Infrastructure has been a hot topic over the past few years, with Canadian pension funds already considered investment leaders in the area amid solid returns for the asset class.
Since late 2003, global infrastructure has delivered a 9.1 per cent return, with a 5.1 per cent standard deviation. The result compares favourably to global equities, which returned 6.1 per cent since over the same time period with an 8.3 per cent standard deviation, according to Bloomberg and Cambridge Associates.
Canada’s provinces have embraced institutional investors’ appetite for infrastructure assets through the use of the public-private partnership model that brings together the government and private investment to help create much-needed projects such as highways, transit, hospitals, correctional facilities, courthouses, bridges and wastewater and sewage facilities. Over the past 10 years, the four most active provinces have been Ontario, Quebec, Alberta and British Columbia, each of which has created an agency to manage the design, delivery and oversight aspects of infrastructure projects in their respective jurisdictions. These agencies have standardized design and bidding in an effort to ensure a fair and open process.
It’s worth noting that most institutional investment has been in economic infrastructure given the sheer amount of it globally in the form of ports, airports, transmission grids, treatment facilities, renewable energy projects, satellites and communication towers. However, revenue can vary more with economic infrastructure, depending on the structure of the deal. Of course, public-private infrastructure isn’t without risk, either. Canadian governments haven’t defaulted on payments, but the risk does exist.
The predominant approach used in Canada is the design, build, finance and maintain or operate model. The bidding process is one to two years. The design-and-build phase is usually about three years (and may be less), while the maintenance or operation component can be 30 years or longer.
The public-private model has attracted both Canadian and global players as providers of equity, debt, construction services and operating platforms. Many public-private projects involve significant amounts of debt financing (90 per cent or more), with equity cheques accounting for only 10 per cent of the total value. That approach contrasts with economic infrastructure assets where equity contribution ranges between 30 to 60 per cent.
In many ways, Canadian public-private partnerships have been too successful, as there’s not enough equity for many plans to invest in given all of the institutional interest. As well, many of the construction companies are keeping some of the equity for themselves and are thereby shrinking what’s already a small pie. There was also a two-year period when provincial elections led to putting many projects on hold. As a result, investment managers have either expanded their investment activities to the United States, which is starting to engage in forms of public-private financing, or have added more economic infrastructure to their portfolios.
The federal government, however, has recently decided to enter the fray with the Canadian Infrastructure Development Bank. The idea is for it to be an arm’s-length organization that will spend $186 billion over 11 years, providing loans, loan guarantees and equity investments to help municipalities and provinces with infrastructure projects. The government has yet to launch the bank or specify the projects; however, speculation is it will use some of the money to build clean electricity connections between provinces and territories. The first $15 billion will become available in the 2017 budget next spring.
Some are arguing that the public-private partnership model doesn’t impose fiscal responsibility, while others suggest many other countries are studying the Canadian approach as one that can help balance societal need with budget constraints.
A study commissioned by Infrastructure Australia in 2007 reviewed the data for 21 public-private partnership and 33 traditional projects. The study concluded there were significant time and cost savings with the public-private partnerships. On $4.9 billion of contracted projects, the net cost overrun was $58 million. The overrun was $673 million on $4.5 billion of traditional projects.
An independent report issued by Hanscomb Ltd. that assessed Infrastructure Ontario’s track record noted 98 per cent of public-private projects (44 out of 45) were on budget and 73 per cent (33 out of 45) were on time for the year ending Mar. 31, 2015. The result is consistent with the 2014 record and, in Hanscomb’s professional opinion, Infrastructure Ontario’s on-budget and on-time performance “exceeds generally accepted standards for [PPP] infrastructure projects.” It’s worth noting that, of those projects that were late or delayed, seven out of 11 were ready within 90 days of their expected completion, with risk was shared with or transferred to the private sector in all cases.
Given the track record, I believe more public-private partnership projects should become available. I’m cautiously optimistic, however, about the Canadian infrastructure bank. Based on the time needed to put projects out for bidding, I see investors having to wait two to three years before institutional capital is necessary. As for the amount of equity available, it’s hard to say how that will play out. In the meantime, there’s always economic infrastructure.