Canada’s pension plans should focus on emerging-market infrastructure

Max Townsend
Originally published in The Globe and Mail on February 9, 2015.

When the World Bank and International Monetary Fund held joint annual meetings last fall, the gathering focused on a vision for the global economy moving forward. As a third-year Queen’s University Commerce student, attending the meetings as a member of the Young Diplomats of Canada, I came away from the meeting with two key conclusions.

First, Canada – and all developed countries – has a bigger role than ever to play in shaping the global agenda for development. Second, infrastructure should be viewed as a key investment opportunity in developing nations, with significant upside for all involved parties. And Canada’s pension plans could play an important role.

Four of Canada’s largest pension funds, including the $234-billion Canada Pension Plan Investment Board (CPPIB), manage multibillion-dollar infrastructure portfolios, with the CPPIB’s amounting to approximately $13.5-billion. The recent financial crisis and subsequent turmoil in global stock markets, has led many funds to look for stable, long-term assets. The demand for these assets is much greater than the supply in the developed world, forcing pension plans to look elsewhere. This comes just as many international organizations, such as the World Bank, have been pushing for more private sector investment in emerging market infrastructure.

Private investment in foreign infrastructure projects is a long-term solution to many of the issues facing developing countries and could lead to less dependency on foreign aid. In 2013, Canada contributed $5-billion in foreign aid through targeted projects managed by the Department of Foreign Affairs, Trade and Development (DFATD). Using private money, particularly from pension funds, to make some of these infrastructure investments could lessen the reliance on DFATD funding and increase opportunities for other types of investment for the developing countries.

For example, the infrastructure assets most targeted by large Canadian pension plans include toll roads, airports, water and sewage networks, as well as telecom towers. Those are many of the same projects that developing countries need. When a nation emphasizes the creation of infrastructure such as passable roads, reliable electricity and improved water supplies, its business climate becomes more appealing for local and international investors.

While historically there has been reluctance to invest in infrastructure throughout the developing world due to a lack of strong political and legal institutions, the development community has emphasized change. It understands the concerns of the private sector, and has committed to finding ways to make the developing markets less risky and more attractive to institutional investors. Only by doing this will the development community be able to achieve lofty economic growth and prosperity goals.

When investing in the developing world, it is vital that investors and multilateral organizations gauge the associated risks. Many of the targeted countries are rife with geopolitical challenges that could quickly destabilize a project. A better understanding of the risks and rewards for private sector infrastructure investment in developing nations could lead to new solutions for many of Canada’s large pension plans, while reducing the foreign aid bill that is funded by taxpayers. Although economic growth does not guarantee an increase in human well-being, it is certainly regarded as a key driving force to improving lives.

There is more at stake than just development for less fortunate countries. Canada too benefits from this kind of investment, through potentially better returns for our pension plans and less taxpayer money taken up with foreign aid.

As a young Canadian, the fall meetings opened my eyes to the countless alternatives that should be considered when facing the systemic issues experienced by many developing nations. While investing in infrastructure is but one option, it gives me hope for the future of both Canada’s development agenda, as well as the success of our global neighbours in this increasingly interconnected world.

Max Townsend is a student at the Queen’s School of Business.