Will Ontario's Large Pensions Invest Alongside the New Ontario Infrastructure Bank?
The Ontario government’s new investment organization could incentivize institutional investors to take a closer look at infrastructure opportunities in the province, says Iftikhar Ahmed, a wealth solutions partner at Aon.
“We work with a large number of pension plans and other institutional investors who would be keen to participate in infrastructure development in the province.”
The provincial government announced the creation of the Ontario Infrastructure Bank during the its fall economic statement earlier this month. The bank, which has an initial $3 billion funding, will seek to develop new long‐term care homes, energy infrastructure, affordable housing, municipal and community infrastructure and transportation.
The provincial organization will attempt to mobilize private capital participation by “preparing and structuring such investments in a more likely executable and bankable way,” says Ahmed.
Following the announcement, a few of Ontario’s largest pension plans and institutional investors — including the Colleges of Applied Arts and Technology pension plan, the Investment Management Corp. of Ontario, the Ontario Teachers’ Pension Plan and the Ontario Municipal Employees’ Retirement System — expressed their support for the new bank and reaffirmed their interest in Ontario-based opportunities.
Indeed, Ahmed has seen a growing interest for investments in Canadian infrastructure assets. “There is tons of private capital available in the market that can be channeled into these projects if designed and structured appropriately.”
The Ontario Infrastructure Bank would benefit from pursuing long-term strategic partnerships instead of one-and-done deals, says Ahmed. “One key yardstick for success, in my opinion, is simply a multiplier effect in private capital mobilization. In other words, how much private equity capital is mobilized for each dollar of [the] bank’s commitment into these projects.”
However, the new bank will have to justify its existence among other similar agencies, such as Infrastructure Ontario and the Canada Infrastructure Bank, he adds, noting it could follow in the steps of the national bank. Since it was established in 2017 with an initial funding of $35 billion, the bank has faced criticism for transaction shortcomings and has only been able to deploy a cumulative total of $9.7 billion as of March 31, 2023.
One policy expert is unsure where Ontario’s new bank fits into the current investment landscape that’s available. In particular, Brian Lewis, a senior fellow at the University of Toronto’s Munk School of Global Affairs and Public Policy, says he’s unsure how institutional investors’ mandates align with the investing goals of the new bank.
“Somebody has to make this worth the investors’ while and is that going to be taxpayers? I hope not. Is it going to be users? I’d be more comfortable with that, frankly. If we’re going to get infrastructure built using private sector money that people would willingly pay for — that the government isn’t — that’s a good public policy outcome.”
Indeed, Thomas Marois, a professor of political economy at McMaster University wrote an op-ed for the Globe and Mail recently asking whose interests does the Ontario Infrastructure Bank serve?:
With the launch of the Ontario Infrastructure Bank, the province has just become home to the world’s newest public bank. As part of the provincial budget, Finance Minister Peter Bethlenfalvy announced recently that an initial $3-billion in public funding is planned for the OIB.
Priority investment areas for the bank will include long-term care homes, energy infrastructure, affordable housing, municipal and community infrastructure, and transportation. Such support appears to be welcome news.
But will the OIB serve the public or private interest? We’ll have to watch closely – early indications suggest the latter.
Having a public development or infrastructure bank provide directed financing for such critical areas is nothing new. There are more than 900 public banks worldwide with combined assets of nearly US$50-trillion – 10 per cent more than the gross domestic products of the U.S., Germany, and China combined. Public banks are specialists in infrastructure finance and development.
The earliest municipal banks, such as Barcelona’s Taula de Canvi, go back to the 1400s. More contemporary ones, such as the Caisse des Dépôts et Consignations in France, were founded in the 1800s.
The OIB, however, has suddenly entered the public stage, and we know very little about its background. What model from the world of public banking have its creators looked to for shaping its practices on accelerating infrastructure investment?
Mr. Bethlenfalvy told CBC Radio last week that he had consulted widely, including with workers, who purportedly welcome the OIB. But so far the government hasn’t shared any information about its consultations, let alone results.
To be fair, these are early days, and the OIB will need to find its feet. Still, the bank’s proposed purpose and structure, as set out by the government, are concerning.
For one, the OIB is being pitched as a silver bullet for funding the province’s infrastructure needs – as if all that’s necessary is to set out public funds and guarantees, and the private sector will follow. This strategy is cut and pasted from the Canada Infrastructure Bank’s initial promise to leverage private funds many times over, but that never happened.
