Fair Play
Securitizing infrastructure gives individual investors a chance

By William B.P. Robson, president and chief executive officer, C.D. Howe Institute

Infrastructure is a key asset class for pension savers. Investments such as toll bridges in politically and economically stable jurisdictions provide long-term cash flows that are likely to grow with real income and inflation. They are not only good for the large pension plans that are now increasing their exposure to these assets, but they would also be good for individuals saving in RRSPs.

Canada, moreover, has huge infrastructure needs. The useful lives of such engineering assets as roads, bridges, wastewater treatment and sewers have declined markedly over the past 30 years. Expanding and maintaining a stock of state-owned assets now approaching $200 billion in value will be very hard for governments that face ongoing demands for current expenditures on income support, healthcare and education.

At the same time, Canadians are generating a massive wave of saving, fixing funding gaps in many defined benefit plans and building their nest eggs. This saving has supported net investment abroad of more than $30 billion annually since 2004, including some headline-making investments by Canadian pension funds in foreign infrastructure. So why do we not fund more of our domestic infrastructure needs with domestic saving?

One key obstacle is political: resistance to private participation in infrastructure projects on the part of government worker unions and much of the public. Another is that infrastructure stakes tend to be large and illiquid, so small investors have few ways to get a piece of the action.

These obstacles raise a number of concerns. The non-level playing field between pension-plan members, most of whom are in the public sector, and small private sector savers may fuel pension envy as baby boomer government workers begin to retire in force. The lack of liquid markets for infrastructure assets not only makes them harder to trade, but also impedes price discovery – not a healthy situation in a market economy, and especially troubling in the pension field. A particular price that would be good to have, moreover, is the premium that would attach to political risk – in jurisdictions such as Ontario, where the Highway 407 episode cast a pall over private participation, appropriate yield premiums might unfreeze the market, and let more projects proceed.

Securitizing infrastructure investments could address a number of these problems. The techniques required to do so are not mysterious: securities backed by real property that is hard to buy and sell on its own have become common in real estate, leasing, and mortgages. Securities backed by infrastructure portfolios, with adjustments to ensure a good mix of credit quality among the available units, would create a potentially huge new class of assets for Canadian savers.

The access that securitization would give individual investors to infrastructure assets, with appropriate diversification and risk-tranching benefits, would be one key advantage. So would enhanced price-discovery – which would be good for the market generally, and also a key long-term benefit for pension funds, which have agency problems that make nontransparency problematic. It would not only be governments looking for attractive funding terms that would benefit from robust retail demand – so too would initial investors, who would have new resale and exit opportunities.

Finally, and perhaps most importantly, securitized infrastructure might be more politically palatable. Privatizations always work better when individual workers and other stakeholders can get a piece of the action. Public-private partnerships are less congenial when the private investor is a large, faceless capitalist – and a government-worker pension plan is no better placed in this regard. Myriad small investors, who can hold bits of the roads and bridges they drive on every day and bits of the plants that clean the water they drink, in their RRSPs are a different and much happier story.

Securitizing infrastructure offers a number of business and public policy benefits. It would bring smaller investors into the picture. It would bring more liquidity and price-discovery to a market that needs it. It would offer attractive financing terms and gains on exit to early investors. And it would help overcome political resistance. All these benefits would help close the gap between Canadians looking for good retirement incomes and Canada’s growing infrastructure needs – a match of saving and investment that would benefit the whole country.