Like some types of real estate (e.g., affordable housing), infrastructure — generally defined here as physical facilities that move people, goods and information, as well as energy, waste and water — has historically required some measure of government spending to be created or renewed. Unfortunately, fiscal constraints have limited public policy’s efforts in the 1990s, causing an investment shortfall estimated by the Federation of Canadian Municipalities (FCM) to stand at over $20 billion. There are potentially severe economic and social costs in this neglect, particularly in urban communities in the country. Considerable North American research studies have over the years attested to the contribution of core physical infrastructure to business growth, productivity gains and sustainable development, not to mention jobs associated with the planning, building, operation and maintenance of bridges, roads, sewers, water systems and other public works.
Apparent gaps in the financing of infrastructure investment has encouraged a search for alternative, private supply sources to tap into, such as pension funds and other institutional investors. In some cases, this has co-incided with expressions of pension fiduciary interest in the earnings and diversification potential of this new asset class, net of costs and risks similar to those intrinsic to real estate and other private capital markets. In the United States, the 1993 Commission to Promote Investment in America’s Infrastructure recommended that government actively facilitate the surmounting of pension barriers. This might include leveraging supply through the offer of direct and indirect subsidies or a focus on market development and efficiency issues, such as the provision of adequate numbers of specialized advisors and agents to investors. The AFL-CIO has made comparable proposals, including an ETI approach (see What’s an ETI?). The result has been some early American pension participation, especially among large public sector funds, utilizing both debt and equity financial instruments.
In Canada, large public sector pension funds are also seizing the initiative. In 1997, OMERS called for more national infrastructure revitalization based on new and strategic government-private sector partnerships. At the same time, OMERs determined to embark on its own infrastructure investment projects in Ontario municipalities and elsewhere, calculated to achieve high yields, chiefly through private equity financing, and according to conventional risk-reward criteria. The pension fund has set up an internal program for this purpose, CFMC Fund Management, which is presently investigating a range of deal options.
Infradev and other subsidiaries of the Caisse de dépôt have also started investing recently in Quebec infrastructure development, as well as in selected deals in Asian, European and Latin American locales. Some spending on infrastructure also occurs currently under the auspices of large-scale real estate deals, such as redevelopment of portside facilities (relevant to multiple forms of private and public transit) at Vancouver’s Canada Place, currently underway with the backing of pension-supplied Greystone Properties.
Sources: Bourgeois, Jean-Guy, Infrastructure, the Economy and Pension Funds, 1998; FCM, Rebuilding for a Competitive Canada, 1993; Mintz and Preston, Infrastructure and Competitiveness, Queen’s University, 1993; Richmond, Dale, Private Capital and Municipal Infrastructure: A Two-Way Street, OMERS, 1997
Though often described as an alternative or non-traditional asset class, real estate is a conventionally significant source of Canadian pension portfolio diversification away from more predominant allocations to stocks, bonds and cash. Despite its private capital market basis, a moderate amount of exposure to real estate has been regarded as prudent by most pension fiduciaries for several reasons.