Canadian Pensions on Lagging US Infrastructure?

Matt Scuffham of Reuters reports, Top Canadian investor says U.S. behind in race for infrastructure capital:

The United States is lagging behind Canada in the race to attract capital for infrastructure projects despite launching a charm offensive to global investors and reaching out to officials north-of-the-border for advice, a top Canadian investor said.

Canada is setting up an infrastructure bank to facilitate private investment in projects such as new roads, bridges and tunnels but faces competition from the United States, where President Donald Trump is planning $1 trillion of infrastructure spending, funded mostly by the private sector.

Bjarne Graven Larsen, chief investment officer at Ontario Teachers' Pension Plan, said Canada has an advantage in already being home to a number of the world's biggest infrastructure investors and having an established track record in utilizing public and private funding to build infrastructure.

"I think Canada is actually better positioned than the U.S. because there's more institutions already, there's more history around how to do that in Canada compared to the U.S.," said Larsen, who helps manage assets worth C$175.6 billion ($138.3 billion) with the pension plan being one of the world's biggest infrastructure investors.

Larsen said he and other major Canadian investors recently met with officials, including U.S. Treasury Secretary Steven Mnuchin, at the White House to discuss U.S. infrastructure.

"They acknowledged that Canada is actually ahead of the U.S. in the planning here," Larsen said.

The infrastructure team in the White House was seeking advice from its Canadian counterparts as well as Canadian investors and considering whether they should copy some of the Canadian model, Larsen added in an interview.

Michael Sabia, chief executive of the Caisse de depot et placement du Quebec, Canada's second biggest public pension plan, said the United States should look to replicate Canada's model.

"Crowding in private investment from people like us to finance infrastructure makes a world of sense in Canada and it makes a world of sense in the United States," he told reporters after the fund reported second-quarter results on Friday.

Mark Machin, chief executive of the Canada Pension Plan Investment Board, Canada's biggest public pension plan, said he had attended the same meeting with U.S. officials as Larsen but felt the United States was some way off from having firm plans in place.

"I don’t think there's a lot of clarity yet on how the Trump plan is going to shape up," he said in an interview on Friday.

Trump has begun a "massive permit reform" as part of the U.S. infrastructure plan to speed up construction approval processes and Larsen agreed that the slow process had previously been a deterrent to international investment in U.S. infrastructure.

"In the U.S. the permitting process was sometimes difficult to figure out. You had to take a lot of different things into consideration," he said. "They actually changed that so there is now one federal permitting body in Washington that's sitting in the executive office next to the White House."

Efforts by the United States to woo foreign investment in infrastructure follow a similar charm offensive from Canadian Prime Minister Justin Trudeau who hosted international investors such as Norway's Norges, which runs one of the world's largest sovereign wealth funds, the Qatar Investment Authority and Singapore state investor Temasek in Toronto last November.

Canada's efforts are focused around the infrastructure bank, which plans to attract C$4 to C$5 for every C$1 of public funding for infrastructure projects.

"I think it's a very important initiative and we're very supportive of the infrastructure bank," said Larsen. "We see it as a vehicle that we can potentially invest in."

Matt Scuffham of Reuters contacted me several weeks ago and I thought he was conducting an exclusive interview with Ontario Teachers' CIO, Bjarne Graven Larsen, but I see here the focus is on US infrastructure and how Canada's large pensions can take part in investing in it.

There is no question that large US pension funds lag far behind their Canadian peers in terms of global infrastructure investments. Moreover, there is no question the US lags far behind Canada in terms of developing a cohesive infrastructure policy using a similar federal "infrastructure bank" that Canada created to help fund projects and be a conduit for large funds all over the world to invest in these infrastructure projects.

Even though the Canadian Infrastructure Bank is many months away from opening its doors, last month the Liberals gave a group of civil servants the power to help fast-track approval of projects for private funding well in advance.