It also mirrors the World Bank’s “Cascade” approach: “To maximize the impact of scarce public resources, the Cascade first seeks to mobilize commercial finance, enabled by upstream reforms where necessary.”
That’s code for bending public infrastructure investments to private investors’ needs for low-risk, high-return financial assets that generate returns for their owners or, in the case of pension funds, pensioners. This is their understandable fiduciary duty, but one that does not include protecting (let alone advancing) the public interest.
The OIB’s strategy ignores criticism of the Cascade approach, which for many civil society organizations is little more than a warmed-over yet failed public-private partnership/privatization strategy. What Ontario needs is more public-public collaboration to deliver equitable infrastructure as a matter of policy, not profit.
Further, the government sees the OIB as a way “to attract trusted Canadian institutional investors to help build essential infrastructure.” Trust is indeed important. How are we to trust and hold accountable this new public institution with control over allocating $3-billion in public money?
According to its new website on governance, the OIB will be “a new, arms-length, board-governed agency. The Board of Directors shall manage or supervise the management of the Ontario Infrastructure Bank’s affairs and will be composed of at least three and at most 11 members.”
The site adds: “Board members will be appointed by the Lieutenant Governor in Council (LGIC) on the recommendation of the Minister of Finance and will need to have significant financial and infrastructure related project expertise.”
This is far from assuring, at least in terms of public banks functioning in the public interest. The world’s best public banks are mandated to advance economic and social developmental policies.
These policies need advancing with government and society, not through opaque nominations and appointments. What’s required is a representative, diverse, accountable and transparent governing board – one that can collaborate with government and society.
Fortunately, the world is full of promising examples of stable, secure, effective, well-governed public infrastructure banks to help shape the future of the OIB.
The government even references one of them: the German KfW, which has a representative Board of Supervisory Directors that includes government representatives, along with members from municipalities, trade unions, small- and medium-sized enterprises, and so on. This provides opportunities for dialogue, co-determination and accountability.
On a wider level, there are other promising examples, such as the Dutch Municipalities Bank (the BNG). Its mandate is the polar opposite of the proposed OIB’s: “BNG Bank is of and for the Dutch public sector. Instead of maximising profits, our priority is to maximise the social impact of our activities.”
Unfortunately, the OIB does not appear to be following any such models.
There is nothing inherently good or bad about public banks. They are only ever as good or as bad as society makes them. Good ones contribute to the public good by advancing prosperous, inclusive and increasingly sustainable societies. Whether Ontario will craft the new OIB in that vein remains to be seen
I'll get to professor Marois's comment below.
First, what is this all about? You have to go visit the Ontario Infrastructure Bank website to learn more:
Ontario is launching the Ontario Infrastructure Bank, a new, arms-length, board-governed agency that will enable public-sector pension plans, other trusted institutional investors and Indigenous communities to further participate in large-scale infrastructure projects across the province.
Institutional investor participation will help the government deliver more infrastructure faster, while leveraging additional capital from investors, and helping to maintain a responsible fiscal plan for today and for future generations.
The Ontario Infrastructure Bank shall not enter into any arrangement for the financing of a project with an investor whose interests do not align with the Ontario public interest.
More specifically:
- Structuring proposals and negotiating agreements with investors in infrastructure projects.
- Receiving and assessing unsolicited ideas and proposals for infrastructure projects that come from qualified institutional investors, public sector entities, governments or Indigenous communities.
- Investing in infrastructure and appropriately allocating risks amongst the Ontario Infrastructure Bank and other investors
The way I read it, the Ontario Infrastructure Bank is modeled after the Canada Infrastructure Bank.
That's good and bad. Let me explain.
When it first appeared on scene, the Canada Infrastructure Bank was suppose to unleash a flood of mega infrastructure projects that would entice our large pension funds to invest in domestic infrastructure.
Well, it didn't turn out that way.
Instead, the Canada Infrastructure Bank is doing a bunch of smaller scale social infrastructure projects that doesn't interest our large Canadian pension funds.
And this is the problem I see off the top with this new Ontario Infrastructure Bank (OIB), its main focus is on long-term care homes, energy infrastructure,
affordable housing, municipal and community infrastructure, and
transportation.
Unless these are mega projects where the OIB takes a huge equity stake to de-risk, I do not see this as an attractive area for Ontario's large pension funds and plans.
To be fair, it's early days, and I'm assuming all of this was discussed with Ontario Finance Minister Peter Bethlenfalvy.
