The most recent headline saw CPPIB, Ontario Teachers’ and OMERS’ Borealis unit team up to buy the Chicago Skyway Toll Road. It’s a long-dated concession: $2.8 billion up front for tolls till 2104.
Of course, infrastructure is very much on the minds of Canadian pension funds as they seek to diversify into real assets that provide a closer match to their liability durations. What’s surprising is not the thirst for a better, inflation-linked bond replacement, but just how quickly Canadian funds have slaked that thirst.
Canadian pension plans are world leaders in infrastructure investing. Of course the big three are prominent in the global league tables – just behind the sovereign wealth funds. In fact, there are 15 Canadian pension funds among the top 40 in IPRE’s survey of the world’s largest infrastructure investors.
To gauge just how big a footprint Canadian funds have in the infrastructure space, only two appear among the top 40 in Towers Watson and Pensions and Investments 2015 survey of global pension plans by assets – CPP and Ontario Teachers’.
Canada is not alone as an outsize investor in infrastructure; Australia is close behind. As an OECD paper notes, both countries were pioneers – arguably, long before infrastructure became the kind of issue that could both win election campaigns and justify deficit spending.
What about Canada?
Which raises the question of Canadian pension involvement in Canadian infrastructure. Quebec has offered the Caisse the foreman’s helmet as the province’s infrastructure supervisor, in a shift away from more traditional public-private partnerships. The Caisse will take charge – and take the profits as well as the risk. Which means also deciding whether a project gets built. This is on par with what the OECD paper calls the “Canadian model:” direct infrastructure investments, almost exclusively on the equity side.
That wasn’t the case in Australia, where a few PPPs foundered on overly optimistic revenue projections, the OECD report notes. There, privatization and “asset recycling” were much more extensive. In Canada, privatizations and PPPs are relatively underdeveloped – and unpopular. The privatization of Highway 407 north of Toronto remains a lighting rod – even though it is partly under pension ownership. (Not that pension ownership ever bothered long-suffering Maple Leafs fans.)
The OECD authors argue:
“The country‟s infrastructure story could be summed up by two paradoxes. First, Canada’s pension funds are major infrastructure investors in the global context, but most of the capital goes overseas, given the near abstinence of the country from large-scale privatizations of public infrastructure assets. Second, Canada has a well-functioning PPP model and yet, pension funds are not major investors in it. A key reason for this is the small “ticket size‟ because PPP projects often are too small, highly leveraged with an equity share of less than 20%.”
Still, the newly elected federal Liberals did emphasize infrastructure spending. Will they harness Canadian pension managers’ expertise?