January 27, 2005

Shortage of opportunities at home

Pension plan board pumps $470M into European infrastructure funds

TORONTO

The Canada Pension Plan Investment Board bemoaned a shortage of opportunities at home Monday as it announced plans to spend $470 million on infrastructure projects half a world away.

The board said it has committed 200 million euros to the Macquarie European Infrastructure Fund, which invests in European utilities, railways, airports, toll roads and other assets — low-risk, long-term opportunities tailor-made for the CPP.

“Infrastructure, which is a relatively new asset class for us, has higher expected returns than bonds and is a good hedge against inflation,” said David Denison, who took over last week as the board’s president and chief executive.

“This is the type of regulated asset we are ideally looking for and are disappointed that there are so few domestic opportunities that meet our investment criteria.”

It’s be-coming a familiar refrain: pension fund managers making pointed statements about how few investment opportunities there are in Canada’s public sector despite persistent warnings about the country’s disintegrating infrastructure.

‘This is the type of regulated asset we are ideally looking for and are disappointed that there are so few domestic opportunities that meet our investment criteria’

David Denison

Last August, when the Ontario Teachers’ Pension Plan revealed it was part of a consortium planning to invest in gas distribution networks in Scotland, vice-president investments Robert Bertram admitted the fund was forced to look outside of Canada “because that’s where we are finding good opportunities.”

Teachers spokeswoman Lee Fullerton said the Scottish regulatory environment was far friendlier to institutional investors than anything Canada can offer.

“They have the experience, they have a regulator there who works closely with investors, and they found that there was an openness for private investment, along with a regulatory environment that supported it,” she said.

“We don’t have that here yet.”

The $79-billion teachers fund invests pension earnings on behalf of 252,000 retired and active teachers in Ontario.

The CPP commitments announced Monday raise the fund’s infrastructure commitments to $670 million; it entrusted $200 million last year to Macquarie Essential Assets Partnership, which invests in North American assets.

The CPP Investment Board held $75.2 billion in its reserve fund at Sept. 30 — $35.6 billion in bonds and money market securities, and $39.6 billion in stocks, private companies, property and infrastructure.

The CPP board is also investing 66 million pounds in the Wales & West natural gas distribution network in Wales and southwest England.

‘The government people aren’t always as sophisticated about these things as are the private- sector guys they’re negotiating with’

Alex Murphy

Proponents of public-private partnerships, or P3s, say Canada doesn’t have the economic regulatory framework to make such investments attractive, and therefore has few projects worth investing in.

“The projects do not exist in this country; that’s the problem,” said Jane Peatch, executive director of the Canadian Council for Public-Private Partnerships. “There are just no opportunities here of any kind.”

Peatch pointed to the chaos that erupted Sunday in Toronto — a broken water main flooded a transfer station, knocking out power to much of the downtown core — as an example of what Canadians may have to get used to in coming years.

“Governments have got to get their heads around this,” she said.

“There is not a day in the foreseeable future that we’ll have more public money to spend, and all of these pension funds are lined up and ready to put money in Canadian infrastructure once those structures exist to do so.”

Peatch said pension managers love P3s because they’re stable investments with a respectable upside that usually involve 25 or 30-year terms — perfect timing to avoid impairing pension payouts.

“They understand this is a perfect match for their money,” she said. “More importantly, from a public policy perspective, a lot of that pension money comes out of public sector jobs, so reinvest it into the community that funded it in the first place.”

Opponents of P3s, however, portray the partnerships as the leading edge of a push towards privatization, making them a political liability — the last thing a pension fund manager is interested in putting money in.

Governments are also wary of being stung, said Alex Murphy, a Toronto strategic consultant who’s advised provincial governments and pension funds alike on P3 deals.

“The guys have gotten a little greedy on the private-sector side, and the governments have all backed away,” he said.

“I think there’s an issue of what governments expect out of these public-private partnerships. The government people aren’t always as sophisticated about these things as are the private-sector guys they’re negotiating with.”

The Canadian Press

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