New and Improved: How to Bring Institutional Investment into Public Infrastructure

Canadian governments are on the verge of the largest infrastructure spending increases in decades. The challenge for policymakers at all levels of governments is to decide whether they should seek more private funding. Canadian institutional investors – notably the seven largest Canadian public pension plans as well as global investors – are looking to participate in new user-fee-supported infrastructure: both in existing assets and in new projects. To provide Canadian retirees with the best possible returns, Canada’s largest pension plans have invested $87 billion of their $1 trillion-plus in assets in infrastructure, but mostly abroad. Meanwhile, Canadian and foreign institutional investors such as pension funds and insurance companies would likely place a high value on Canadian user-fee financed infrastructure, but Canadian governments have opened few opportunities for such investment. Indeed, this Commentary argues that government ownership of infrastructure has led to inefficient management, poor project selection, and higher risks on taxpayers disguised by low government borrowing costs. To provide opportunities for investors to meet beneficiaries’ needs through financing infrastructure, Canadian governments should create policies that support institutional investment in both existing assets and for new infrastructure. Existing government-owned, user-fee-financed assets offer the greatest potential for government revenue from asset sales, including partial sales in which governments retain economic control. Governments could use the proceeds from such institutional investment to fund new infrastructure – particularly social-service infrastructure like schools and hospitals and other non-fully-self-financing infrastructure – alongside institutional investors. Taxpayers would benefit from better use of existing assets, as would users of more efficient infrastructure. The federal government recently announced plans to create an infrastructure bank that it would initially bankroll, but with a mandate to foster institutional investment capital for new public infrastructure. It is critical that Ottawa get right the design details of such a bank as well as other related institutions. There are differences between private investment in new versus existing infrastructure. But many policy issues are the same. In addition to an infrastructure bank, Canadian governments should take the following steps to encourage more institutional infrastructure investment: • where necessary, create independent regulatory bodies to oversee infrastructure assets that ensure their owners, either government-owned corporations or institutional investors, act in the public interest ahead of private profit and for long-term sustainability; • open infrastructure investment opportunities to the highest bidder among domestic or foreign investors and do not require any provincial or federal pension funds to invest. This requires the federal government to have expertise it can lend to smaller communities on business cases for institutional investors; • seek out opportunities to “recycle” user-fee financed assets at their maximum value to taxpayers or allocate contracts to operate new non-full-user fee assets that provide the highest savings or cost-avoidance; and • provide financial encouragement to provincial and municipal governments to work with the federal infrastructure bank since they own the vast majority of existing and potential user-fee financed infrastructure of interest to institutional investors.