Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.
The Canadian Press reports, Liberals tap former pension fund CEO to help build new infrastructure bank:
The former head of one of the country’s largest pension funds is being tapped to help build a new federal infrastructure bank.
The Liberals are naming Jim Leech as a special adviser to help design the proposed arm’s-length lending machine that could leverage billions in public money and turn it into new highways, bridges and transit projects.
The Liberals plan to infuse the bank with $35 billion in funding to financially backstop projects, with the details of how it will work to be outlined in this year’s federal budget.
The government says Leech will guide the bank’s implementation team and help recruit board members.
The former head of the Ontario Teachers’ Pension Plan has experience investing pension money in profit-generating infrastructure projects.
The Liberals hope that large pension funds like the teachers’ plan will invest in the bank, which will use federal funds to attract private- sector dollars for major projects, possibly generating $4 to $5 in private funding for every $1 of federal money.
Matt Scuffham of Reuters also reports, Canada may fund some infrastructure entirely from private funds:
Canada could finance some future infrastructure projects entirely through private sources, without using government funds, the special advisor for its new infrastructure bank said after his appointment on Friday.
Canada’s Liberal government announced last November it would set up the agency to supplement government investment in projects like new roads and bridges with funding from private investors such as pension and sovereign wealth funds.
The government advisory panel that recommended its creation had said it could look to raise C$4 to C$5 of private funding for every C$1 provided by taxpayers to fund projects.
However, Jim Leech, the pension executive recruited on Friday to advise the government on the bank, said it could go further with private investment on some projects.
“I’m sure that there are many projects that won’t need any investment from taxpayer money. They can be totally funded by the private sector,” Leech said.
New U.S. President Donald Trump has said he would launch a $1 trillion infrastructure spending program financed entirely by private sources. Infrastructure products are traditionally funded by a mix of private and public investment.
Leech said one of the challenges for the infrastructure bank will be that institutional investors such as pension funds traditionally prefer to invest in ‘brownfield’ assets which have already been built, while the greatest infrastructure need is for ‘greenfield’ assets which have yet to be built.
“I think that’s where the logjam is. You have, on the one hand, on a global basis, a lot of money looking for infrastructure to invest in but it doesn’t have the talent within those institutions to be able to assume greenfield.”
The Caisse de depot et placement du Quebec is the only Canadian pension fund making large-scale ‘greenfield’ investments, having agreed to construct one of the world’s largest light rail networks in Montreal, a project which could become a test case.
“I think what the Caisse is doing is very encouraging. I was impressed to see they are building a team within the Caisse which knows how to assess some of this risk. I think that’s good innovation and there are things we can learn from it,” Leech said.
He said the bank would look at ways to make projects “risk tolerable” for financial institutions but declined to specify how they might do that. Infrastructure experts say they could provide guarantees on future returns or backstop some construction risk.
And Janyce McGregor of the CBC reports, Ex-Teachers CEO Jim Leech named special advisor for new Canada Infrastructure Bank:
Prime Minister Justin Trudeau has named Jim Leech special advisor for the new Canada Infrastructure Bank.
Leech is a former CEO of one of the world’s largest pension funds, the Ontario Teachers’ Pension Plan. Since his retirement in 2014, he’s been an adviser to the Ontario Liberal government, leading a review of the sustainability of the province’s electricity sector pension.
In a release from the Prime Minister’s Office Friday, Trudeau referred to Leech’s “immense knowledge and experience,” saying he was “confident that he will help ensure a smooth and successful launch of the Canada Infrastructure Bank.”
The release said Leech will work with the Privy Council Office and the offices of Infrastructure Minister Amarjeet Sohi and Finance Minister Bill Morneau to build an implementation team and get the new organization off the ground. It promises an “open and transparent process” to recruit future board members.
Leech said in a statement Friday he was honoured to be asked to contribute to moving the bank from concept to reality.
“I believe that, if done right, an infrastructure bank will give Canada a competitive advantage in the global quest for infrastructure funding and development,” he said in a release issued by Queen’s University in Kingston, Ont., where he currently serves as chancellor.
The creation of the infrastructure bank was announced in Morneau’s fall economic statement as part of the government’s overall infrastructure investment plans.
Although touted as an effective way to ensure more projects get built quickly across Canada, very little about the new entity has been revealed in the months since.
Bank may manage up to $35B
Legislation to create the bank will come after the federal budget, expected in the coming few weeks.
The bank is intended to work with other levels of government to “further the reach” of federal infrastructure spending using a broad range of financial instruments, including loans and equity investments.
Last fall, the government suggested the bank would manage up to $35 billion: $15 billion from the federal infrastructure funding announced last year and an estimated $20 billion sought from private investors.
