Following the federal government’s announcement yesterday of its plans to invest in infrastructure, one of Canada’s largest pension funds is advising the government that the implementation of a governance structure will be essential to its success in attracting private capital.

“We recommend the government appoint a strong, professional and independent board to ensure it is run like a business, as is the case for Canadian pension plans, which have validated the soundness of this model on the global investment stage,” said Ron Mock, president and chief executive officer of the Ontario Teachers’ Pension Plan, in a press release.

Read: How Canadian pension funds can help Ottawa’s infrastructure agenda

In his Fall Economic Statement yesterday, Finance Minister Bill Morneau said the federal government will invest an additional $81 billion in public transit, green and social infrastructure and transportation infrastructure, along with a number of other measures.

Canada’s largest pension funds, including the Ontario Teachers’, were among the first pension plans to invest directly in infrastructure assets, noted Mock.

“We believe that a government-backed Canadian infrastructure institution that partners government and institutional investor capital and risk sharing will significantly improve the Canadian infrastructure landscape,” said Mock. “It will benefit the Canadian government and, ultimately, Canadians.”

Read: Trends in infrastructure investing

Since it began investing in infrastructure in 2001, Ontario Teachers’ has partnered with governments around the world, leveraging the fund’s governance and management expertise. “In our experience, countries that develop and implement a long-term vision for infrastructure are some of the most economically progressive and productive countries in the world,” said Mock.

The Ontario Teachers’ infrastructure portfolio is diversified across the transport/logistics, water and waste water, gas distribution, renewable and conventional energy industry sectors.

Read: Infrastructure and natural resources investors face divergent outlooks: survey

The Canada Pension Plan Investment Board also addressed infrastructure investment yesterday before the House of Commons finance committee. Mark Machin, chief executive officer of CPPIB, said the pension fund would need to see investment opportunities that meet its specific criteria in order to participate in the spending boom, according to the Globe and Mail.

CPPIB infrastructure investments include toll roads, shipping ports and pipelines around the world but the conditions are rarely satisfied by the infrastructure assets available in Canada, said Machin, although the pension fund is invested in the Ontario Highway 407 toll road.

“That’s been one of the biggest challenges in Canada, and around the world, is there’s just not been enough of those scale opportunities in size, but also that are prepared for our type of investments,” said Machin before the committee. He noted that the pension fund likes to buy operational assets, rather than investing in constructing new projects from scratch.

Read: Top 40 Money Managers: Why pension funds are turning to non-core infrastructure

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It’s important to make the distinction between operational infrastructure investments and green field ones (specifically ones utilizing the DBFM model, which is being contemplated here).

Quite rightly, Teachers and CPPIB steer clear of the latter because they are far riskier, require specialized legal expertise, and more recently, the application of Lean construction methods to manage successfully to time and dollar budgets. CPPIB and Teachers lack the necessary expertise to assess such infrastructure investment types, which is certainly not a knock against them.

So at the end of the day, Mock’s and Machin’s commentary as it relates to governance of federal government infra. projects is irrelevant. Most of the projects will be non-revenue plays and DBFM (i.e. full life cycle) projects and therefore outside of their permitted investment mandates.

These being P3 projects as well, private equity will be the (P)rivate driver, and I would imagine that their risk/reward profile, for those who know how to size them up, will be attractive.

Wednesday, November 02 at 1:23 pm | Reply

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