Canada may turn to investors to help finance an ambitious $92-billion-plus infrastructure plan aimed at boosting its lagging energy-sector-based economy. Prime Minister Justin Trudeau’s proposed federal budget, unveiled in March, includes a line that opens the door to “asset recycling”—potentially involving the sale to investors of stakes in roads, bridges, office buildings, real estate and other publicly owned property.
The reference to asset recycling has generated buzz in the multibillion-dollar pension-fund sector, which sees added investment potential as the Trudeau government seeks ways to finance and deliver big public-works projects and keep deficits in check (ENR 2/15 p. 20). But some anti-privatization critics argue against the government giving up key public assets.
“They are considering it—it’s not easy being a national government these days,” says Michael Fenn, a former Ontario deputy minister and now a management consultant and a board director of the OMERS provincial pension fund. “A case was made in some quarters that you don’t have to incur additional new debt. You can leverage your existing assets,” he noted, adding that he was not speaking for OMERS.
At the moment, the potential use of asset recycling, at least on the federal level, appears to be more of a long-term possibility than an imminent initiative. The government is focusing on “shovel-ready” maintenance and repair projects during the first two years of its infrastructure campaign (ENR 4/11 p. 14).
But it is now planning more ambitious and expensive projects, with asset recycling helping to defray costs while allowing for even more ambitious proposals, Fenn noted. With money streaming in from asset recycling, the government could look at bundling together whole packages of projects, such as groups of bridges and roads, Fenn said.
The assets to be recycled, however, may have little or no connection with the projects to be funded, other than to provide a revenue stream. Ontario has a well-established asset-recycling program that is raising billions of dollars to pay for a new light-rail system in Toronto as well as other road and bridge projects.
The province recently gained $1.3 billion after selling shares in the government-owned power company, Hydro One. Two more stock sales are planned to raise a total of $6.9 billion. With stock markets around the globe on a roller-coaster ride, pension funds have been aggressively seeking out alternative investments.
Return on Investment
In a March speech in Toronto, Michael Sabia, CEO of Caisse de dépôt et placement du Québec, Canada’s second-largest public pension fund, said stock-market returns are expected to fall to 5% to 6% over the next few years, down from 10%. Fixed-income returns have dropped to 1% to 2% from 5%. But he pegged potential returns on infrastructure investments at 7% to 9%. “The party’s over. The traditional engines of investment returns are just not going to deliver as they once did,” Sabia said, according to a copy of the speech.
But that could be an understatement of the profit potential. Ontario’s asset recycling, which has included the sale of the province’s land-registry system, has produced double-digit profits, Fenn said. The government’s new interest in asset recycling comes as supporters of the idea push their case, with top pension-fund executives named to advisory roles by the new Liberal government.
Finance Minister Bill Morneau recently appointed Mark Wiseman, CEO of the Canada Pension Plan Investment Board, to his economic advisory council. Sabia is also on the council.
Australia has emerged as a pioneer in asset recycling, selling billions of dollars in stakes and shares in various public assets. In a speech last fall in Sydney to the Canadian Australian Chamber of Commerce, Wiseman noted that the $217-billion pension plan he runs now makes 75% of its investments outside of Canada. Wisesman pointed out that he has been urging Canada’s government, among others, to look at the Australian model.