Should Plan Sponsors Pay For Infrastructure?

Coverage of the Investment Innovation Conference

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story_images_steel_girderIn cities and towns across Canada, the need for new and better infrastructure – transit, roads, and public buildings – is growing rapidly. The question is – who is going to pay for it? While Canada’s infrastructure gap is expanding, pension funds have the capital to help bridge the gap, noted Philip Robson, president of the IAM Private Debt Group. His presentation, “Building the Bridge: Funding the Infrastructure Gap in Canada,” highlighted ways governments and pension funds can work together to fund infrastructure in the future.

There are compelling reasons to do so, he explained: post-2008, major traditional capital sources for funding infrastructure are drying up. Banks have been forced to curb lending in response to Basel III regulation, which eliminates new long tenor lending. The loss of such capital sources comes as infrastructure demand becomes a global issue. According to the Organization for Economic Co-operation and Development (OECD), 20-year global demand for infrastructure will cost in the range of US$50 to $870 trillion – in all, 3.5% of global GDP.

Made in Canada 

Robson explained that there is currently $2.5-$3 billion, annually, of infrastructure debt activity in Canada – not much when you consider that, globally, some 75% of institutional investors are either investing in or consider investing in alternatives, including debt. Infrastructure is part of their plans: total investment in the space is forecast to grow from $4 trillion per year in 2013 to $9 trillion in 2025, he said.

Robson urged plan sponsors to consider infrastructure investment because it generates predictable and substantial free cash flow over the long term, as well as solid risk-adjusted returns. Plan sponsors can also use it within their liability-driven investing strategies for duration matching, inflation hedging and volatility reduction.

“I think the case for infrastructure investment is clear,” he said. So why aren’t pension plans investing more in Canadian infrastructure? Delegates were encouraged to respond to this question during an interactive session. Barriers to investing noted by plan sponsors in attendance included difficulty accessing deals, costs, and staffing/internal resources. There were also questions around when it would be appropriate to outsource – and when doing so could create new problems.

Plan sponsors also raised the question of a disconnect between their fiduciary duty to plan members and investing in Canadian infrastructure. They noted that plans sponsors are obligated maximize returns for beneficiaries, forcing them to consider investments outside of Canada. Such opportunities could be more compelling for their needs – and it could pull them away from considering Canadian infrastructure and playing a role in bridging the gap.

Robson also raised the issue of fees as an important consideration for investors. “Are you being charged private-equity type fees to get bond-like returns in the current market?” he asked. Overall, he highlighted that pension plans have the capital for these investments, but there are various reasons many plans are not making Canadian infrastructure investment. So how can pension plans bridge this gap? The key will be creating a larger conversation between plan sponsors and governments about making infrastructure more attractive from an investor’s perspective.

Infrastructure chart 2

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