Broadening the Investment Framework for Canadian Infrastructure
First proposed in the 2016 fall economic statement, Canada’s new infrastructure bank is a tool to help the federal government allocate $35 billion towards new, major infrastructure projects that will contribute to the country’s long-term economic growth while mobilizing additional investment from the private sector.
Of this allocation, $15 billion will come from federal funds over the next 11 years and is earmarked for public transit and transportation projects, trade and green infrastructure. The remaining $20 billion will be repayable capital with no fiscal impact on the government or Canadian taxpayers. Innovative attributes of the Canada Infrastructure Bank (CIB) include its ability to make equity investments, loans and loan guarantees, and to serve as a centre of excellence to help effectively structure and deliver transformative infrastructure projects. The CIB will be located in Toronto and is expected to commence operations by the end of 2017.
The CVCA sat down with Greg Smith, President and CEO of Toronto-based private capital firm InstarAGF, to discuss what the new infrastructure bank means for Canadian communities and the quality of our national infrastructure, and more broadly, the private investment ecosystem in Canada.
What is InstarAGF’s view on the recently announced government infrastructure bank?
Building and modernizing Canada’s essential infrastructure structures and services for the 21st century is a critical economic and social imperative. Every one per cent increase in infrastructure spending in North America is estimated to have a multiplier effect of up to 1.7 times, increasing our productive capacity, creating jobs and enabling new economic opportunities.
Public investment in infrastructure as a percentage of GDP declined continuously from 1960 to 2004. The resulting infrastructure deficit for critical infrastructure such as public buildings, roads, bridges, sewers, electrical grids, and water purification plants is estimated to be up to $570 billion. Given the age and condition of much of Canada’s critical infrastructure and diminishing sources of traditional financing, our collective approach to infrastructure can no longer be “business as usual”.
With the federal government’s new Canada Infrastructure Bank, we have a unique opportunity to approach infrastructure renewal more strategically. The bank will have an important role to play in enabling great private sector investment in local infrastructure, and positioning Canada for a bright future. With its focus on economic or revenue-generating infrastructure and its openness to exploring and deploying new financing structures and other innovative approaches to infrastructure development, the CIB will help to create a pipeline of viable regional and national infrastructure projects and new partnership opportunities for institutional investors and communities alike.
How do you see this factoring into “broadening” the asset class?
The CIB will create a process to bring larger, economically viable projects to market and has a mandate to leverage private sector capital for value and growth. Private investors, working alongside governments, can play a positive role in delivering high quality infrastructure. Interestingly, there is more than enough capital available from private investors to fund the staggering cost of upgrading our infrastructure. Globally, institutional allocations to infrastructure are on the rise with more than half of investors planning to further increase their allocation over the long term, a trend that is playing out in Canada as well. Our experience is that a number of local infrastructure fund managers and institutional investors are already stepping up to supply capital to mid-sized domestic projects and assets, including partnering with municipalities, which are responsible for 60 per cent of public infrastructure assets. The Canada Infrastructure Bank will help to deepen and extend such relationships and help to focus private capital and operational expertise around strategic national infrastructure projects.
What are the positives and negatives of the CIB?
The federal government has made infrastructure investment a central feature of its mandate and commitment to Canadians. Initially, the government’s 12-year, $180 billion infrastructure plan is focused on smaller projects and will transition into larger and more complex projects over time, which requires proper planning and a clear procurement process to match the supply of capital to demand for infrastructure. It is a challenging undertaking, so it will be important to establish the right governance structure and infrastructure expertise to position the CIB for sustained success.
How have you seen infrastructure investing evolve over the last few years?
Investor appetite for the infrastructure asset class is increasing as investors seek real alternatives that are more resilient to economic cycles and have a lower correlation with other asset classes, including private equity. Infrastructure investments also provide some inflation protection, making them a good match for long-dated liabilities, and deliver current yield. In addition, the infrastructure asset class has generally demonstrated a stable return profile, and adding infrastructure to a portfolio typically delivers diversification benefits and improves return per unit of risk. Globally, equity assets under management for unlisted infrastructure managers reached USD $373 billion in 2016, a 15 per cent CAGR over the past five years. Infrastructure meets many institutional investor needs, and allocations to the asset class are likely to continue growing.
Has InstarAGF witnessed anything particularly interesting about this asset class?
We believe the North American middle market, which is characterized by assets in the $100 million to $1 billion enterprise value range, offers a compelling value proposition for investors and is less competitive than the market for large-scale assets. Middle market transactions are often more complex, such as separating an asset from a larger company. In addition, middle-market opportunities are typically available primarily through existing relationships and partnerships, often enabling acquirers to compete on factors other than price. Although there is significant capital chasing the “mega deals”, the greatest need for infrastructure is really at the local level, which aligns well with middle-market investors. For these and other reasons, middle-market investments typically offer the opportunity to achieve returns up to 100 to 150 basis points higher than the broader infrastructure market in the same sector and jurisdiction.
The other interesting aspect of the asset class is how the opportunity set is evolving in response to urbanization, technological change and sustainability imperatives. As a result of these macro drivers, we are seeing a shift away from large-scale projects to more “localized” infrastructure in many subsectors: district energy systems and scalable water distribution and treatment facilities instead of large utilities, for example; and urban light rail transit; renewable energy and energy storage; and retrofit and refurbishment projects. Overall, there is an increasing emphasis on “future-proofing” our critical infrastructure and on bringing innovation to the table.
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