Much to play for

It may not be a big enough playground for some investors, but opportunities continue to fl ow in Canada for those who like their deals modestly sized. Joel Kranc met with six infrastructure professionals in Toronto to get their thoughts on what’s coming through the pipeline in one of the world’s most advanced PPP markets

CANADA, HAVING ADOPTED a P3 (public-private partnership) model for infrastructure investing from places like the UK and Australia, has moulded and shaped the model in a uniquely Canadian way [for one thing, it seems to prefer the ‘P3’ abbreviation to the ‘PPP’ commonly used elsewhere]. This has stood it in good stead. Despite the worst credit crisis seen in a generation and the potential for investment to decline, the Canadian infrastructure space continues to see new deals come online – with potential for new and varied markets to be developed in future.

Hence, it is with a sense of optimism that six Canadian infrastructure professionals gather in mid-January at the Hazelton Hotel in Toronto: Bruce Hogg, vice president of infrastructure, private investments at the Canada Pension Plan Investment Board; John McBride, chief executive offi cer at government corporation PPP Canada; Jeff Mouland, executive director and head of infrastructure
at Greystone Managed Investments; Alina Osorio, chief executive officer of Aquila Infrastructure Management; David Vickerman, managing director and head of global infrastructure investments at
Scotia Capital; and Craig Walter, partner at KPMG Advisory Services.

“At the macro level, Canada is a great place for infrastructure investment and private sector investment as well,” says PPP Canada’s McBride. “In terms of P3s,” he adds, “Canada is certainly recognised as the leading place for P3s globally and [that] will continue to be based on a strong pipeline of projects at the provincial level. I think what we will see in the year ahead is adoption of that by the federal government and increasingly at the municipal level as well.”

Beyond the continuing pipeline of P3 projects in sectors such as healthcare, roads and justice systems, McBride says the space will broaden out to encompass areas such as water, waste water and rapid transit, which will likely increase in the coming years.

Aquila’s Osorio agrees and says that Canada has been a vibrant and welcoming environment for infrastructure investing. “If you look at some of the European countries that have really adopted
private sector fi nance, it’s been in things like airports, roads and electricity networks. I think it’s fair to say that Canada very much dominates infrastructure in the private finance world through the P3 mechanism. We are encouraged to see the P3 model of procurement be applied to other sectors in this country like water and transportation.”

Adds Osorio: “I think we are still looking towards the electricity sector and seeing if and when that is to open up. We encourage the ongoing penetration of the model into a broader sectoral base.”


However, the Canadian infrastructure marketplace is not without its challenges. One of the greatest of these going forward is meeting the needs of Canadian society and ensuring dollars are spent in the right areas. Greystone’s Mouland says Canada still finds itself faced with an infrastructure deficit.

“There are many sectors that require renewal and new build within Canada,” notes Mouland. “We are well capitalised from a debt and equity perspective and the Canadian P3 model, relative to many other countries, does provide clarity and a transparent structure that investors are comfortable with. However, we shouldn’t forget that the opportunity set extends beyond what is
captured in the P3 model and with increasing needs within the energy and utilities sectors, I would anticipate increasing opportunities for infrastructure and pension funds to deploy larger equity cheques than are normally associated with the P3 market.”

Osorio adds one challenge facing government is in the area of substantial completion payments [a form of milestone payment from the government to help projects faced with difficult market conditions]. “There was the need for substantial completion in some projects to get them through the financial crisis but we don’t believe that need is still there and to some extent we believe that
the involvement of the substantial completion payments skews the risk/reward balance for both debt and equity capital,” she adds.

McBride points to the challenge around getting people to understand the P3 model. He says: “The
challenge is to educate government decision makers about infrastructure investing to break down the myths about P3s. This means both educating supporters that private investment requires a return either from users of the infrastructure or governments, and detractors that P3s are not privatisation and involve strong performance based accountability.”


Although P3 infrastructure projects in Canada started more as a form of stimulus during the financial crisis of 2008-09, there are still an abundance of areas untapped that will likely be a focus for investors in the coming years.

