Who gets to decide the price of a bus ticket?

Will pension funds own and operate the next generation of mass transit in Canada?

Like other large investment funds, pension funds in Canada and around the world have a lot of assets to put to work, and not enough attractive investment opportunities. This is intensifying pressure to get access to projects that historically have been the preserve of public sector.  It may also be driving pension funds to take on more risk.

Pension funds have $25 trillion dollars in investment in the OECD area alone, and funded pensions in Canada held investments equal to one and a half times GDP.

In a low-interest environment with uncertain stock-market returns, pension funds are in an intensely competitive hunt for yield. Large pension funds scour the globe for large-scale investments that can deliver healthy and predictable returns over the long term. Large-scale infrastructure projects promise stable, solid, inflation-protected returns over the long run.

Canadian pension funds, “maple revolutionaries” as the Economist Magazine termed them, are world leaders in making large, direct investments in private equity, real estate, and infrastructure.  They also play a leading role at the OECD and in other international forums championing this approach.

In particular, Canadian pension funds have been vocal advocates of the Australian model of privatizing public assets known as “asset recycling.” Australian state governments have assumed the risk of constructing and launching large-scale projects, demonstrating their revenue potential before selling the assets to consortia of private investors, including pension funds.

For years, pension funds in Canada have urged governments to adopt the Australian model, but governments here confront the stubborn opposition of unions and NGOs to the sale  of public assets, not to mention a wealth of research and long experience with P3s that has documented their inefficiencies relative to public infrastructure.

Now, however, new impetus is growing for greater pension fund involvement in public projects. On the one hand, governments continue to show unwillingness to borrow in order to finance much-needed infrastructure renewal, despite exceptionally low interest rates, and evidence that expanded infrastructure investment is likely to largely pay for itself. On the other, significant investments in mass transit, renewable energy, and climate-resilient infrastructure will be needed if Canada intends to help mitigate and adequately prepare for the effects of climate change.

The current Government of Canada is signaling it will move toward expanded private involvement. Budget 2016 announced that the government intends to “engage public pension plans and other innovative sources of funding—such as demand management initiatives and asset recycling—to increase the long-term affordability and sustainability of infrastructure in Canada” (88).

Relatedly, it also announced that the federal government would consult over whether to abolish or amend the investment rule that restricts pension plans from holding more than 30 per cent of the voting shares of a company. Earlier, the April 2015 Conservative federal budget had promised a review of the rule, and before that the Ontario government in 2013 had signaled that it would review the 30 per cent rule as it pertained to infrastructure investments. The federal consultation wrapped up in September, and it is likely the government will move to abolish the 30 percent rule.

In February 2016, the federal Minister of Transport tabled the report of the 8-year review of the Canada Transportation Act. The heavily business-dominated review was launched by the Conservatives, and was chaired by ex-Conservative MP David Emerson. Among the many recommendations for further deregulating, privatizing and liberalizing transportation in Canada, the report also seeks to open up infrastructure to pension fund investment. It makes for interesting and revealing reading:

“On average, Canadian pension funds have allocated about four to five percent of their funds to infrastructure. Although the large pension funds are major infrastructure investors in the global context most of the capital goes overseas, given the slower pace of privatization of public sector assets in Canada. In addition…Canadian projects are often ignored by the pension funds because they are too small, or because they offer equity shares of less than 20 percent….

“Canadian policy has favoured commercialization over privatization, which has resulted in a lack of significant infrastructure available for private sector investment. Governments in the U.S., United Kingdom, and Australia are using a practice of “asset recycling” to dispose of outdated or legacy assets in order to generate the capital needed to invest in new public projects, or refurbish existing infrastructure. Canada could do the same: certain federal assets with potential for privatization (based on recommendations made elsewhere in this report) include various ports, and small and large airports. Privatizing would not result in the loss of transportation assets, but rather, become a source of new funding required for strategic investment in the system. This would require that the proceeds from disposition of crown held assets be redeployed for new critical transportation initiatives that improve the performance of the network, i.e. as identified on the transportation projects pipeline” (26-27).

Most recently, the Government of Quebec enabled the Caisse de dépôt et placement du Quebec (CPDQ) to construct and operate light rail transit for private gain. The agreement between the Caisse and Quebec contains several worrisome provisions, including the requirement that the government must give up control over the project’s assets, and that it “must not assume any risks and derive any benefit inherent to the ownership of such assets.” By making public transit lines available to the Caisse with these restrictions, the Government of Quebec could very well lose control over an important public asset and service sector, despite the fact that the government will invest public money.

On November 14th, Toronto will play host to an investor summit convened by Blackrock, the world’s largest investment fund manager. In addition to Canadian pension fund CEOs, the federal Minister of Infrastructure and provincial counterparts will gather to discuss opportunities for public-private partnerships in infrastructure projects.

It’s unlikely that, at any point during the gathering, someone will ask the question, “why should pension funds get to decide the price of a bus ticket?” But it’s an essential question that unions and their allies will continue to press. Pension trustees and plan stewards have a fiduciary obligation to plan members – members who may be employed in the public sector, but who are not at all the same as the public. Transferring ownership and control of public assets to pension funds, even public-sector workplace pension funds, is the opposite of retaining the asset in public control. The opposition to Ontario’s decision to privatize Hydro One is an indication of deep skepticism in the public and strong opposition inside the labour movement, which has long supported the mandate for public ownership and control of vital infrastructure as fundamental to protecting the public interest.

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