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Good times in Canada--high loonie, high oil, low unemployment -- shine a harsh light on Canada's decaying infrastructure. After decades of neglect, governments and private equity are now looking down the road to the next boom
Jacqueline Thorpe, Financial Post
Published: Saturday, November 10, 2007
Ileave Jordan, Ont., for the 100-kilometre trip east to Toronto one recent morning at 7:30 a.m. I pass new subdivisions that ring the west side of Lake Ontario like a giant barnacle. Twenty-five minutes into my drive through the Golden Horseshoe, I run into traffic at Burlington. It never lets up. I slow down, speed up, get cut off, swear at the moron in front of me. I cruise talk radio and resist the urge to check my BlackBerry. My blood just begins to boil amid the sheer tedium and inefficiency of what is for hundreds of thousands of Canadians a typical everyday morning commute.
Two hours and 15 minutes later -- at least twice as long as it should have taken me--I arrive at my office in north Toronto a frazzled mess.
Still, it could be a lot worse. Tragically, in September, 2006, an overpass crumpled, killing five people in Laval, Que. That accident crystallized what nerve-wracked drivers trying to negotiate the country's biggest cities have known for years: Canada's creaking infrastructure is in urgent need of an upgrade and, in the case of Quebec, can be downright unsafe.
Enter the private sector. While governments drove Canada's last major expansion of infrastructure from the 1950s to the 1980s, the next major overhaul will involve an enormous infusion of private cash, private brainpower and, in some cases, private ownership.
The huge demand for new roads, transit, ports, water systems and power is running headlong into a wall of money looking for a home, from giant pension funds like the Canada Pension Plan and oil-rich sovereign wealth funds like the Alberta Heritage Fund, to publicly traded firms like Brookfield Asset Management Inc. and the growing ranks of private equity and hedge funds.
"We kind of draw a comparison to what happened in the real estate market," Aaron Regent, managing partner and co-head of infrastructure activities at Brookfield, said at an infrastructure conference this week in Toronto. "If you look at the securitization of real estate, with the creation of the REIT [real estate investment trust]market, the market cap of REITs were about US$20-billion. Today that's worth about US$700-billion. If you look at the infrastructure market 20 years from now, it will be multiples of US$700-billion. It will be measured in the multiples of trillion ... about US$5-trillion to US$10-trillion will not be beyond the realm of possibility. That's what we find particularly attractive."
As the tech boom becomes a distant memory and the global residential real estate boom fades to black, the infrastructure boom will provide a new source of economic growth, new opportunities for investors and pose new challenges for both governments and voters over how far they are willing to open up public assets to private involvement.
Even Ontario-- still traumatized by its late-1990s Highway 407 private-sector experiment -- is spending $10-billion on some 35 hospitals under its "Alternative Financing and Procurement" program in the next few years.
The trend is firmly underway. "Few things could be growing as fast as this," says David Livingston, president and chief executive officer of Infrastructure Ontario, the crown corporation charged with making the projects a reality. "It's just sucking up people and money. It's quite unprecedented."
And overdue. Estimates of Canada's infrastructure gap (the difference between what is needed to bring services up to scratch and support growth and what is being spent) range from about $60-billion to $125-billion.
It was not always thus. Infrastructure spending actually outpaced GDP from about 1955 to 1985, but began to fall behind as the focus switched to social spending. It was among the first to get axed during Canada's big-deficit days. More recently, new money poured into health care.
Canada is not alone. The infrastructure demand is global as the need to renew the West's creaking public services collides with an insatiable appetite for new investment in emerging markets such as Brazil, India, China and Russia.
The United States, which wowed the world with the speedy development of its Interstate Highway System in the 1950s, this summer faced the tragedy of a bridge collapse in Minneapolis, Minn. It killed 13 and injured more than 100.
The American Society of Civil Engineers estimates it would take US$1.6-trillion over a five-year period to bring U.S. infrastructure into "good" condition.
In Canada, which has been blessed with an oil windfall in recent years, the money is beginning to flow. The federal government committed in June to invest $33-billion over the next seven years to renew public infrastructure under its Building Canada Plan. Ontario plans to spend $30-billion on its 2005-2010 ReNew Ontario program, while Quebec also has a five-year $30-billion plan. Other provinces are spending too.
