities that other national governments (such as the U.K) are desperately trying to develop domestically. Ontario is truly a powerhouse in this regard. For instance, the Indian Finance Minister recently visited Toronto, not to meet with our political leaders but to pitch to Ontario pension funds to invest in India.
Billions in Ontario pension funds are flowing into infrastructure assets, but almost none of it in Ontario.
The CPPIB has spent more than $7-billion in Australia in less than 3 years largely on infrastructure. OMERS recently announced a major initiative to raise $20-billion to invest in large infrastructure assets, dubbed the Global Strategic Alliance. Given this pool of quality global capital headquartered in Toronto and Ontario’s need for infrastructure investment, one would think that Ontario would be lining up much-needed infrastructure plays. Unfortunately, this is not the case.
The reason is that there is little or no public policy framework to allow large funds to invest. Ontario faced a similar situation over a decade ago during the initial phases of the P3 model. Both the Harris PCs and the McGuinty Liberals recognized this barrier to innovation and created a series of frameworks culminating in the highly successful Infrastructure Ontario. But in regards to institutional investing, the government has not begun to think about the challenge – or the opportunity.
If we were to create a policy to attract such investments, what would it look like?
1) Asset Fit Institutional investors are looking for assets that have stable cash flows, constant demand and can generate uncorrelated returns that are linked to inflation. Such large investments have very long time horizons (such as the 407 highway). If the government wishes to access these funds’ pools of capital, it must create an environment where these assets are available.
2) Rates of return and a market mechanism If institutional investors are to take on the risk of owning and monitoring assets, they must receive a risk-adjusted rate of return as compensation. But with risk adjusted returns, comes the responsibility to ensure user affordability and service quality. A robust and transparent regulatory mechanism for different assets or sectors (such as energy) is a prerequisite for managing private sector returns for the provision of public infrastructure.
3) Resolving the union paradox Ontario-based institutional investors operate as private sector managers. Public sector unions can have a very different conception of effective management and opinions about the sale of public infrastructure assets. The Canadian labour movement would likely oppose the management approach of the funds if they were applied domestically rather than abroad. Labour needs to develop a set of principles that would allow for their own funds to invest here.
4) End political Interference Institutional investors are weary of jurisdictions where politics and policy whims create market instability or unintended consequences. The Ontario energy sector is emblematic of what not to do to attract private investment. From the failed privatisation efforts of the Eves years to the gas plant and green energy debacles of the McGuinty government, these efforts have done nothing but harm the energy sector, to the detriment of the economy and ratepayer.
J.C. Bourque is a business strategy consultant in Toronto. He has worked on several campaigns for the Progressive Conservative Party of Ontario.