The public money, the government said, would fund projects that wouldn’t normally be able to provide a return for private investors.
For other more profitable projects, the bank may attract “as much as four or five dollars in private capital for every tax dollar invested,” Morneau said last fall.
“Potential investors have said projects need to be worth $500 million or more for them to invest,” said Conservative infrastructure critic Dianne Watts Friday. “That’s a lot of risk to put on taxpayers for something that will only benefit the large urban centres.”
The Liberals have touted the new bank as an innovative way to put private capital to work building much-needed infrastructure.
Leech was credited with innovative decision-making during his tenure at Teachers, a highly-influential public pension manager because of its large size and investment scope. He eliminated the plan’s funding deficit and its returns performed among the top-ranked funds of its kind internationally during his tenure.
You can read this press release from the Prime Minister’s Office announcing the appointment of Jim Leech as a special advisor to the newly created federal infrastructure bank.
Over the weekend, I emailed Jim Leech to get his views on this new role. Jim sent me this:
My role is as advisor (pro bono) to help “stand up” the bank. Will focus on governance (board, management), talent (org structure, skill sets, hiring Chair and top management), and process (how projects prioritized/evaluated). Lots to do like what G/L to adopt, risk management, location etc.
When I asked him what he meant by G/L he said:”General Ledger – mundane but remember we are creating a major financial institution from scratch.”
Jim Leech is an excellent choice to gets things going on this new federal infrastructure bank. Apart from Leo de Bever, another retired pension veteran who worked at Ontario Teachers’ and AIMCo and is widely considered as the godfather of direct infrastructure investments in Canada, I don’t think the federal government could have picked a better special advisor.
Jim has tremendous experience and knows all the key people in the pension industry in Canada and abroad. He will make recommendations for the board (I would nominate Leo de Bever as the chair) and will get to work setting up the governance, hiring top management, and focusing on the process and how to quickly and efficiently get things rolling so that these projects can get underway as soon as possible.
Who should lead the new federal infrastructure bank? Good question. Again, I would place Leo de Bever high on the list if he’s interested in that job or chairman of the board, but there are others as well like Michael Sabia and Mark Wiseman who co-authored an article for the Globe and Mail last October on why the private infrastructure bank will put Canada on a path to growth.
Jim Leech hired Mark Wiseman at Ontario Teachers’ to run the fund investments and co-investments before he moved on to head CPPIB. Mark is now working at BlackRock so I’m not sure if he’d give up that high profile job to come back to head up the federal infrastructure bank.
Michael Sabia is the president and CEO of the Caisse but his term is coming to an end, so along with Leo de Bever and Mark Wiseman, I wouldn’t be surprised if he’s high on the list of likely candidates to head up the federal infrastructure bank. Sabia’s baby at the Caisse is the Montreal REM project which he recently defended publicly and he’s a huge believer in developing infrastructure to kick-start and sustain economic growth over the long run.
Who else is a potential candidate to run the new federal infrastructure bank? Neil Petroff, the former CIO of Ontario Teachers’, someone else who Jim Leech knows well and worked closely with in the past. After retiring from Teachers, Neil joined Northwater Capital Management back in 2015 as a Vice Chair and he knows infrastructure investments very well and is plugged in to the key players all over the world.
There are other candidates as well, like Wayne Kozun who was up until recently the senior VP of Public Equities at Ontario Teachers’ and Bruno Guilmette, the former head of infrastructure investments at PSP Investments and someone I worked with in the past when he was putting together his business plan to introduce infrastructure as an asset class at PSP back in 2005.
Another name that was mentioned to me to head up this new federal infrastructure bank is Larry Blain, Senior Director, Global Infrastructure at KPMG and advisor and corporate director of the Canada West Foundation:
Previously, Mr. Blain served as Partnerships BC’s President and CEO, and subsequently as Chair of the Board of Directors. Under Mr. Blain’s leadership, Partnerships BC participated in more than 45 partnership projects with an investment value of $15 billion. Mr. Blain has also been a Director of BC Hydro, the Chair of Powerex, a Director of the Transportation Investment Corporation, and a Director of the UBC Investment Management Trust.
And thus far I’ve only mentioned men. Some women I would strongly consider to be chair of the board or to serve on the board are Eileen Mercier, the former chair at Ontario Teachers’ who is now the new chancellor of Wilfrid Laurier University and Carol Hansell, a former board of director at PSP Investments who was recently awarded the Hennick medal for career achievement. I would certainly tap their expertise for this new federal infrastructure bank.
Now, I am merely speculating here, I have no idea if any of these people are interested in heading the new federal infrastructure bank or taking any role on the board of directors, but the point I am making is there is no shortage of qualified individuals to consider for potential roles.