With some of these federal and provincial amounts overlapping, the cash will only make a dent in a $60-billion gap, let alone $125-billion.
"That size of gap can't be bridged by any jurisdiction", said Saad Rafi, national infrastructure leader for Deloitte & Touche Canada, said at the Toronto infrastructure conference. That is why observers say private sector involvement is inevitable.
"It is inevitable because the need is so great and this ability to partner with the private sector is one of the few ways to get the badly needed revenues," said Bill Owens, former governor of Colorado and vice-chairman of RBS Greenwich Capital, whose parent company, Royal Bank of Scotland, is the biggest project financier in the world.
The private sector has cash waiting to be deployed.
Mr. Regent at Brookfield estimates about US$160-billionhas been raised globally in funds in the past 18 months specifically dedicated to infrastructure. And because infrastructure assets provide a steady stream of revenue over the long term -- the reason the private sector likes them -- they can afford a high degree of debt.
"So, you can lever this up by about three times," Mr. Regent told the conference. "So, in the last 18 months, approximately US$750-billion in purchasing power has been created in the marketplace." He adds the current goal among pension funds globally is to raise their "real asset" --infrastructure and real estate -- allocation to about 10% to 15% of their portfolios. Today, less than 6% is allocated to property and less than 1% dedicated to infrastructure.
"There has been a substantial amount of liquidity created to fund infrastructure assets and there's a substantial amount of pending liquidity," he said.
The only question now is how closely the public and the private sector want to tango and that usually depends on a jurisdiction's political point of view.
The range of partnerships can run from outright privatization to selling off long-term concessions (as is usual in toll roads such as Highway 407) to a design-build-finance-maintain (DFBM) project. Most fall under the broad umbrella of a public-private partnership (P).
Mr. Owens at RBS Greenwich says that in Colorado, half the state's prisons are now private. "We've privatized half our bus system in Denver," he added. The routes comes up for bid every three years. "The savings? Thirty-five per cent per vehicle passenger mile. The Denver bus system director used those savings to build an entire light railway line."
Recent large U.S. toll-road concessions include the Indiana Toll Road, leased to a private consortium for US$3.8-billion for 75 years and the Chicago Skyway, leased for US$1.8-billion.
Led by Britain, Europe has been doing P3s for years, while Canada and the United States have been straggling behind. But Canada is catching up fast, with several key transport P3s underway or completed in the last few years, including the Sea-to-Sky Highway in British Columbia and the Edmonton Ring Road.
Ontario, however has been reluctant to dip its toes back into the P3 waters after the Highway 407 controversy. Depending on who you ask, the toll road that bypasses Toronto either provides excellent value for money and is a pleasure to drive or a rip-off sold by the province for a song.
The Ontario Liberal government has expunged all traces of the word "private" from its P3 strategy, preferring to use the "Alternative Financing and Procurement" handle. Most of the focus so far under the DBFM model has been on hospitals. The private sector takes little equity and the province maintains ownership.
That is why big Canadian players like CPP and the Ontario Teachers' Pension Plan, which have become leaders in infrastructure around the world have so far invested little in their own country. They can't get enough equity. Ontario has also made it clear any form of privatization is off the table.
"If, in the end, these are assets that are designed to be for the public good then they should be controlled by the public and you don't need to have the thing transferred to have the private sector be involved so why confuse the issue?" Mr. Livingston said.
It will be interesting to see how Ontario handles its next major infrastructure push -- transport.
But with the wall of private money flowing into the sector and governments slowly opening their doors to it, you can be sure Wall Street and Bay Street will be trained on how to bring it home to a wider investing public-- after they dust themselves offfromthe creditmarketmess.
---
WHY PUBLIC/PRIVATE PARTNERSHIPS?
Let's say a government needs to spend $300-million on a new hospital. It puts out a tender for a design-build-finance-maintainance contract. The winning bidder puts up that money through to post construction. The government will pay them back on an annual basis over the term of the maintenance period which can run for any number of years; 25 to 30 is common.
Governments like it because it transfers the risk of getting the project built on time and on budget to the investor. It also allows them to do a large number of projects at once, as they don't have to make large initial outlays. Payments don't start flowing until the project is completed and can be adjusted to take account of the quality of the maintenance. Contracts can be detailed to ensure union employment for example. Investors, who are now taking on the risk, have an incentive to get the job done but they get paid to take on that risk, the cost of the project and for maintenance which becomes their profit.
