The

Caisse de dépôt et placement du Québec

’s $3.2-billion investment in a new

nuclear energy facility

this week is the kind of deal Canada is hoping the country’s largest pensions and institutional investors will step up to fund — but it’s happening overseas, in England, alongside the U.K. government.

The Quebec’s pension giant’s 20 per cent stake in the Sizewell C nuclear power station in Suffolk was part of a final funding push to greenlight the project, of which the U.K. government owns 44.9 per cent. Once completed, the country’s first new nuclear plant since 1995 is expected to reduce carbon emissions and provide more than 60 years of “clean, reliable power to the U.K. grid, helping to boost the U.K.’s economy (and) strengthen energy security.”

The deal is noteworthy for a couple of reasons: first, it capitalizes on a renewed push for nuclear power as countries search for less carbon-intensive options alongside a more recent desire to rely less on imported energy amid geopolitical tensions and trade upheaval driven by United States president

Donald Trump

. It also comes in a country where the government’s push for more institutional investment in infrastructure is being met with some success, both domestically and abroad.

In May, ahead of publication of a final review that could impose investment quotas on large pension providers in the United Kingdom, 17 of them — responsible for managing about 90 per cent of defined contribution pensions — signed an accord pledging to invest 10 per cent of their portfolios in assets to boost the economy by 2030. This will include investments in infrastructure, property and private equity, and half will be “ringfenced” for the United Kingdom, an allotment projected to inject about £25 billion into the economy.

The consortium backing the nuclear project, which is the first direct investment in nuclear by the Caisse, includes French energy operator EDF, British multinational energy and services company Centrica and investment partner Amber Infrastructure. This structure is not unusual for the Caisse, a seasoned global infrastructure investor.

But a key draw is undoubtedly the project’s financing structure. The U.K. government will foot the majority of that bill — an important consideration for institutional investors because of the potential for cost overruns common in infrastructure projects. Officials told the Canadian Press that the Caisse would begin receiving compensation right away, and that there are agreements with the British government that protect the pension fund’s return in the event of overruns or significant delays.

The project financing is coming through the U.K.’s National Wealth Fund, which was created by Keir Starmer’s Labour government. It replaced the U.K. Infrastructure Bank and is intended to be the government’s principal investment vehicle, with the express aim of creating conditions to draw in private investors.

“It’s an ambitious project in terms of size and complexity,” said Sebastien Betermier, a finance professor at McGill University, adding that the Caisse is arguably one of the world’s most advanced investors when it comes to new infrastructure builds referred to as ‘greenfield’ projects.

He credited the U.K. government’s success in forging partnerships with private investors to a strong track record of designing regulatory frameworks for privately-operated businesses and “de-risking” investments for institutional investors.

“In this particular project, I believe the U.K. government was able to reduce the level of construction risk for investors and provide a dividend yield early on,” said Betermier, who has done extensive research on pensions. “This project shows it is possible to generate win-win opportunities for governments and pension funds in infrastructure (projects), and hopefully we can learn from it here in Canada.”

Past efforts by the Canadian government to include the country’s pension funds in major infrastructure projects have largely fizzled, with complaints that the government isn’t offering up projects with enough size and scale. Furthermore, potential projects haven’t come with sufficient policy assurances or guarantees that the private investors will be adequately compensated for the risks they’re taking, particularly if they’re being asked to participate in building them.

An exception has been the Caisse, which has a dual mandate to support economic development in Quebec alongside meeting investment objectives to pay pension beneficiaries. For example, the Caisse was a major investor in the province’s The Réseau express métropolitain (REM) mass transit project, which was beset by cost overruns. The $6.3-billion cost of the Montreal light-rail system presented in 2018 had risen by 26 per cent by 2023. It rose further last year, reaching $8.34 billion. While the project was also backed by Quebec and the federal government, the Caisse was responsible for overruns. However, the pension manager structured the deal to derive revenue from ridership, advertising and real estate development, with a forecasted annual return of eight per cent over 30 years.

The Caisse is also unique among Canadian pensions when it comes to energy transition. In 2021, the Quebec pension management organization pledged to divest completely from oil producers, which could have given the Caisse an edge with the U.K. nuclear deal. Plus, in May, CEO Charles Emond told the Financial Times that the Caisse plans to deploy more than £8 billion in the U.K. “in the coming years,” increasing its exposure in the largest investment destination outside North America by 50 per cent.

