Today, there are literally dozens of different types of investors – everything from public pension funds and sovereign wealth funds through to concessionaires and global operators. And, as the following roundtable discussion illustrates, each has a slightly different motivation, investment strategy and expectation of control.
James Stewart, Chairman, Global Infrastructure, KPMG, sat down with executives from three very different ‘private sector’ investors to explore their unique and shared motivations. Tim Treharne, European COO of Meridiam represents the ‘new breed’ of infrastructure fund, focused on long- term strategic investments and portfolio shaping. The Pension Plan viewpoint – reflective of the wider ‘direct’ institutional investor sector – is represented by Dale Burgess, a Director in the infrastructure group at Ontario Teacher’s pension plan. And Michael B. Cline, VP of Physical Facilities at Purdue University represents a ‘hybrid’ public/private model where private investment is conducted through a ‘State Instrument’.
James Stewart (JS): Clearly, each of your organizations has invested heavily in the infrastructure sector. What factors are driving your investment decisions today?
Dale Burgess (DB): The Ontario Teachers’ Pension Plan has been investing in infrastructure assets for fifteen years now and we manage a pretty diverse portfolio of assets, both by geography and by sector. When we started, we were growing our portfolio and had to be pretty opportunistic about where we went. But now I see us as more of a ‘top-down, bottom-up’ investor in that we have a certain portfolio that we want to create but at the same time we are continuing to look for opportunistic deals that have strong individual merits as well.
Tim Treharne (TT): Dale is certainly right; investors are becoming much more strategic in the way they make their decisions. At Meridiam, our funds are targeted at certain sectors and geographies and we’re clearly looking to invest in particular types of projects. Much is influenced by the more technical metrics such as the project profile, who the potential counterparties are, the ESG (Environment, Social and Governance) assessments, and so on.
But we are always influenced by the importance of the project itself and the necessity and benefits it brings to the community. We want to avoid what might be considered ‘trophy’ projects; we want to focus on projects that fit with the community and satisfy their needs.
Michael B. Cline (MC): Our situation is somewhat different in that Purdue University is essentially a state instrument that – since our founding in 1869 – has always owned much of our own infrastructure: buildings, power generation and distribution, parking facilities and roadways for example. Ultimately, our objective today is very much as it has been for more than a century: deliver higher education at the highest possible value. So we have dozens of projects that are intended to improve, maintain or manage our growth while managing costs and helping to redirect capital towards value- driving investments.
JS: How has ownership translated into operational control over the assets that you own?
TT: As a long-term investor, we ultimately look to have a significant amount of control over the asset. Generally, we seek to secure a majority of the project company in each project we bid on and, in turn, we want to manage the investments we have with senior and proportional representation on the project company’s Boards.
Naturally it is the project company itself that is responsible for implementing the project. We are there to make sure the project is operating in an appropriate manner ensuring that we offer safe, value-for-money projects to the communities that we serve.
DB: I think that’s worth emphasizing. Teachers’ views smart governance as being central to economic ownership and so we have Board representation on all the companies we invest in. But while we’re active at the Board level, we’re not involved in the operational decisions. We focus on helping the company’s management team deliver better results for customers and for stakeholders.
MC: We recently engaged in a collaborative process which resulted in the City of West Lafayette annexing Purdue's West Lafayette campus, and we are realizing mutually beneficial results. Annexation is allowing us to deal with some relatively large projects – in the tens of millions of dollars – in a way that was previously not possible. It has allowed us to join forces with the City to create a stronger 'town and gown' governance structure that prioritizes the needs of our community and leverages best practices from the private sector to help move projects forward.
The bigger challenge is that we need to constantly look for more innovative ways to create value within the rules of the state laws we are beholden to. In some situations, those in which we are not using any government money at all, we still need to find innovative procurement and project delivery models to get the best value from the market.
JS: Who do you see as your main stakeholders in infrastructure?
DB: You know, that’s often one of the challenges for private infrastructure investors; there are so many important stakeholders that each play a critical role.
Infrastructure assets are generally high-profile and tend to serve an important need in a community so clearly you have an obligation to the customers that use that infrastructure; in some cases, they are represented by regulators – another very important stakeholder in our world. Then there are the project partners – both operating and financial– that are involved in the project.
At the end of the day, our role is to invest on behalf of the elementary and secondary school teachers in Ontario so we also need to make sure we’re always striving to get strong returns on the investments we are making.
TT: I think for the project companies themselves, it is pretty clear that it’s their local communities that are their key stakeholders. Relationships with the local users and community around a project are absolutely critical and they are a barometer of the project’s success. At the corporate level, there’s a different set of stakeholders that also come into play – contracting parties such as governments and public authorities, industrial contracting parties and so on.
Ultimately, though, we really believe in developing projects that represent the communities we serve and, in doing so, we aim to create strong stakeholder consensus and broad support – from users and regulators – for making good investment decisions.
MC: Our stakeholders are fairly evident and we spend significant time working with them to understand and meet their needs. The most obvious are the nearly 40,000 students that invest their money into the university and expect to receive strong value for that money. But it’s also the faculty, researchers, staff, local government, community members, alumni, prospective students and guests that use our facilities and our infrastructure and – over time – this has created a few interesting situations. Consider, for example, that we supply energy, water and heating and cooling services directly to more than two- thirds of our campus but we have never charged our campus stakeholders directly for their utility consumption. This creates no financial incentive for energy conservation and, as our energy management practices evolve, and we measure energy consumption by each campus unit, we anticipate that our stakeholders’ energy consumption behavior will change, hopefully with a positive impact on our student affordability initiatives.
JS: How has your relationship with government and regulators evolved over the past few years?
