In Thunder Bay, Ontario this past winter (one of the coldest on record) city crews were called out to repair 58 water main breaks and 750 frozen pipes. Winter has certainly taken its toll on Canadian infrastructure this year – but age is also a problem. Across all of Canada, infrastructure is in immediate need of repair, replacement and a massive amount of investment.
But domestic and foreign investors which are interested in the Canadian infrastructure market must face the reality that it is relatively small with few opportunities for large institutional investors.
Canadian infrastructure, unlike in countries such as the US or Australia, lacks large-scale privatisation and is still mostly held by public entities. As a result, many of Canada’s largest institutional investors (like the Canada Pension Plan Investment Board, the Ontario Teachers’ Pension Plan or the Alberta Investment Management Corporation – AIMCo) look outside of Canada when seeking to expand their infrastructure portfolios.
Besides the lack of privatisation, and thus the ability for investors to find large-scale projects, the so-called “infrastructure gap” occurring over decades has limited the number of projects available to invest in within Canada. Estimates have pegged this gap at about C$145 billion (€96 billion; $133 billion).
The Canadian Centre for Policy Alternatives says that infrastructure spending in Canada peaked in the late 1950s at just over 3.0 per cent of GDP but declined steadily until the early 2000s. However, there has been renewed spending in infrastructure of late with capital spending rising from 2.5 per cent to 4.0 per cent over the past decade, according to Infrastructure Canada.
Moreover, in 2006 the federal government launched a C$33 billion infrastructure fund known as Building Canada, which provided funding to the provinces, territories and municipalities for a period of about seven years. Last year, the government launched a C$14 billion “New Building Canada Fund” with a 10-year plan: C$4 billion for national infrastructure, C$9 billion for provincial/territorial infrastructure, and C$1 billion for small communities. A C$32.2 billion “Community Improvement Fund” was also set up to help build roads, bridges, and recreational facilities across Canada.
“The good news about that,” says John McBride, chief executive officer of government unit P3 Canada, “is that there is going to be lots of infrastructure built in this country. What you are going to see also is an increasing proportion of that going into P3 (public-private partnership) investment,” he explains.
By way of example, the federal government is using the P3 model to build two new bridges (one in Montreal and one at the Windsor/Detroit crossing) as well as a new Canadian Broadcasting Corporation (CBC) building in Montreal.
McBride adds that a bigger proportion of the money will now be spent on P3 projects partly due to the fact that the government has renewed the P3 Canada fund – with another C$1.2 billion to be directly invested by the organisation. Also, he adds, the government has put a provision on all provincial and municipal projects over C$100 million requiring them to be assessed for P3 suitability.
He further explains that more players have entered the arena and been embracing P3 projects such as the province of Saskatchewan (joining Ontario, British Columbia and Alberta) as well as cities such as Edmonton, Victoria, Regina and Saskatoon.
The C$100 million threshold for P3 projects is still a bit of a sticking point, however. Claude Dauphin, Mayor of the Borough of Lachine (within Montreal) and president of the Federation of Canadian Municipalities (FCM), says his constituents need more clarity on the analysis process required for P3 suitability.
“We want more clarity and flexibility,” he explains. “We have nothing against P3s but at the same time when you look at their [information] it could take between six and 18 months just to do the analysis, so for us that is too long.”
Investors and P3
Size and scale are recurring themes in the Canadian infrastructure discussion. Fengate Capital Management, a Toronto-based investment management firm, specialises in infrastructure fund management for pension fund clients. It services about 18 funds with between C$1 billion and C$5 billion under management – within the mid-size fund category. So far it has a little more than C$700 million of infrastructure capital under management.
George Theodoropoulos, managing director, infrastructure with Fengate, says there are essentially two types of infrastructure. There are the large-scale projects where large investors buy complete businesses like airports and utilities. “Those opportunities do not come up in Canada,” he says. “Once every two years or more something comes up for sale that big in Canada. We are not ones to privatise things.”
However, for smaller funds, the kind that Theodoropoulos services, P3s are ideal. “P3s are perfect investments for my investors,” he adds. Deals of C$50 million or C$100 million are more in line with most of the pension funds in Canada seeking to explore infrastructure on a smaller scale. One project that Fengate has helped finance is the New Oakville Hospital outside Toronto. Fengate has also exposed its pension investors to other P3 healthcare, courthouse and solar project facilities.
“All pension funds in Canada are looking for duration,” he explains – in other words, long-term stable investments that pay a solid return. And outside of government bonds, Theodoropoulos says the risk-reward ratio of infrastructure investment can be quite good and secure over the long-term. On projects like the New Oakville Hospital, he estimates a return of 11 percent over 30 years.