In the article, Emond praised the “clarity” of its business environment, the “ability to execute deals” and its “welcoming approach” to investors.

Perhaps it was not a coincidence that Starmer dispatched Rachel Reeves, the U.K.’s chancellor of the exchequer, to Canada to talk up the investment destination last summer. This was followed by a cross-country tour by U.K. trade officials looking to partner with Canada’s pension funds to address, among other things, Britain’s decades of underinvestment in infrastructure, with the lowest levels among G7 countries.

When it comes to enticing Canada’s pension giants to invest more at home, Prime Minister

Mark Carney

appears to be trying to change the conversation: his focus is on the need to create infrastructure and energy corridors to unify and strengthen Canada’s economy and reduce dependence on the United States.

During his spring campaign, Carney pledged to use $150 billion of government funds to kickstart private sector investment in projects ranging from housing, defence production and transportation infrastructure to digital innovation and patents, critical minerals and energy.

“Our plan is expected to catalyze $500 billion in new investment over the next five years,” the costed platform said, a similar if slightly less ambitious target than the UK’s plan to draw in £3 of private investment for every £1 of government money.

But there are a few things the Canadian government has to get right with its “Maple 8” pensions, including the Caisse, as well as other large institutional investors such as Brookfield Asset Management (which had been a rumoured front-runner to invest in the Sizewell C nuclear power station), if it hopes to replicate what the U.K. government has done.

For starters, Canada’s infrastructure efforts lack both coordination and a comprehensive evaluation framework, crowding out private investors rather than drawing them in, Betermier said in a research paper on infrastructure banks around the world, published by the C.D. Howe Institute in May.

Government efforts since 2016 have led to sprawling commitments of more than $180 billion for infrastructure projects spread over 20 federal departments and agencies, primarily in the form of grants and subsidies, he pointed out, adding that provincial governments, too, have tried to get in the game over the past decade.

“Having multiple grants and investment agencies operating in the same market means there is a high risk of competition between the agencies,” Betermier wrote. “Coordination between these organizations, along with regular engagement with the private sector, will be critical in order to generate maximum engagement from the private sector.”

Canada could also take lessons from other governments, such as using loan guarantees to underwrite the risk of projects, as is done in the European Union’s under the InvestEU model. Other infrastructure banks allow projects to move forward with the expectation that private investors will come aboard in the future, while Canada’s flagship infrastructure bank needs to secure private investment partnerships for a deal to move forward.

Large-scale public-private projects are also hobbled by the lack of a comprehensive evaluation framework for short- and long-run performance, said Betermier, whose paper compared public infrastructure banks in Australia, California, Canada, the Nordic-Baltic region, Scotland and the U.K.

The

Canada Infrastructure Bank

, launched with much fanfare in 2017 and a goal of every government dollar being matched by private sector investment of $3 to $4 — a target later reduced to $1 to $2 — failed to live up to that promise. By 2022, a House of Commons standing committee on transportation, infrastructure and communities recommended abolishing it.

A couple of weeks ago, the Parliamentary Budget Officer estimated that the infrastructure bank would disburse $14.9 billion in 2027-28, well short of its $35-billion target. However, the PBO noted that the $1-billion target for Indigenous investments has already been met.

Among the many reasons for the struggle in Canada, Betermier said, is that most of the country’s infrastructure assets – including airports, seaports, railways, and utilities – remain publicly owned by federal, provincial or municipal governments. This stands in sharp contrast to countries like Australia and the U.K., where Canadian pensions have been, and continue to be, big investors in infrastructure assets that provide diversification, hedges against liability risks, and offer opportunities for high risk-adjusted returns and direct value creation.

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“The lack of infrastructure assets available for sale to (pension and other institutional investors in Canada) has become a hot topic recently because it is one of the reasons why Canadian pension funds have decreased their domestic investments over the past decade,” he wrote.

“For infrastructure banks to successfully catalyze investment in infrastructure from private banks and large institutional investors, Canadian governments must actively support and commit to a private-sector role in the infrastructure market.”

• Email: bshecter@postmedia.com

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