They like the fact the payments are stable and long-term.
Jacqueline Thorpe, Financial Post
Published: Saturday, November 10, 2007
Ileave Jordan, Ont., for the 100-kilometre trip east to Toronto one recent morning at 7:30 a.m. I pass new subdivisions that ring the west side of Lake Ontario like a giant barnacle. Twenty-five minutes into my drive through the Golden Horseshoe, I run into traffic at Burlington. It never lets up. I slow down, speed up, get cut off, swear at the moron in front of me. I cruise talk radio and resist the urge to check my BlackBerry. My blood just begins to boil amid the sheer tedium and inefficiency of what is for hundreds of thousands of Canadians a typical everyday morning commute.
Two hours and 15 minutes later -- at least twice as long as it should have taken me--I arrive at my office in north Toronto a frazzled mess.
Still, it could be a lot worse. Tragically, in September, 2006, an overpass crumpled, killing five people in Laval, Que. That accident crystallized what nerve-wracked drivers trying to negotiate the country's biggest cities have known for years: Canada's creaking infrastructure is in urgent need of an upgrade and, in the case of Quebec, can be downright unsafe.
Enter the private sector. While governments drove Canada's last major expansion of infrastructure from the 1950s to the 1980s, the next major overhaul will involve an enormous infusion of private cash, private brainpower and, in some cases, private ownership.
The huge demand for new roads, transit, ports, water systems and power is running headlong into a wall of money looking for a home, from giant pension funds like the Canada Pension Plan and oil-rich sovereign wealth funds like the Alberta Heritage Fund, to publicly traded firms like Brookfield Asset Management Inc. and the growing ranks of private equity and hedge funds.
"We kind of draw a comparison to what happened in the real estate market," Aaron Regent, managing partner and co-head of infrastructure activities at Brookfield, said at an infrastructure conference this week in Toronto. "If you look at the securitization of real estate, with the creation of the REIT [real estate investment trust]market, the market cap of REITs were about US$20-billion. Today that's worth about US$700-billion. If you look at the infrastructure market 20 years from now, it will be multiples of US$700-billion. It will be measured in the multiples of trillion ... about US$5-trillion to US$10-trillion will not be beyond the realm of possibility. That's what we find particularly attractive."
As the tech boom becomes a distant memory and the global residential real estate boom fades to black, the infrastructure boom will provide a new source of economic growth, new opportunities for investors and pose new challenges for both governments and voters over how far they are willing to open up public assets to private involvement.
Even Ontario-- still traumatized by its late-1990s Highway 407 private-sector experiment -- is spending $10-billion on some 35 hospitals under its "Alternative Financing and Procurement" program in the next few years.
The trend is firmly underway. "Few things could be growing as fast as this," says David Livingston, president and chief executive officer of Infrastructure Ontario, the crown corporation charged with making the projects a reality. "It's just sucking up people and money. It's quite unprecedented."
And overdue. Estimates of Canada's infrastructure gap (the difference between what is needed to bring services up to scratch and support growth and what is being spent) range from about $60-billion to $125-billion.
It was not always thus. Infrastructure spending actually outpaced GDP from about 1955 to 1985, but began to fall behind as the focus switched to social spending. It was among the first to get axed during Canada's big-deficit days. More recently, new money poured into health care.
Canada is not alone. The infrastructure demand is global as the need to renew the West's creaking public services collides with an insatiable appetite for new investment in emerging markets such as Brazil, India, China and Russia.
The United States, which wowed the world with the speedy development of its Interstate Highway System in the 1950s, this summer faced the tragedy of a bridge collapse in Minneapolis, Minn. It killed 13 and injured more than 100.
The American Society of Civil Engineers estimates it would take US$1.6-trillion over a five-year period to bring U.S. infrastructure into "good" condition.
In Canada, which has been blessed with an oil windfall in recent years, the money is beginning to flow. The federal government committed in June to invest $33-billion over the next seven years to renew public infrastructure under its Building Canada Plan. Ontario plans to spend $30-billion on its 2005-2010 ReNew Ontario program, while Quebec also has a five-year $30-billion plan. Other provinces are spending too.
With some of these federal and provincial amounts overlapping, the cash will only make a dent in a $60-billion gap, let alone $125-billion.