Where to look
In its report, Pension Fund Investment in Infrastructure: A comparison between Australia and Canada, the OECD says: “There have been signs of a strong pick-up of the P3 market in the healthcare, road and justice systems sectors which are now considered mature and benefiting from strong competition from equity and debt participants.”
Outside investors are making in-roads into these “smaller” P3 investments. Fund managers such as France-based Meridiam Infrastructure have invested in the Montreal University Research Hospital and the Northeast Anthony Hendey Drive highway project in Alberta (in which Germany-based Hochtief is also an investor). France’s Bouygues was contracted to build and operate the Royal Canadian Mounted Police’s headquarters in Vancouver through a P3 procurement model. Hochtief has acquired Flatiron, a civil engineering and infrastructure company operating in North America. UK-based John Laing Infrastructure Fund is invested in three projects – the Abbotsford Hospital, the Vancouver General Hospital and the Kelowna and Vernon Hospitals Project.
And while investors are able to find plenty of projects such as courthouses and hospitals to meet their needs, other investable areas are gaining momentum. Renewable energy and assets such as wastewater treatment facilities are becoming a key focus on the Canadian infrastructure front.
Much of this is happening at several of levels of government. Jeff Mouland, co-head of infrastructure with Greystone Managed Investments, says: “Infrastructure at the federal and provincial level is increasingly getting more attention. The municipalities in Canada are lobbying pretty hard at both the federal level and provincial level to get support for their infrastructure projects.”
“In the renewable space, for example, there are transactions throughout Canada particularly in the waste energy space where relationships are being formed between the developer and the municipality and then an opportunity [for investors] has come out of that,” says David Vickerman, co-head of infrastructure with Greystone.
In terms of sectoral trends, P3 Canada’s McBride says he is seeing more projects in the water and wastewater sectors – particularly as P3s. “There are significant needs for water and wastewater across the country – some of that driven by growth and some of that driven by new regulatory requirements for quality,” he says. Aging infrastructure also plays into this sector. He cites the City of Regina, which contracted out its new wastewater treatment facility and used the P3 model to do so.
Fengate’s Theodoropoulos says renewable power generation is also on the horizon for smaller Canadian infrastructure investors, especially in wind and solar energy.
When size matters
“Canada has a lot of capital available but very few projects of any size,” says Leo de Bever, AIMCo chief executive officer.
“When I talk to provinces or municipalities they seem to believe [P3] has improved fiscal discipline in terms of how these things get executed but for us a lot of these projects are small, they are too debt-laden and it’s often difficult to see a legitimate role for private capital beyond the construction phase. What I am looking for are projects I can legitimately add value to,” adds de Bever.
He says that too many projects are still geared towards construction companies and rely on one-of-a-kind agreements. De Bever says to make P3 projects a little more attractive he would like to see greater standardisation with agreed-upon terms that are universal.
Kevin Kerr is a partner with fund manager Bastion Infrastructure Group. He argues that there might be more projects available in renewables because there are government incentives to participate in them, but overall there are few infrastructure projects available for (larger) investors.
“We don’t see a ton of volume of the type of infrastructure that we would like to buy in Canada,” he notes. And from an investor’s standpoint, Kerr says, focusing only on the Canadian market would not result in an optimal risk-return profile. The amount of product available is low or inconsistent at best.
“If that’s the profile you are after, there are certainly some opportunities in the P3 space but on the pure infrastructure side it is much more difficult – and the opportunities are much more limited,” he adds. Another issue, notes Kerr, is that the market is fragmented. Many municipalities have requirements but have not yet made decisions on how best to finance or build out the needed infrastructure.
The next frontier
Greystone’s Mouland notes that the federal government (in its latest budget) has estimated the development of $650 billion worth of natural resource projects over the next 10 years. Many of these projects are in rural and remote areas claimed by various First Nations/Aboriginal groups.
“The financing and investments available in this space will likely increase as land agreements and resource revenue-sharing with First Nations become more abundant,” he adds.
“Increasingly, more partnerships are occurring between the First Nations, various levels of government and project proponents. Some of the projects thus far have varied from transmission lines, generating stations, to renewable power (hydro, wind and solar projects).”
While renewed commitments to infrastructure in Canada have been taking shape, the size and scope of those projects are at issue. For large investors looking to deploy capital and acquire equity in privatised entities, Canada will disappoint.
Smaller investors, however, which also have long-term investment horizons but have less capital, can find opportunities among the growing P3 model being used more at each level of government and within various infrastructure platforms.
Joel Kranc is Director of KRANC COMMUNICATIONS in Toronto, focusing on business communications, content delivery and marketing strategies. firstname.lastname@example.org