Michael Sabia is president and chief executive officer of the Caisse de dépôt et placement du Québec.
No matter where you live, no matter where you go, infrastructure is top of mind.
Investments in the roads, bridges, trains and other commuter systems that are the backbone of our economy are a key issue for citizens and politicians alike. Witness Ontario's most recent general election. Or recent hearings in Quebec's National Assembly, which passed a law last Friday authorizing the Caisse de dépôt et placement du Québec to play a wider role in developing, financing and operating infrastructure assets.
This is not a local, Montreal pothole sort of problem, nor is this a uniquely Canadian concern. At the Great Lakes governors' summit in Quebec City this past weekend, American political leaders expressed a keen interest in learning about alternative ways of financing infrastructure projects. So have President Barack Obama's administration and several other U.S. governors and mayors.
Why? Because after years of underinvestment and sometimes flat-out neglect, infrastructure in most developed economies has failed to keep up with cities that are bursting at the seams. In many cases, it has literally reached the breaking point.
The numbers – from all sources – are dizzying. The American Society of Civil Engineers estimates that the United States can cover only half of the country's $10-trillion (U.S.) in infrastructure investment needs over the next 25 years, pegging its financing gap at $4.5-trillion. Simply put, governments can't pay for it all.
Enter institutional investors. They have a huge appetite for infrastructure, and as such, they are in a unique position to solve part of the problem in a mutually beneficial way.
While their infrastructure deals have increased multifold in recent years, this is no investment fad. Their interest is born entirely of necessity. With basement-level interest rates, now and for the foreseeable future, pension fund managers need to find new ways of generating solid returns for their clients. The Caisse, for instance, holds more than $60-billion (Canadian) in fixed-income securities – no trivial matter.
In this context, infrastructure is an attractive asset class. It offers meaningfully higher returns than fixed-income investments, with very little risk of capital loss. In fact, institutional investor interest is so keen that the world infrastructure market has become crowded and fiercely competitive.
Many sovereign funds and pension asset managers can write big cheques. To differentiate ourselves and to access a new deal flow, the Caisse has chosen to draw on its operational expertise to become a one-stop shop that oversees the development, financing and operation of infrastructure assets. This ensures effectiveness and cost savings that will be passed on to users in the form of lower prices, which will maximize usage and solidify returns.
The Caisse plans to create incremental value by overseeing the end-to-end development of projects and by managing operations efficiently. This is exactly what our real estate subsidiary, Ivanhoé Cambridge, has been doing successfully for decades. And this is the strategy for our new infrastructure affiliate going forward.
Pension fund managers strive to meet the financial needs of their millions of clients, people who are counting on their performance for their retirement. Using retirement savings to generate returns while building much-needed public infrastructure is a new way of doing just that.
As with all new ideas, this business model has raised some legitimate questions – concerns that were echoed in a recent column by The Globe and Mail's Konrad Yakabuski. But in Quebec, the idea of building a better today while building a better future has received an overwhelming endorsement during recent parliamentary hearings.
This is not to say that innovation is tantamount to hazardous ventures, quite the contrary in fact. At the Caisse, for instance, we will start by analyzing two public transit projects in Montreal. We will evaluate the risk/return profile of each project just as we do with every other investment, to determine whether they meet our clients' requirements. Should they fail this test, we will not proceed with them, plain and simple.
This is the same rigorous discipline we put in place at the Caisse six years ago. A discipline that, looking forward, remains the best safeguard of our future returns.
With their distinct investment strategies and their clout, large Canadian institutional investors have played a tremendous role in building our economy. And it is that same innovative spirit that should carry us in the future.