Stocking Up

Remember the good old days when a $123-billion infrastructure deficit was a big number? Considering that the U.S. Treasury could drop $700 billion to buy up mortgage investments and bail out a locked-up economy, Canada’s $123-billion gap is starting to look like a manageable figure.

Though it may sound counter-intuitive, the best way to bolster our economy is not to hold onto our money, but to invest it. More specifically, to invest in infrastructure.  Morty Gross, chair of the national public-private infrastructure project group at Borden Ladner Gervais in Toronto, says not only is the outlook for infrastructure strong, but the more our government invests, the healthier our economy will be. “Funding infrastructure puts funding into the economy, which has a multiplier effect,” says Gross, “and increases productivity.”

That is exactly what’s happening. Institutional investors like pensions and tradable stocks like Macquarie’s Power & Infrastructure Income Fund are adding more infrastructure assets to their portfolios. In a climate of falling stocks and concerned mutual-fund investors, infrastructure providers like Aecon are seeing their stock’s value rise.

Public-private partnerships (P3s) are also stronger than ever. And Gross says they will continue to be an attractive model for the private sector, “P3 projects will be able to weather the storm because these government-sponsored, structured projects, unlike traditional financings, are protected from liquidity concerns by the current ‘flight to safety.’”

But P3s are not a new source of finance, says Mario Iacobacci at the Conference Board of Canada (CBC). “The idea that you can meet the deficit by relying on the private sector doesn’t make sense,” he says. The government is still paying for the project in the long term.

President and CEO of CG/LA Infrastructure and the Global Infrastructure Leadership Forum Norman Anderson calls P3s “small-time” and says, “They haven’t really worked because the private sector doesn’t want to take on risk and neither does the public sector.”

Anderson says they haven’t eliminated financing shortages in the past, and they won’t now.

“I agree in a sense,” says Iacobacci. “[P3s are] a tool used for maybe 15 to 20 per cent of government capital spending requirements, so it’s not the solution to the infrastructure deficit. If, through efficiencies, there’s a savings of 15 per cent, you can view it as increasing the government’s spending capacity by that amount.” But that’s not about to seal up the funding gap.

What P3s can do is free up money for projects that otherwise might not get done as quickly. David McFadden, director of the Canadian Council on Public-Private Partnerships and partner at Gowlings Lafleur Henderson LLP says, “Is it new money? It’s money the government doesn’t have today.”

McFadden says, “The issue we now have is that because of a seize up in credit markets, we need to get money moving.” He says P3s are a way to mobilize private-sector money to finance projects. “The benefit to the government is they can amortize it over a period of years.”

While P3 models are the only form of investment that bring cost and schedule discipline to a project, there are plenty of other ways for private investors to take advantage of a stable, long-term asset class like infrastructure.

Canadian Pensions have started developing in-house teams to make their own investments.

An infrastructure group was formed within the private investments department at the Canada Pension Plan (CPP) Fund in 2006 to look at global, private and public-to-private infrastructure equity investment opportunities. They focus mostly on electricity transmission and distribution, gas transmission and distribution, water utilities, toll roads, bridges, tunnels, airports and ports.

According to the annual report, the fund is initially focusing on deals originating in North America and Western Europe. The Fund has invested $65.1 billion in Canada and, as of June 2008, 2.6 per cent of inflation-sensitive assets in its portfolio were infrastructure — that represents $3.3 billion. It has also committed $200 million to the Macquarie Essential Assets Partnership which will invest mainly in regulated infrastructure assets such as pipelines, electricity transmission and distribution networks, located mostly in Canada.

The Ontario Municipal Employees Retirement System (OMERS) is also investing in Canada whenever possible. The Fund manages over $52 billion in net investment assets. Under its current business plan, it will expand the infrastructure portfolio, opening up co-investment participation for third-party investors.  As of December 2007 its net asset mix exposure to infrastructure was just over $5 million, which represents almost 10 per cent of its total fund net investment assets. As for how Canadian infrastructure fits into the mix, OMERS’ Darlene Bulard says, “We do not publicly disclose the amount invested in Canadian infrastructure assets.”

These pension funds are adding to a pool of capital that, according to Standard & Poor’s, is now over USD 2.1 trillion. The global listed infrastructure market includes a number of publicly listed funds on the Toronto Stock Exchange — a list that’s growing every year.

“What was once the domain of large pension funds, foundations and endowments, is now accessible to individual Canadian investors,” said Jonathan Wellum, AIC’s chief executive officer and chief investment officer, as they launched a new global infrastructure fund, sub-advised by Chicago-based Brookfield Redding, an investment manager known for property, power and other infrastructure assets.

Even as these million-dollar funds flood the stock exchange, Anderson insists that existing funds and P3s are inconsistent in terms of generating competitiveness. It amounts to a couple of projects getting built, the equivalent of $150 billion spent a year when it really needs to be $350 billion. “When there’s significant investment in infrastructure (more than the current one per cent of our GDP per year), it tends to be federalized, or centralized,” says Anderson. “Ottawa would have to be deeply involved.”

He suggests a national or North American infrastructure bank that would sell infrastructure bonds to middle class investors who want bond returns (ten to twelve per cent). “An aggressive public sector approach to infrastructure investment is the logical extension of current public policies, and the only way to protect the productive sectors of the global economic system. The vehicles, whether sovereign wealth funds, national infrastructure banks, or national infrastructure funds, have in many cases already emerged, and will now be sharpened.”

U.S. president-elect Barack Obama has adopted a version of the national infrastructure bank as part of his platform.

“It’s a possibility,” says Iacobacci. While the public can already invest in infrastructure through publicly-traded funds, this would be a way for the government to borrow money earmarked specifically for infrastructure funding.

“Infrastructure Ontario is, in some ways, already such an agency,” says Iacobacci. “It doesn’t have any borrowing authority, but it’s an agency with a clear mandate, outside of the usual political process.”

Anderson says financing for infrastructure projects will come from a strategy that hasn’t yet been tried, not the tried-and-true. “The sector that will lead us out of this current crisis is the public sector. There will be significant debt over the next few years; they will be forced to take on the risk.”