In fact, Engineering News Record recently reported, Funding Contenders Emerge as Canada’s Infrastructure Bank Is Official:

The newly minted Canada Infrastructure Bank is fueling up for a fast start when it opens for business later this year, with officials in the Trudeau government already having vetted a potential first round of projects. An “interdepartmental project advisory group” met in recent weeks to discuss the rollout of the Parliament-approved, $27.5-billion bank and some initial projects the government’s new lending-investment arm might focus on, says Kate Monfette, spokeswoman for Amarjeet Sohi, federal infrastructure minister.

One project identified is Montreal’s ambitious light-rail system, which will receive a $1-billion federal commitment, Prime Minister Justin Trudeau said. The province of Quebec and Caisse de Dépôt, the giant pension fund heavily involved in financing and overseeing the $4.7-billion project known as Réseau Electrique Métropolitain, will be able to seek financing from the bank, Trudeau noted. At 76 kilometers, the Montreal line would be the world’s fourth-largest automated transit system, behind those in Vancouver, Singapore and Dubai.

Any money invested by the bank would free up already allocated federal funds for other infrastructure projects, federal officials have said. When announcing the investment, Trudeau said the Montreal line “is one of the most ambitious public transportation projects in our history.” A spokesman for CDPQ Infra Inc., the Caisse de Dépôt infrastructure unit, says it hopes to complete preliminary design in fall, with line operation set for the end of 2020.

Meanwhile, Washington Gov. Jay Inslee (D) had talks in May with Trudeau to gain bank funding for a long-gestating high-speed-rail line that would connect northwestern U.S. cities and Vancouver, British Columbia, spokespersons for the governor confirm. They said a $350,000 project feasibility study awarded to CH2M is set for release at year-end They did not provide a proposed project cost, but the line, which media have estimated at $30 billion, also is seen as a boost for a proposed technology corridor. Trains would run at speeds of at least 400 km per hour between Vancouver and Portland, Ore., with Washington stops in Bellingham, Everett, Seattle, SeaTac, Tacoma and Olympia. The state and Microsoft Corp. are funding the study. “We have heard from some Canadian counterparts that the Canada Infrastructure Bank is a possible option, and we’re open to analyzing it.” said one spokesperson.

Legislators green-lighted the bank in June, despite opposition party criticism that questioned whether the new financing arm would end up shielding investors at the expense of taxpayers if projects fail to meet financial expectations. But before the bank can start financing projects, it needs to have its executive team in place, says Jim Leech, former chief of one of Canada’s largest public pension funds who was named earlier this year as a bank special adviser. “We have to get the board and CEO hired … before any project can be brought forward for consideration,” Leech told ENR in an email, although it is not clear if he is a contender.

I'm quite certain Jim Leech, the former CEO of Ontario Teachers', has been busy interviewing candidates for the CEO position and for board positions. Obviously, these decisions are not just done by Jim but he has a big say as the government tasked him to oversee the creation of this federal infrastructure bank.

The key here, and Jim Leech knows this all too well, is to get the governance right so that investors feel comfortable their best interests are being taken seriously and there won't be any undue or unwanted government interference beyond setting the foundations and funding the first tranche of these infrastructure projects.

People reading this might wonder why do Canada's large pensions and other large global investors need the federal government to invest in domestic infrastructure projects? Apart from providing significant funds, the answer is red tape, regulations and the need to "fast-track" projects which can only happen if the federal government is part of it.

Infrastructure projects are complex and they take a long time to come to fruition. You can't build these projects in a year or even three years, many of them take a lot longer and the setup is equally long (fesasability studies, environmental studies, working with various groups to address concerns, and on and on before you get to the actual construction phase).

Lastly, the Canadian Press recently reported, Trump’s $1T infrastructure boast could push up construction costs in Canada:

The Trump administration’s fledgling promise to spend $1 trillion on repairing American roads and bridges may have some unintended ripple effects in Canada.

Newly released documents show that top civil servants in Ottawa worried earlier this year that Donald Trump’s ambitious infrastructure program that he talked about on the campaign trail could end up driving up the construction costs in Canada.

