Benefits and Pensions Monitor: Canadian infrastructure needs private capital

Infrastructure

October 25, 2024

Media Coverage

Canadian infrastructure isn't working. Governments have long declined to invest in maintaining and building new infrastructure, climate change is exacerbating the wear and tear on our existing infrastructure, and broken government finances coupled with the high-interest-rate environment are only making matters worse. How bad is it?

Toronto was completely flooded this past summer. In Ontario, the deteriorating water run-off has put cities at risk, and it is estimated that nearly $5 billion is needed to fix it. Renovations to Toronto's Union Station are 10 years behind schedule and other transportation projects have taken longer to complete than it took to build the ancient Egyptian pyramids (!). These delays have only worsened traffic and commute times, with Toronto ranked the third most-congested city in North America.

With decades worth of underinvestment across water treatment and management, grid resiliency and transportation, plus a population that has expanded approximately 14 percent in the last decade, the question is whether we can develop the infrastructure needed to support Canada's expanding economic and social needs.

The truth is that governments alone don't have the capital to solve these crises, so we as a society need to look elsewhere to plug the gap. The good news? There's a role for everyone to play, and private markets can help. Private capital can help revitalize Canada's essential infrastructure while also benefiting investors. There is light at the end of the tunnel.

Three ways private capital can help

Historically, private capital has successfully funded infrastructure projects, accelerated project timelines, and delivered attractive returns to investors across the globe. While much of our infrastructure has historically been funded by government, privately funded infrastructure investments can succeed in Canada, too. Here are three ways where collaboration with private capital can get our infrastructure back on track:

Public-private partnerships (P3s) can use private sector capital and project management capabilities to deliver public infrastructure assets on behalf of governments to meet society's needs. Successful P3s, including British Columbia's Sea to Sky Highway Improvement Project or the nearly completed Gordie Howe International Bridge, have boosted our economic and social well-being. More P3s are needed to address our growing infrastructure needs.

The recently launched Canada Infrastructure Bank (CIB), established by the federal government, is a great example of governments finding creative ways to partner with private capital to accelerate infrastructure project completion. CIB partners with private capital to "invest in revenue-generating infrastructure which benefits Canadians." To date, CIB has been involved in over 70 infrastructure partnerships with nearly $13 billion deployed,3 addressing green infrastructure, clean power, public transit, trade and transportation, and broadband. Expanding these partnerships can help improve our infrastructure too.

Additionally, there is a huge need and opportunity for private capital to finance, build, and operate economic infrastructure within the private sector. Industries such as renewable energy and digital infrastructure require billions of dollars of investment to build out Canada's power grid and communications networks of tomorrow, the majority of which will come from private capital. Ensuring the government creates the right incentives and a supportive regulatory framework to attract such investment will be critical. For example, Canada recently announced the Clean Economy Investment Tax Credits program to encourage investment in renewable energy. Private capital can be deployed to fund and develop the infrastructure needs identified in this policy.

With global private infrastructure assets growing over the last 24 years from about $5 billion in 1999 to $1.3 trillion in 2023,4 private capital has demonstrated its ability to address market needs. And with hundreds of billions of dollars of investable capital available, private markets can play a big role in Canada's infrastructure revival.

Moving Canada forward

Canada now has an opportunity to leverage private capital to improve the crumbling roads, flooded streets, and delayed infrastructure solutions that current levels of funding have not been able to get under control or complete on time. Private investors can contribute to the country's infrastructure success and potentially benefit from positive investment outcomes as well.

By working together, private capital, federal, provincial, and municipal governments and quasi-governmental organizations can revitalize Canada's infrastructure - hopefully in less time than it took to build the pyramids.

Taylor McManus is a principal based in Hamilton Lane's Toronto office, where he is responsible for originating, evaluating, and executing direct, secondary, and primary fund investment opportunities.