"That size of gap can't be bridged by any jurisdiction", said Saad Rafi, national infrastructure leader for Deloitte & Touche Canada, said at the Toronto infrastructure conference. That is why observers say private sector involvement is inevitable.
"It is inevitable because the need is so great and this ability to partner with the private sector is one of the few ways to get the badly needed revenues," said Bill Owens, former governor of Colorado and vice-chairman of RBS Greenwich Capital, whose parent company, Royal Bank of Scotland, is the biggest project financier in the world.
The private sector has cash waiting to be deployed.
Mr. Regent at Brookfield estimates about US$160-billionhas been raised globally in funds in the past 18 months specifically dedicated to infrastructure. And because infrastructure assets provide a steady stream of revenue over the long term -- the reason the private sector likes them -- they can afford a high degree of debt.
"So, you can lever this up by about three times," Mr. Regent told the conference. "So, in the last 18 months, approximately US$750-billion in purchasing power has been created in the marketplace." He adds the current goal among pension funds globally is to raise their "real asset" --infrastructure and real estate -- allocation to about 10% to 15% of their portfolios. Today, less than 6% is allocated to property and less than 1% dedicated to infrastructure.
"There has been a substantial amount of liquidity created to fund infrastructure assets and there's a substantial amount of pending liquidity," he said.
The only question now is how closely the public and the private sector want to tango and that usually depends on a jurisdiction's political point of view.
The range of partnerships can run from outright privatization to selling off long-term concessions (as is usual in toll roads such as Highway 407) to a design-build-finance-maintain (DFBM) project. Most fall under the broad umbrella of a public-private partnership (P).
Mr. Owens at RBS Greenwich says that in Colorado, half the state's prisons are now private. "We've privatized half our bus system in Denver," he added. The routes comes up for bid every three years. "The savings? Thirty-five per cent per vehicle passenger mile. The Denver bus system director used those savings to build an entire light railway line."
Recent large U.S. toll-road concessions include the Indiana Toll Road, leased to a private consortium for US$3.8-billion for 75 years and the Chicago Skyway, leased for US$1.8-billion.
Led by Britain, Europe has been doing P3s for years, while Canada and the United States have been straggling behind. But Canada is catching up fast, with several key transport P3s underway or completed in the last few years, including the Sea-to-Sky Highway in British Columbia and the Edmonton Ring Road.
Ontario, however has been reluctant to dip its toes back into the P3 waters after the Highway 407 controversy. Depending on who you ask, the toll road that bypasses Toronto either provides excellent value for money and is a pleasure to drive or a rip-off sold by the province for a song.
The Ontario Liberal government has expunged all traces of the word "private" from its P3 strategy, preferring to use the "Alternative Financing and Procurement" handle. Most of the focus so far under the DBFM model has been on hospitals. The private sector takes little equity and the province maintains ownership.
That is why big Canadian players like CPP and the Ontario Teachers' Pension Plan, which have become leaders in infrastructure around the world have so far invested little in their own country. They can't get enough equity. Ontario has also made it clear any form of privatization is off the table.
"If, in the end, these are assets that are designed to be for the public good then they should be controlled by the public and you don't need to have the thing transferred to have the private sector be involved so why confuse the issue?" Mr. Livingston said.
It will be interesting to see how Ontario handles its next major infrastructure push -- transport.
But with the wall of private money flowing into the sector and governments slowly opening their doors to it, you can be sure Wall Street and Bay Street will be trained on how to bring it home to a wider investing public-- after they dust themselves offfromthe creditmarketmess.
---
WHY PUBLIC/PRIVATE PARTNERSHIPS?
Let's say a government needs to spend $300-million on a new hospital. It puts out a tender for a design-build-finance-maintainance contract. The winning bidder puts up that money through to post construction. The government will pay them back on an annual basis over the term of the maintenance period which can run for any number of years; 25 to 30 is common.
Governments like it because it transfers the risk of getting the project built on time and on budget to the investor. It also allows them to do a large number of projects at once, as they don't have to make large initial outlays. Payments don't start flowing until the project is completed and can be adjusted to take account of the quality of the maintenance. Contracts can be detailed to ensure union employment for example. Investors, who are now taking on the risk, have an incentive to get the job done but they get paid to take on that risk, the cost of the project and for maintenance which becomes their profit.
They like the fact the payments are stable and long-term.