Let me be blunt, if they don't make these projects big and scalable, I don't see how OTPP, OMERS, IMCO or CAAT Pension Plan will invest, it would run against their mandate and objectives.
And that's something professor Marois doesn't pick on clearly in his op-ed piece above.
He notes: “BNG Bank is of and for the Dutch public sector. Instead of maximizing profits, our priority is to maximize the social impact of our activities.”
Well, professor, the mandate of Ontario's large pension funds and plans is to first maximize risk-adjusted returns all while enhancing their responsible investing approach.
In plain English, profits first, ESG second.
And let's not forget, unlike CDPQ, Ontario's large pension funds do not have a dual mandate to invest in Ontario, so any government interference will not be tolerated or be viewed well.
So, color me skeptical, I know IMCO, OTPP, OMERS and CAAT Pension Plan put out statements supporting the Ontario Infrastructure Bank (read them here), but unless they address scalability and the governance is non reproachable, I don't see this going anywhere, much like the Canada Infrastructure Bank.
Lastly, I'm a bit surprised Doug Ford's government set up this Ontario Infrastructure Bank because it can blow up in their face, especially if they fund the wrong projects or if it turns out to be a big flop costing Ontario's taxpayers billions (not that Kathleen Wynne's corrupt government was any better).
What else? Sources have told me the Ford government is looking at the possibility of amalgamating Ontario's large pension funds/ plans to save on administrative and investment costs.
In effect, they're looking at creating an Ontario Investment Management Corporation modelled after BCI, CDPQ and AIMCo (where they merge plans, not just asset management).
Not sure this is possible or that it will be well received from plan members but it is being discussed at the highest level of Ontario's government and Ford isn't closed to the idea.
We shall see, I doubt they will amalgamate all these pension plans/ funds.
If you have anything to add, contact me at LKolivakis@gmail.com.
Below, the Ontario government is forecasting larger than anticipated deficits while also pledging to invest an additional $3 billion in a new “infrastructure bank” to help spur community development. Eight months after promising to balance the budget by 2025, the province is projecting a $5.6 billion deficit for 2023-24.
Also, as Ontario forecasts billion-dollar deficits, Finance Minister Bethlenfalvy shares his plan to tackle the province's challenges.You can listen to that interview here and read the CBC article here.
Minister Bethlenfalvy makes a lot of good points, let's hope this new Ontario Infrastructure Bank works out for the better and Ontario's large pensions invest in its projects and make great returns over the long run.
Update: Someone sent me this after reading my latest comment:
Hi Leo, today you mentioned this: "What else? Sources have told me the Ford government is looking at the possibility of amalgamating Ontario's large pension funds/ plans to save on administrative and investment costs. In effect, they're looking at creating an Ontario Investment Management Corporation modeled after BCI, CDPQ and AIMCo."
How is that any different than IMCO? But the Ford government doesn't seem to be all that supportive of IMCO. You wrote about this in 2012: http://pensionpulse.blogspot.com/2012/11/ontario-set-to- pool-pension-assets.html But maybe they mean going further and actually merging the plans, not just the asset management. BC did this and has BCI managing the investments, and the BC Pension corporation managing the administration side.
IMCO was specifically created to be the same as BCI or AIMCO. The blueprint was the Morneau report from 2012. But the Ontario government from 10 years ago didn't want to make it mandatory so they asked for plans to volunteer to join. So there is no need for IMCO to merge with other plans, the government just has to coerce these other plans to use IMCO for their asset management, not unlike how Alberta recently forced their Teachers plan to use AIMCO.The Morneau report called for OPB, WSIB, CAAT, OPSEU, OPG, Hydro One, university pension plans, the TTC plan, etc to all be part of one entity. The entity that they created to do that is IMCO. But IMCO is stuck with just WSIB and OPB as clients, with perhaps one or two smaller entities. If the Ontario government followed the initial plan then the University Pension Plan would not have hired its own investment staff, they would have outsourced investment management to IMCO. But the Ford government lost the will to do this, perhaps because they saw IMCO as being too closely aligned with the previous Ontario government and the Liberal party as Bert Clark was seen as a Liberal since his dad, Ed Clark, was a senior advisor to Kathleen Wynne. Ford fired David Leith, the first chair of IMCO, and the rumour is that he did that because Leith wouldn't fire Bert.Here is the table from the Morneau report of the plans that should be considered for consolidation. Since the AUM numbers are from 2011 they will be roughly twice as large today.
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