I’ll leave those decisions up to Jim Leech, he’s more than qualified and much better plugged in than I am to pick the right people for the board of directors and senior management.
One infrastructure expert shared this with me:
It is absolutely essential that they hire the right mix of people from both the pension fund industry and from infrastructure.
They also need to hire Canadians who have experience working with institutions in different geographic markets. The Europeans and Japanese are light years ahead of us in this respect. We need to learn from some of their models, transform the models to make them uniquely Canadian, and then execute.
There are quite a few infrastructure experts in Canada. One of them is Andrew Claerhout, Senior Vice President at Teachers‘ Infrastructure Group, who shared these great comments with me back in November when the federal government started courting big funds for their infrastructure projects:
- Andrew told me that OTPP, CPPIB, OMERS and the rest of Canada’s large pensions are not interested in small DMBF/ PPP projects which are typically social infrastructure like building schools, hospitals or prisons. Why? Because they’re small projects and the returns are too low for them. However, he said these are great projects for construction companies and lenders because you have the government as your counterparty so no risk of a default.
- Instead, he told me they are interested in investing in “larger, more ambitious” infrastructure projects which are economical and make sense for pensions from a risk/ return perspective. In this way he told me that they are not competing with PPPs who typically focus on smaller projects and are complimenting them because they are focusing on much larger projects.
- Here is where our conversation got interesting because we started talking about Australia being the model for privatizing infrastructure to help fund new infrastructure projects. He told me that while Australia took the lead in infrastructure, the Canadian model being proposed here takes it one step further. “In Australia, the government builds infrastructure projects and once they are operational (ie. brownfield), they sell equity stakes to investors and use those proceeds to finance new greenfield projects. In Canada, the government is setting up this infrastructure bank which will provide the bulk of the capital on major infrastructure greenfield projects and asks investors to invest alongside it” (ie. take an equity stake in a big greenfield project).
- Andrew told me this is a truly novel idea and if they get the implementation and governance right, setting up a qualified and independent board to oversee this new infrastructure bank, it will be mutually beneficial for all parties involved.
- In terms of subsidizing pensions, he said unlike pensions which have a fiduciary duty to maximize returns without taking undue risk, the government has a “financial P&L” and a “social P & L” (profit and loss). The social P & L is investing in infrastructure projects that “benefit society” and the economy over the long run. He went on to share this with me. “No doubt, the government is putting up the bulk of the money in the form of bridge capital for large infrastructure projects and pensions will invest alongside them as long as the risk/ return makes sense. The government is reducing the risk for pensions to invest alongside them and we are providing the expertise to help them run these projects more efficiently. If these projects don’t turn out to be economical, the government will borne most of the risk, however, if they turn out to be good projects, the government will participate in all the upside” (allowing it to collect more revenues to invest in new projects).
- He made it a point to underscore this new model is much better than the government providing grants to subsidize large infrastructure projects because it gets to participate in the upside if these projects turn out to be very good, providing all parties steady long-term revenue streams.
Basically Andrew Claerhout explains why pensions are not competing with DBFM/ PPPs and are looking instead to invest alongside the federal government in much larger, more ambitious greenfield infrastructure projects where they can help it make them economical and profitable over the long run.
Andrew added this: “Most infrastructure investors focus on brownfield opportunities while the government is most interested in seeing more infrastructure built (i.e., greenfield). The infrastructure development bank is meant to help bridge this divide – hopefully it is successful.”
I certainly hope this new federal infrastructure bank is successful in bridging this divide and I’m happy the government appointed Jim Leech as a special advisor to get things rolling. He has a big job ahead of him when he starts working in March but till then, I hope he enjoys his ski vacation with his family on top of mountain in Okanagan (can’t ask for better ski conditions).
One final note, I recently reported that GPIF is making America great again by investing billions in Trump’s infrastructure project. I updated that comment to state GPIF and Prime Minister Shinzo Abe denied these reports. I think the Japanese would be far wiser to invest in Canada’s infrastructure projects once this new federal infrastructure bank is set up.
As far as US infrastructure, Bloomberg reports that Blackstone is targeting as much as $40 billion for infrastructure deals if the world’s biggest private equity firm re-enters the sector. Interestingly, President Trump and Prime Minister Shinzo Abe both attended Blackstone CEO Stephen Schwarzman’s 70th birthday party in Palm Beach over the weekend where there was a ‘frantic rush to change ‘Chinese decorations to Japanese’.
Care to hazard a guess as to who will be the biggest investor in Blackstone’s new infrastructure fund once it re-enters the sector? Happy birthday Mr. Schwarzman, you and your Blackstone colleagues are about to become a whole lot richer under the Trump administration.