Dominique Gautier is a senior partner at Roland Berger Canada and a global lead in the Public Sector practice.
Canada ranks 23rd in the world in terms of the quality of its infrastructure network with nearly 20 per cent of its buildings and transportation infrastructure in critical condition, according to the World Economic Forum.
This situation not only reduces the growth potential for the Canadian economy but also increases maintenance spending which, in our experience, can be more than 20 per cent higher for older assets. In this context, there is an urgent need to reinvent the Canadian infrastructure development model.
In response to this challenge, the Canadian government has launched a comprehensive plan to invest in infrastructure leveraging it to foster competitiveness and growth. The federal government has announced investments totalling about $185-billion by 2028, the lion's share of which will be dedicated to urban transportation ($29-billion) and renewable energy ($27-billion). Other measures proposed by the federal government include the creation of an infrastructure bank, with $35-billion in investment capital from the federal government, and the possibility of launching privatization programs. In line with federal plans, provinces are also expected to increase their infrastructure spending over the next five years. Quebec and Ontario have announced plans for yearly increases of 5 per cent and 12 per cent, respectively.
In our view, however, the most critical component of this plan is the federal government's ambition to involve major Canadian institutional investors in the roll-out. In the context of today's intervention model (pure investment), it is unclear what would prompt long-term investors to want to focus on Canadian infrastructure.
The 10 largest Canadian pension funds hold 8 per cent ($102-billion) of their assets in infrastructure investments – one percentage point higher than the world average. While this is a positive indicator, it is important to notice that their portfolios are primarily composed of brownfield assets (projects that are already in operation) outside of Canada.
This investment approach is not surprising and is consistent with the risk-return profile required of pension funds and other institutional investors. Risk levels for brownfield projects are lower than for greenfield (new) projects while yields in developing countries are higher, on average.
For example, in the transportation sector, internal rates of return are sometimes twice as high in developing countries with returns of 18 per cent to 20 per cent, compared with 10 per cent to 12 per cent.
There is a need in Canada to create new intervention models to encourage institutional investors to be more prone to invest in Canadian infrastructure. These new intervention models can take on three different directions.
Secure the risk/return profile early on by becoming involved in the strategic choices of the infrastructure solutions to be developed:
The Caisse de dépôt et placement du Québec (CDPQ) has initiated this movement by creating CDPQ Infra, a subsidiary that can act as owner-operator of certain infrastructure projects. This new division will support the growth of its infrastructure portfolio, today at 5 per cent of total assets ($15-billion), by increasing the number of projects in collaboration with the Quebec government and by assuming responsibility along the entire process of infrastructure development, from planning and financing to execution and maintenance. The Réseau electrique métropolitain (REM) rapid transit project in the Montreal region is an ambitious example that still needs to be proved successful.
Take positions in assets that have good long-term potential in breakthrough technologies:
Most large infrastructure projects, whether in renewable energy, inter-/intra-city transportation or electric mobility, are expected to create fundamental disruptions. These projects are in line with the ambitions of certain pension funds aiming to identify long-term challenges and to create tomorrow's industry leaders. Such an approach would enable generation of interesting returns in segments of the economy where there will be a strong first-mover advantage.
Invest in projects with a strong social responsibility component:
Responsible investing has become a strong differentiation factor for some large pension funds, such as APG in the Netherlands ($455-billion [U.S.] in assets). Investing in infrastructure projects having a strong social responsibility (ESG) component should become a strong strategic lever for Canadian institutional investors. Companies implementing good governance have historically performed progressively better than others. Those who will integrate these factors are expected to ultimately create additional value, in line with the return requirements and the sustainable development needs of their stakeholders.
We believe that, if given the opportunity to co-create new intervention models, institutional investors will be more prone to invest in Canadian infrastructure.