TT: Obviously, relationships with government authorities are very important. We have multinational teams with great contacts at local, national and regional levels across a range of geographies. And things like rule of law, contract certainty and transparency certainly play a major role when we make investment decisions. But I think we have developed great relationships with all of the public sector counterparties that we’ve worked with.
We’re also always looking at new markets – those with longer-term potential – and seeing how we can work with their governments to explore new ways to help develop their infrastructure by doing workshops or showcasing projects from other parts of the world.
DB: It’s interesting; in some cases, it’s easier to have those conversations once you are seen to have some ‘skin in the game’ or investments in the country because you have more credibility with the local government. But in other cases, where we do not have an existing investment in a particular market, we’re acting as almost an impartial player because we don’t have a conflicted position on issues such as regulated rates of return.
And while it’s often the project company that leads the relationships with the particular regulators or public authorities on a day-to-day basis, we recognize that regulators also want to hear directly from the investors themselves and so we spend quite a bit of time in conjunction with our management teams meeting with regulators and government entities.
MC: Our relationship with government and regulators are positive. We’re very blessed to be led by the former Governor of Indiana, Mitch Daniels, who is now the President of Purdue University. Purdue has strong relationships with State and Federal levels of government. We also have a number of senior leaders who have held infrastructure authority positions with government in the past which vastly helps as we strive to enhance those relationships and speed our ability to deliver infrastructure within the current context of statutes and regulatory requirements. Purdue has always had a very symbiotic relationship with government – particularly local government – who we work closely with to execute our plans.
The redevelopment of State Street in West Lafayette is a great example of these close relationships at work. The road is the responsibility of the City of West Lafayette and has significant influence on the dynamic, safety and efficiency of our city and campus. We are working very closely with the City to find innovative solutions that will allow us to strategically, and many times jointly, develop our community, while working within the City’s jurisdictional authority.
JS: Who is responsible for capital investment decisions within your portfolio of assets? What is involved in the investment decision?
DB: A lot of this is wrapped up in the long-term business planning that is done with management and approved by the shareholders and it’s really management’s job to do CapEx planning. Not surprisingly, it’s not all that different from the metrics we use when evaluating a new project. And the metrics for a CapEx investment that expands capacity – like a new runway, for example – are different to the metrics that we’d want to see if the CapEx was more focused on maintenance.
But when you talk about metrics, people tend to think of the financial ones that are used to measure CapEx. This is too one dimensional. Sometimes you just need to make the investment because of safety, quality or supply. And that’s not always easy to quantify but at the end of the day it’s about being a good steward of your assets.
TT: Much like the experience at Teachers’, we let the Boards and management do what’s in the best interest of the company and the asset when it comes to investment. That approach is not only operationally sound, it also creates unique opportunities. Our first project in Finland, for example, created a community outreach program to develop new safety mechanisms that could be applied around the project and the company went on to make numerous investments into these community-driven ideas. This concept was so popular that is was later adopted by the government as part of the scope of the subsequent project.
MC: The interesting thing about Purdue’s situation is that President Daniels has been very clear about his desire to ‘recycle’ capital back into the campus and city. We’re not just trying to reduce costs and shore up our bottom line; we’re trying to ensure that our investments are being channeled towards the projects that will deliver the most value to our stakeholders on campus, in the community and in government.
JS: How do you expect infrastructure ownership to evolve over the coming decade?
TT: Clearly, there’s going to continue to be an upsurge and enthusiasm for increased private participation in infrastructure. And I think that, as we see growing familiarity with PPP type arrangements, we should start to see a greater number of deals flowing faster through the pipeline. For governments, what will be key is having the right advice, capability and capacity to make sure that the projects they are bringing to market are well prepared and properly structured ahead of time. Dale: I think that the market is certainly going to continue to grow, but I firmly believe that it will take some good precedence and strong examples of success to make customers, governments and investors happy. As a sector, I think we need to play a key role in this by ensuring that we remain good stewards of the assets we own and control rather than allowing competition to drive us to increasingly aggressive assumptions. It only takes a few high-profile examples of badly structured deals or failures to stoke anti-privatization sentiments.
MS: I absolutely agree with Tim and Dale. While the US has been a bit slow to take up PPP approaches, I do believe that the natural forces will continue to drive the public market to be influenced and driven by private participation. I see that – as more organizations like Purdue strive to pioneer new approaches to deliver infrastructure – we’ll see increasing appetites for the type of risk ‘balance’ and private participation we are encouraging here on our campus. I think that the next decade will bring renewed focus onto PPPs as more evidence emerges that they work.
JS: What do you see driving infrastructure investment decisions over the next few years?
DB: I think that – for newcomers to the sector – much will depend on their ability and capability. It’s not an asset class that everyone can manage and, in our experience, if you are going to invest directly into infrastructure, you need to spend the time and resources to make sure you have the appropriate level of expertise and team to execute on your plans. I suspect that will be the biggest challenge for many. The supply of capital into the sector is only going to increase; my concern is that the competition for strong projects will result in some questionable structures and potential project failures.
TT: I think governments and investors are quickly starting to recognize that the best way to bridge the development gap between countries is by investing in developing countries’ infrastructure and helping those economies to grow. I think over the next few years we will see continued focus on developing market opportunities and projects.
I think we’re also going to see much more rigorous approaches being undertaken on the management of environment, social and governance issues, talking about local community and stakeholder engagement and growing focus on ensuring that projects are accepted within the environment and community that they support and deliver on the shared benefits that they create.
MC: I think our investment decisions are fairly clear if we hope to support the growth of our University. But, for us, the key is in continuing to create and structure new ways to invest into and manage our infrastructure so that we can continue to deliver higher education at the highest possible value. Where that means breaking new ground or creating new approaches, we want to make sure we are taking those opportunities and learning from the best in order to drive real and lasting value.