Canada Opens Door to Airport Privatization, Sparking Pension Interest
Canada’s airports are valued in the billions and generate over $120bn in annual economic output, supporting nearly 436,000 jobs.
According to the Financial Post, the federal government is now signaling openness to privatization and new private-sector partnerships, which may soon lead to a dramatic shift in airport ownership and investment opportunities.
The latest federal budget, the first from Prime Minister Mark Carney, states that the government will “consider options for the privatization of airports” and explore “new ways to attract private sector investment,” as reported by the Financial Post.
This move is part of a broader strategy to unlock more economic potential from Canada’s airports and to jump-start private investment in nation-building infrastructure projects.
The government’s initial steps include negotiating lease extensions with not-for-profit airport authorities, enabling more economic development on airport lands, and reviewing ground lease rent formulas.
The groundwork for these initiatives was laid in the previous government’s economic update, which appointed former Bank of Canada governor Stephen Poloz to lead a task force focused on boosting domestic investment by large pension funds.
However, as per the Financial Post, earlier policy statements had stopped short of explicitly endorsing privatization, despite previous studies and reports, such as the 2016 Credit Suisse valuation commissioned by the Trudeau government.
Industry experts see renewed potential in this approach.
“It’s encouraging that the government is open to airport privatization, as private investors, including Canadian pension funds, can provide the capital needed for airport improvements and expansions,” said Andras Vlaszak, director in global infrastructure advisory at KPMG Canada, as cited by the Financial Post.
Vlaszak noted that such a move could allow the government to recycle capital into higher-growth projects.
The government has also committed to direct investment in airport infrastructure, allocating $55.2m over four years, plus $15.7m ongoing, to support safety-related projects at local and regional airports, according to the Financial Post.
This funding, delivered through the Airports Capital Assistance Program, includes a priority runway extension at the Îles-de-la-Madeleine Airport.
Despite these efforts, private investment in airport development has so far been muted.
In March, Transport Canada outlined ways for private investors to participate in airport land development, such as commercial subleases and minority stakes in share-capital subsidiaries.
Some pension officials view these measures as positive, but others maintain that only a controlling stake would meet their investment criteria.
Canadian pension funds, including the Ontario Teachers’ Pension Plan Board, the Caisse de dépôt et placement du Québec, and PSP Investments, have a history of investing in international airports and have expressed interest in expanding their domestic infrastructure portfolios, as reported by the Financial Post.
The evolving landscape for Canadian airports comes at a time when trade diversification and new economic realities are reshaping the country’s infrastructure needs.
As noted by the Financial Post, airports are central to Canada’s growth and trade diversification, and the current environment presents significant opportunities for institutional investors to play a pivotal role in the sector’s future.
So, will the federal government finally privatize Canadian airports allowing Canada's large pension funds to invest?
I hope so and have been openly advocating for doing so but some experts have contacted me privately telling me they're not convinced it's going to happen.
Why? Basically airports are cash cows for the federal government, generating huge revenues every year and they have hardly invested in them over the last ten years (never mind the REM extension at Montreal's airport).
One expert shared this with me:
From the government perspective, airports are a very lucrative perpetuity. It’s guaranteed revenues with 0 expense. The government made very little investment in the 1930, 40’s and some in the 50’s, bar YMX in the 70’s. Then all the improvements were done by LAA’s (local airport authorities) since 1992, still the government is cashing 12% on gross revenue. What’s the value of that, no cash down, no debt, no improvement cost and $0.12 for every dollar of airport revenue. And on top of this, assets have to be maintained at state of the art standard. The plus value is through the roof when you look at the investments made in YVR, YYC, YEG, YYZ,YUL and smaller airports.
If this expert's figures and assertions are right, it helps explain the reluctance of the federal government to partially or fully privatize airports.
Still, my argument is if the government knows how much revenues airports are generating, it can easily ascribe a value to those future cash flows and sign a super long-term lease with pension funds to control them.
Of course, in a fair and transparent bidding process, it would need to open this up to international funds as well and that can create political backlash.
There are many details to be ironed out before the federal government can move forward to privatizing airports, and as the article states pension funds prefer controlling interests.
And our airports might generate a lot of revenues but they're not in good shape.
Take Montreal's Trudeau airport, it's a complete embarrassment.
One expert shared this:
YUL is indeed a shamble because improvements have been reduced to minimum and judged too expensive, now, no matter how rich any investor is, rebuilding YUL to be an airport again will take years and years, because the magnitude of the project is overwhelming…. Ground side access plans were drawn in the early 2000 and kept on being postponed and postponed. Soon enough, ground side improvement is going to be like LHR R3
I agree, I'd shut down Montreal's airport and build residential housing there and I'd move to reopen Mirabel airport. Unfortunately, it's too late, and I fear we we are stuck with this abomination of an airport for better or for worse.
Running airports is no easy business, Canadian pension funds use an operating company to do it for them and their investment in airports is only as good as the expertise in those operating companies.
For example, one expert shared this with me on PSP and its airports operator, Avi Alliance:
The platform PSP has in place means that PSP is the financial partner and Avi Alliance is the operating partner. PSP can appoint board members but these board appointments are external experts because PSP doesn’t have the knowledge in house. The problem with these platforms is that they work just fine as long as additional capital is allocated over time. A maturing plan and/or other asset allocation decisions lead to friction as a partner like Avi Alliance would like to continue to grow. Infrastructure is still in demand but I have seen this happening with other platforms. I am not sure whether the government thinks about this, but perhaps they should. By the way, I am not saying that the pension funds should not take over these assets; quite the opposite, these brownfield assets fit their mandate well.
Lots of great insights surrounding this discussion and I look forward to seeing if the federal government does move ahead to finally partially or fully privatize airports.
I remain hopeful but skeptical and need to see the details in writing.
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