Interestingly, one of the larger recent projects related to infrastructure and P3 investing was in the healthcare sector. Osorio notes that the building of the Montreal University Hospital produced a relatively large bond offering which Canadian capital markets proved themselves very able to digest.

Also, according to McBride, the Ottawa Light Rapid Transit Line is another “bellwether”, given that it is a project of significant size being undertaken by a municipality.

Walter of KPMG adds: “We should see some of the larger renewable energy projects, most notably in Ontario, approaching financial close in late 2012. Those are some of the bigger cheques that, not just the Canadian financial community, but the global investment community, has been looking for.”

But Scotia Capital’s David Vickerman says there is a ‘wait and see’ attitude in the Ontario renewable energy sector while the Ontario Power Authority conducts its review.

“On the renewable side in Ontario, of the ‘ground mount’ solar PV projects that have been awarded FIT (Feed-in Tariff) contracts, a very small percentage has been built. Thus, market participants will watch closely to see how this plays out, especially given the current review process. Further, in the secondary market there are a few portfolios for sale and I think we’ll see who they get sold to as an actual bellwether to understand what types of investors are most interested in these assets.”

“Our thesis,” notes Osorio, “is that a lot of the power assets will need significant renewal in the next few years – maybe not in the next two years but certainly in the next 10-plus years, whether it’s
generation or transmission.”

Mouland agrees and says while people are focused on the pipeline of P3 projects, there is realisable potential in the domestic energy sector.


Despite having a robust market, Canada is still seen as relatively small by larger investors seeking infrastructure plays. Bruce Hogg of the Canada Pension Plan Investment Board (CPPIB) says he does not yet see a need for large investors in the Canadian market (although a few exceptions crop up, such as the 407 ETR highway north of Toronto where the CPPIB recently acquired a 40 percent
stake before syndicating to primarily Canadian institutions).

“It is a fairly healthy and robust market in Canada,” says Hogg. “In terms of attracting the international players and the large construction firms, they are here. However, in terms of needing large equity players, substantial completion payments create a situation where there is not a substantial amount of equity required and PPPs haven’t yet been broadened to areas which require
a greater equity portion in the capital structure.

He adds: “Without that next step it’s unlikely to be in a place where it makes sense for people like us to be active in Canada. There have been few projects of scale for us in Canada but, as a practical matter, things are getting built and developed so you don’t need us at this stage. But people have the experience so if it broadens to that, we and others will be there.”

Hogg adds that scale at the municipal level is also too small for large institutional investors within Canada. “But,” he adds, “there are sufficient players in Canada at the smaller end plus the construction companies themselves that seem to fill that gap right now.”

“That’s the ironic aspect of Canada,” stresses Mouland. “We have a strong understanding of the asset classes, execution capacity and significant domestic equity sources. Yet, from a deal sourcing
perspective, many funds are looking outside of our borders to deploy capital since the amount, value and return proposition often allows more efficient use of a fund’s capital and resources.

From a credit discipline perspective, you are going to do the same degree of due diligence on a $30 million deal as you are going to do on a $500 million deal, thus the larger international deal will often take precedence.”

Scotia’s Vickerman agrees and says P3 and infrastructure generally in Canada will attract the small and mid-size investors.

“They’re watching the large Canadian pension funds do large transactions in infrastructure – and want to replicate exposure to the asset class as they understand the benefi ts from a fundamental point of view. There is a gap whereby these smaller transactions do not attract the bigger players
but you have a pool of capital from smaller funds looking for transactions in that space but lacking the direct experience. They will need to work with infrastructure funds for their exposure.”

Hogg adds that user-pay models may start to play a larger role in municipal infrastructure projects. “Are people willing to move to user-pay models which will broader the revenue support base and which will result in more projects getting done?” he ponders.

