Infrastructure Investing: An Emerging Challenge for Canadian Labour

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1 Infrastructure Investing: An Emerging Challenge for Canadian Labour Jordan Berger Supervisor, SPPD & Benefits OPSEU/NUPGE / 1

2 Who we are The National Union for Public & General Employees (NUPGE) represents 340,000 workers across Canada, primarily public sector. The Ontario Public Service Employees Union (OPSEU), the largest NUPGE component, represents 120,000 public sector workers in Ontario, Canada s largest province and financial services centre. NUPGE components have members in over 30 public sector pension plans and appoint trustees to some of the largest in Canada, including: British Columbia Investment Management Corporation ($76 Billion) Hospitals of Ontario Pension Plan ($25 Billion) Alberta Pensions Administration Corporation ($21 Billion) OPSEU Pension Trust ($13 Billion). OPSEU is currently engaged in negotiations regarding a new governance model for the Ontario Municipal Retirement System ($42 Billion) and has a representative on the Sponsors Committee. / 2

3 Canada s Pension Universe Of the top 100 plans: 5 are over $20B 13 are over $10B 6 are over $5B 28 are over $3B 48 are over $1B Key infrastructure players: CDP (Quebec) $237B CPPIB (Canada) $111B Teachers (Ontario) $95B BCIMC (BC) $76B OMERS (Ontario) $42B PSP Investments (Canada) $28B OPSEU Pension Trust (Ontario) $13B Other large plans are not involved in infrastructure including: HOOPP (Ontario) $25B OPB (Ontario) $14B CAAT (Ontario) $5B >$20B >$10B >$5B >$3B >$1B / 3

4 Canadian Infrastructure Infrastructure investment deficit caused in large part by political irrelevance of capital spending compared to tax cuts and service improvements Rhetoric has shifted sharply, but emphasis on transportation (est. $100B required over 10 years) and utilities rather than social infrastructure Public infrastructure stock is also aging 41% was constructed within last 40 years 31% within last 80 years 28% over 80 years ago Foreign investors and Canadian governments have highlighted the potential impact on direct investment of a deteriorating public infrastructure Is there a perfect storm emerging between governments desire for infrastructure investment and the search by fund managers for investment opportunities? Investing our pension assets in Canada has always been part of labour s agenda, now it may become a reality Pyrrhic victory? Two goals avoid conflict with our plans and protect public services and the workers who provide them / 4

5 Pension Plan strategy Early investments often garnered high returns due to market inefficiencies especially inexperienced or under-scrutinized governments Benchmarks are being compressed, usually real returns of 4 or 5% suffice. More emphasis placed on diversification and long-term cash flows than out-performance Project yields continue to fall but growing demand for these kinds of alternative investments can only increase pressure Start-up costs oversight required of trustees, recruitment and retention challenge, impact on existing compensation practices, and political risk has kept all but a few Canadian funds from exploring direct investment Yet, without direct investment, funds must pay a huge premium to external managers Canada represents a small fraction of the global infrastructure market for labour, a strategic approach to infrastructure should take the global market into account / 5

6 The Challenge for Labour The labour movement in Canada is officially and strongly opposed to the P3 model, known as PFI in the UK, in which there is a long-term often generational contractual relationship between a private sector service provider and the public sector funder or regulator This is, however, a model that seems to match the long-term pension plan investment objectives Labour s opposition has been led by public interest groups, political parties, and public sector unions (primarily NUPGE, CUPE, and PSAC) Level of private-sector and, in particular, building trades support for our position is unclear We are increasingly concerned about the potential for conflicts between our principled position, on the one hand, and, on the other, government strategies to increase private-sector investment in infrastructure and the desire of our pension plans to invest in infrastructure We are concerned about the threat to the public interest as well as the threat to our members wages, benefits, and working conditions. These are, however, two very different kinds of challenge, requiring two different strategies. / 6

7 Illustrative P3 Deals Abbottsford Regional Hospital and Cancer Centre (B.C.) Accenture/Ministry of Social Services (Ontario) Bruce Nuclear (Ontario) Confederation Bridge (PEI) Highway 407 (Ontario) Nova Scotia Schools (N.S.) Royal Ottawa Hospital and William Osler Health Care Centre (Ontario) / 7

8 Failed Deals and labour Coquihalla Highway (British Columbia) Threat of a union raid caused dramatic change in labour s position Ontario Clean Water Agency (Ontario) Participation in P3 bid seen as method to improve workers rights and preserve agency Drivers Examiner Centres (Ontario) Union pursued bid to protect existing members / 8

9 Key Labour Concerns Unionization, wage and employment levels, benefits, and bargaining relationship hang in the balance Service cuts may be used to increase profits/reduce debt Service provision will follow terms of the contract signed, long-term loss of flexibility Cost over-runs, contractual targets met but Design and construction flaws Transaction charges, rigid contracts, legal disputes, and shifting state capacity Improper compensation for risks and bankruptcies The impact of the British experience with PFIs Alternative narratives in Canada / 9

10 Time for a New Strategy Shifting political environment encourages a more proactive labour strategy Public cynicism about private sector involvement but confusion about P3s Parallel development of ESG rhetoric within institutional investment community how much can we influence/extend this debate? Reputational risk as potential tool There may indeed be an alignment of interests between large investors and the union movement, with or without government participation / 10

11 Our Bottom Line - I The NUPGE Pension Committee is considering a set of principles to govern infrastructure investment by pension plans We believe that the long-term nature of these investments requires the highest possible standards of care risk management must include respect for workers as well as the public interest What is the pension promise, from the members perspective? Key principles include: Risk management in infrastructure requires respect for workers and the public interest As much transparency as possible but full review in any case by empowered auditors Clear role for workers and public agency in project design, protection of government s intellectual capital Use of union labour, or pay at union rates, for construction Ownership decisions must involve public sector client Public employees must suffer no change in working conditions, employment levels, or status / 11

12 Our Bottom Line - II Key principles (continued): Public agency must have right to purchase asset at end of lease for a fixed and fair price Governments and large investors should recognize their shared interest in keeping transactional and advisory costs to a minimum These principles are being discussed within the National Union and, in general terms, with some of the institutional managers The goal is to forge a consensus within labour and then among investors around the conditions that we consider necessary to protect our members interests both as workers as well as pension plan members and retirees A related goal would be to find existing or build new international coalitions promoting a similar approach to infrastructure European experience Equator Principles / 12