Trump has long talked about a massive infrastructure spending program to prod his country’s economy, but the yet-to-be-released program has taken a back seat in a legislative agenda focused on an ongoing fight over health care, the country’s debt levels and tax reform.

The longer it takes to approve a plan, the longer it may put off what a group of deputy ministers worried in February would be an upward pressure on construction prices.

“The U.S. infrastructure plan, coupled with the Investing in Canada Plan, may drive up costs for materials and services in the medium term, thereby increasing the total costs of infrastructure projects in Canada,” read the minutes from the meeting inside the building that houses the Prime Minister’s Office.

The Canadian Press obtained a copy of the document under the Access to Information Act.

The concern was listed as an issue that could affect relations with provinces and territories that were banking on federal financial help to replace and build new roads, bridges, water and transit systems.

Higher costs would mean that planned federal investments in infrastructure wouldn’t be able to buy as much new infrastructure as the Liberals hope, and potentially dampen any economic spin offs.

The Liberals have banked on their infrastructure program to drive economic growth and job creation. The plan calls for $81.2 billion in spending over the next decade, not including some $90 billion in existing legacy funds the Liberals also want to spend.

Most of the spending on the Liberal infrastructure program doesn’t happen until after 2021.

Infrastructure spending was one of Trump’s key talking points on the campaign trail, which he billed as a way to stimulate the American economy and create millions of good-paying jobs and long-term economic growth _ language not all that dissimilar from what Justin Trudeau used in promoting his infrastructure plan to Canadians during the 2015 federal election.

Trump has also envisioned having the private sector help pay for his promise, which in reality is envisioned as $200 billion in federal funds to leverage $800 billion in private sector money; again, an idea the Liberals have captured in their soon-to-be launched infrastructure bank.

The White House is reportedly set to give congressional lawmakers the outline of the infrastructure proposal this fall, although it’s unclear if Trump can get a bill passed before the end of the calendar year with divisions within the Republican ranks and opposition from Democrats.

Meanwhile, the Liberals are trying to finalize funding agreements with provinces on their long-term infrastructure program to start moving money for long-term, large scale projects and get their new financing agency up and running by the end of the year.

Why the two programs could drive up costs is chalked up to supply and demand economics.

Industry officials point out that companies can increase the cost of their services if the market is flooded with open contracts. Materials suppliers could also boost rates as demand for their products increases.

A spokesman for Infrastructure Minister Amarjeet Sohi said the roll-out of the infrastructure program over a 12-year timeline should mitigate any concerns about prices rising too fast.

“This will provide jurisdictions and asset managers with greater flexibility to prioritize and phase-in projects to best consider various factors, including the relative availability of particular goods and services, as market conditions evolve over time,” Brook Simpson said.

“In addition, as these investments will be made over a long period, we can expect that the increase in demand for economic sectors contributing to infrastructure will lead to increase in supply, which could mitigate pressures on costs.”

It remains to be seen how successful the Trump administration will be in terms of tax cuts and its ambitious $1 trillion infrastructure program.

As I have stated on my blog, it's too little, too late, the US economy is slowing and these policies, if passed, won't make a difference in the near term.

One thing that is clear to me, Trump's team needs the expertise of Canada's large pensions when it comes to infrastructure. I have no doubt about this, none whatsoever. If they work closely together, they will make a huge difference but it will take time.

Lastly, I want to plug Toronto's Caledon Partners which recently merged with CBRE to create CBRE Caledon Partners. Many small, medium-sized and even large pensions don't know how to properly invest in infrastructure and private equity and David Rogers and his team can help them as they worked at large pensions like OMERS and Ontario Teachers and they really know their stuff. If you're looking for a great partner to help you with your private market investments, contact them here.

Below, the markets are watching Republican support in Congress for Trump's economic agenda on tax cuts, deregulation and infrastructure spending, says Jim Swanson, chief investment strategist, MFS Investment Management.