Minister of Infrastructure and Communities Amarjeet Sohi confirmed in early November that the Canada Infrastructure Bank was on track to be up and running by the end of the year.DAVE CHAN/The Globe and Mail
For the rest of the year, all eyes will be on the Canada Infrastructure Bank (CIB), the institution set up by the federal government to build the next generation of roads, hospitals and other public infrastructure projects with $35-billion in seed money.
The bank is expected to up and running by the end of 2017. Meanwhile, Ottawa has been busy promoting the benefits for all parties involved in this public-private partnership (P3). In the P3 model, the public gets new projects that governments can't afford to build on their own, and the investors that build and run them will receive returns in the form of long-term user-fee revenue, a negotiated rate of return or other profit-making options.
Still, securing important institutional investors could be one of the most challenging parts of this ambitious infrastructure plan, but it is also critical to CIB's success.
The federal government has been courting both private and institutional investors. But it is the institutional players that comprise some of the world's largest infrastructure investors, and they have the track record and expertise in owning and operating toll roads, airports and transit lines across Canada and globally. Larger pension funds, traditionally interested in the safety of existing infrastructure projects, known as "brownfield," have also been signalling a greater willingness to consider new or "greenfield" opportunities, as long as they come with limited operational, political and economic risks.
Pension funds to consider size of projects and payouts While institutional investors say they are open to participating in the new bank, especially given historically strong returns from other P3 projects, experts say their involvement will depend largely on how projects are chosen, developed and operated.
Pension funds in particular have a difficult choice to make, according to Amin Mawani, an associate professor of accounting at York University's Schulich School of Business. The projects need to be attractive in size, scope and duration, to gain their attention. "Projects need to be large enough," Mr. Mawani explains. "Also, no pension fund wants too much of one project. They need to be diversified and Canada is a small country."
An example is the Ontario Teachers' Pension Plan, which manages $180-billion in assets, yet invests only a small portion of that in Canadian infrastructure.
The project returns also need to parallel the future income needs of their fund members, says Mr. Mawani. For instance, if a fund has a lot of millennials expected to retire in 30 to 40 years, they'll need to put their money into projects that pay out in that time frame. "There has to be some management of duration," Mr. Mawani points out.
Smaller pension funds to play key role in infrastructure bank While big pension funds are key to the success of the CIB, smaller pension funds can also play an important role. A handful of smaller pension funds are raising their hands to participate, including those whose members have the potential to benefit today and when they retire in the future.
One of these is the Labourers' International Union of North America (LiUNA), which has about $7-billion in assets in its Canadian employee pension plan. "We like infrastructure for obvious reasons because our members build infrastructure," says Joseph Mancinelli, LiUNA's international vice-president and regional manager for Central and Eastern Canada. "We understand that industry better than anyone else and [we] have been very active."
P3s don't just create jobs for LiUNA's employees but also "exceptional returns," he notes, that have the potential to outperform traditional investments such as stocks and bonds. For instance, Mr. Mancinelli says his pension plan bounced back more quickly than many more traditional investments after the 2008–2009 global financial crisis.
"Pension plans in Canada and around the world are starved for good returns," he says.
LiUNA's pension fund has leveraged about $5-billion in work in Ontario to date, ranging from hospitals and police stations to courthouses and detention centres.
"We are very strong advocates of the P3 system," says Mr. Mancinelli, adding that cash-strapped governments – using taxpayer money – can no longer afford to build projects on their own. "The private sector needs to jump in and we have."
Mr. Mancinelli believes that Canada's larger pension funds will participate in projects backed by the new infrastructure bank – if they're large enough. "They've invested in large infrastructure projects all over the world. There's no reason why they won't invest in Canada. I'm sure they will. [It] just has to be the right project, the right returns and the right amount of money and I'm sure they'll do it."
He is also looking forward to potentially partnering with some of the larger Canadian pension funds on projects, something that he says hasn't happened in the past.
It's "a different ballgame" now, he notes, because the federal government is involved. "I think this is an opportunity. If [there are] some very large projects, they will come to the table as well," Mr. Mancinelli says. "Definitely, we will be there."
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