Mouland says: “One of the challenges at the municipal level is if you get involved in water and waste water there can be potential public opposition, despite the underlying need. The ability of a private investor and operators to implement user-fee charges for an asset class that is
traditionally not subject to such costs can be sensitive. Implementing improvements
in areas such as roads and bridges, there is more of an historical public acceptance of
fee-based structures.”


The crisis in the Eurozone and financial volatility worldwide is undoubtedly having an impact on the financing of deals in Canada. However, while financing has dried up from foreign sources, a Canadian solution is slowly becoming a viable option to help fill the gap.

Says Walter: “In the renewable energy space a lot of the debt capital has come from Europe historically and we are seeing some of those sources dry up. There has also been with that a commensurate change in mood with Canadian financial institutions getting more and more comfortable with the renewable space and seeing solar and wind as an infrastructure asset rather than, say, a technology risk.”

Scotia’s Vickerman raises a caveat by saying that Canadian financial institutions are looking at it but perhaps are not there yet. “They have made some progress in the last 12 to 18 months at the same time as you are seeing signs of a pull-back from the Europeans who have historically
participated in that space.”

Hogg says “it won’t be what it was” in terms of fi nancing from Europe but “we have a very deep capital market and, relative to the market, that removal of capital is being filled by Canadian institutions who are very well placed.”

However, Hogg agrees with other roundtable participants that Canadian banks are not replacing European banks for longer tenors. There are two opposing forces at work, according to Osorio. The issues in Europe have made people think about the inherent risk in equity and there has been, to a degree, a re-pricing of risk. “We are seeing transactions more representative of the risk/return that they bear and we welcome that because we felt assets were being valued at levels that did not reflect the risk of the underlying asset. On the flipside, we are importing a lot of expertise and
knowledge in this country because we have been seen as a safe haven globally and so we find the Canadian market very competitive.”

But economic volatility could be a good thing for the infrastructure asset class in the right circumstances.

“The volatility created because of the crisis in the Eurozone has increased interest from a wider audience of longterm investors,” adds Vickerman. “Pension plans and institutional investors are more interested in the infrastructure asset class as a way to diversify away from public markets so we’ve certainly seen more people interested because of what’s happened in

Compared with the US, Canada’s reputation in the infrastructure and P3 space has grown exponentially over the last few years. Says Mouland: “South of the border there is real risk of execution, but one thing we can say here in Canada is that once the process starts there is a high
degree of certainty that the transaction will be completed.”

McBride adds that Canada is doing things correctly. “When you look at international comparisons, the driving force behind P3s is not always for the right reasons, for example balance sheet
treatment. The drivers should be what approach produces the best value for taxpayers. Also, the depth and quality of the credit market in Canada is a major asset for Canada.”

McBride adds that consideration of the merits of the P3 is no longer an ideological debate in Canada. It is simply seen as one of the tools in the investment tool kit for certain types of
infrastructure projects.


Certainly there has been interest in the bond market for infrastructure investors but, for the most part, the largest pension funds have not played a big role.

Vickerman says pension funds could play in that sector, however “there are several other players effectively prepared to take a different level of return and [who] have been active in the deals.”

As for infrastructure debt funds in Canada, Osorio says there are three basic reasons why they should work: diversification, access and having a manager with expertise to evaluate bond offerings and different projects. “Having that intermediary, even though you may get some of that through the rating process, is, in our view, a rationale for debt funds.”

Vickerman says the advantage of such a fund will depend on the fees and is a matter of how efficiently the fund is set up both for the manager and the investor. “My concern is that you are limiting the scope in a Canadian-only debt fund structure which may limit how much investor interest is generated.”

Walter says the mandate of many investors is global and Canada is just one destination on the map. “It’s not just possible to focus exclusively on Canada, you have to be looking at multiple
jurisdictions,” he adds.

Overall, roundtable participants agree that Canada, despite its small size, still manages to produce a wealth of infrastructure investment opportunities for mid- and small-sized investors based
in Canada and around the world. Municipalities, ‘first nations’ projects and a focus away from traditional roads, bridges and hospitals are allowing new players to continue the momentum of
infrastructure investing in Canada.