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Canada Looks at Changing Pension Investing Rules to Promote "Asset Recycling"
In the pension investing context, “asset recycling” refers to a policy where a particular level of government sells off to investors some portion of a publicly-held infrastructure asset (e.g., a toll road, a harbor or port, an airport) with an associated income stream attached, and then uses the proceeds to invest in additional needed infrastructure.
By: Neil HrabThink of the word “recycling” and what probably comes to mind is the blue bin you use to collect papers and soda cans. In the pension investing context, “asset recycling” refers to a policy where a particular level of government sells off to investors some portion of a publicly-held infrastructure asset (e.g., a toll road, a harbor or port, an airport) with an associated income stream attached, and then uses the proceeds to invest in additional needed infrastructure.
The World Bank, for example, has advanced the strategy as a way for cash-strapped governments at the national, state/provincial and even local levels around the world to finance new or improved infrastructure.
The idea has been received skeptically by labor stakeholders in many jurisdictions, understandably concerned about the implications of public assets moving into private hands.
So far, one of the world's largest-scale “laboratories” for asset recycling has been Australia, with Canadian pension investors like OMERS and Caisse de dépôt et placement du Québec (CDPQ) in recent years eagerly buying stakes in Australian ports and electricity transmission assets. The Canadians get to apply their recognized expertise in infrastructure investments to the stewardship of these key assets, while the Australians get Canadian cash for improvements to existing infrastructure. The Aussies probably are also grateful that these key assets are in the hands of pension investors located in a friendly country.
And now, the Canadian federal government is looking at taking some initial steps on its own “asset recycling” plan -- but without directly using that term.
Ottawa has as of mid-December announced two asset recycling-related measures involving potential pension investments. In introducing these two potential rule changes (which were part of a broader set of pension investing rule amendments), a Canadian government spokesperson said: “Canada needs to fight harder than ever for capital, including facilitating and supporting the investment of Canadian capital here at home. This is key to the future prosperity of all Canadians.”
The first intended rule change will see Canada's federal government work with Canada's airports and pension funds to find ways to facilitate pension investments in these busy travel hubs. This will, the government says, include “potential changes to airport authority ground leases,” perhaps a nod to allowing real estate development on airport lands including hotels and convention centers – or perhaps warehousing. The large Canadian pensions are well-known for their airport investments around the world, from the UK to New Zealand to India.
There has been an on-again, off-again discussion of the merits of private sector or pension investments in Canadian airports since 2016. The last time the idea was floated, the general reaction from many stakeholders was very hostile; and the Great Canadian Airport Sweepstakes quickly sank without a trace.
The other measure announced in December is that Ottawa will study the merits of increasing Canadian pensions' ability to make large investments in municipally-owned utility corporations, which provide electricity to local residential populations and businesses. The anticipated benefits of such a change could include how “municipally-owned electricity utilities would be able to access more capital to meet future demand and expand electricity production and distribution grids,” without borrowing or resorting to higher charges on customers.
What are the implications for the US, if any, as the Canadians take a step or two down the asset recycling road?
One outcome worth thinking about is this: the materialization of any actual pension investments in Canadian airports could potentially revive interest in re-opening the now-closed effort to selling off an interest in of St. Louis, MO's Lambert International Airport to private investors.
This effort in St. Louis was one of the higher-profile efforts so far to bring the “asset recycling” approach to the US, as the proceeds of any sale would have gone to support St. Louis' municipal infrastructure budget. The sales process did not go ahead however, in part because of strong local opposition. (That's even with at least one Canadian pension investor being among the parties that expressed interest in bidding.)
St. Louis is in Missouri, which of course is known as the “show me” state – an expression derived, legend tell us, from a Missouri-born man who, in refusing to believe some statement he felt to be incorrect, defiantly said: “I am from Missouri. You have got to show me.”
When it comes to asset recycling, in both Canada and the US, public suspicion towards this idea seems to run deep. Until its proponents are able to make asset recycling's benefits clearer, the majority of voters will likely remain “from Missouri” on this issue.
About the author: Neil Hrab worked in the Canadian defined benefit pension sector for 12 years. His views are entirely his own.
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