February 10, 2016 / 9:00 PM / in 2 years

Exclusive: Canada opens talks with pension funds on infrastructure funding

Construction cranes are seen in front of the CN Tower in Toronto December 5, 2012.Mark Blinch

OTTAWA/TORONTO (Reuters) - The Canadian government is talking to the country's largest pension funds about investing in billions of dollars worth of infrastructure projects to help stimulate the economy, the Infrastructure Ministry told Reuters on Wednesday.

Prime Minister Justin Trudeau's Liberals won an election in October on the back of a promise to run three consecutive annual budget deficits of up to C$10 billion ($7.2 billion) to help fund investment in infrastructure and will seek to boost that with private funding, sources told Reuters.

The funds are fiercely protective of their independence from political interference and would not be compelled to invest, but their backing for the projects would be a major boost for Trudeau.

"We are engaging pension funds and other potential partners to find areas of alignment," a spokeswoman for Infrastructure Minister Amarjeet Sohi said. She did not give further details.

Executives at Canada's pension funds, which are among the world's biggest infrastructure investors, say that the projects will need to be structured in a way that limits the risk they take if they are to be lured into backing them.

Traditionally, funds such as the Canada Pension Plan Investment Board (CPPIB) have been reluctant to back 'greenfield' projects, which are built from scratch, because of the risk they carry.

Funds usually prefer investing in 'brownfield' infrastructure, projects that have already been constructed, executives said.

Mark Wiseman, chief executive of CPPIB, which has C$283 billion in assets under management and invests on behalf of the federal plan that covers most working Canadians, told Reuters projects would need to have sufficient scale to be interesting, be overseen by a predictable regulatory regime and carry limited risk.

"That means projects where we are not going to have to take the build-out, greenfield-type risk because we're not good at being able to assess those. There's ways to structurally de-risk these opportunities for institutional investors," he said.

Trudeau needs to find ways to boost Canada's flagging economy, which has deteriorated more than expected since the Liberals came to power with economic growth fading, the dollar weakening and oil prices in freefall.

Bankers say private funding for the projects could amount to several times more than that coming from the public purse and Canadian pension funds, already among the world's biggest infrastructure investors, would be an obvious source of capital.

The CPPIB, the Caisse de depot et placement du Quebec (Caisse), the Ontario Teachers' Pension Plan, and OMERS, the Ontario Municipal Employees Retirement System, are already among the top 10 infrastructure investors in the world.

One government source familiar with the matter said officials had also had conversations with institutional investors such as Canada's Brookfield Asset Management BAMO.TO, as well as the major Canadian pension funds.

"We've talked to Teachers', we've talked to Caisse, we've talked to OP Trust, we've talked to OMERS, we're talking to CPPIB, most of the Canadian ones. I think the conversations have gone well and there's lots of interest on both sides to find a way to partner," the source said.

The source said the talks were exploratory and specific projects had not yet been discussed. Officials have sought advice on setting up the Canada Infrastructure Bank, which Trudeau had talked about creating during the election campaign to provide low-cost financing for infrastructure projects.

"Our conversations with the federal government have centered around what pension plans, like ours, look for in an infrastructure investment," said OP Trust CEO Hugh O'Reilly.

The other funds and Brookfield declined to comment.

It is not yet clear if the plans will be announced in next month's budget and no decisions had yet been taken on how much money will be raised from private investors, sources say.

The Caisse said last year that it would finance, develop and operate major infrastructure projects for the cash-strapped province of Quebec and hoped to pursue other projects internationally.

Executives say the Liberal government is right to invest in infrastructure, believing that monetary policy has exhausted its ability to stimulate the economy.

"Infrastructure makes economies more productive, it gives you more opportunities to grow. Monetary policy is not going to get us out of this slope we're on," a senior executive at one of Canada's biggest three pension funds said.

Editing by Alan Crosby

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