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TORONTO (Reuters) - Canada's biggest pension funds are prepared to finance the construction of major new federal government infrastructure projects, according to senior fund sources, marking a shift from their traditional strategy of avoiding development risk.
Officials with the top funds, which manage C$1.1 trillion ($846 billion) in assets, are seeking to reduce that risk, telling the Canadian government they would like it to provide guarantees on future returns and assurances on costs.
"We think we can create incremental value by taking on the 'greenfield' risk of building the assets," a senior executive at one of Canada's three biggest public pension funds told Reuters, speaking on condition of anonymity due to the sensitivity of the talks.
Canadian funds have traditionally preferred buying 'brownfield' assets that have already been built and have predictable revenue streams, rather than take on potentially higher risk from 'greenfield' assets that have yet to be built.
But like their global peers, the Canadian funds face an increasing challenge in finding assets that generate adequate returns.
"'Greenfield' does come with a different kind of risk than 'brownfield' but it's a source of value and, by doing it, you're less susceptible to this rollercoaster ride of what's going on in the equity markets," the executive said.
Canada's Liberal government was elected last year pledging to spend billions on infrastructure such as public transport, affordable housing or renewable energy to help stimulate the economy.
Reuters reported in February that the government had opened talks with the funds about investing in the projects, the details of which have yet to be revealed.
Bankers say private funding for the projects could amount to several times that from the public purse, meaning Canadian pension funds could invest tens of billions of dollars.
Canada's biggest pension plans, which include the Canada Pension Plan Investment Board (CPPIB) and Ontario Teachers' Pension Plan, pioneered a strategy of directly investing in infrastructure, funding roads, bridges, rail, airports, utilities and pipelines as an alternative to bonds and equities.
Their move into 'greenfield' investments also places them ahead of international rivals.
Four Canadian funds are now among the top 10 global infrastructure investors. By contrast, U.S. pension funds such as the California Public Employees' Retirement System (CalPERS), began investing directly in infrastructure much later and have invested less. (Graphic:tmsnrt.rs/1SLRtfJ)
Britain's decision to leave the European Union has pushed some government bond yields to record lows and fueled equity market volatility. Competition for global infrastructure assets is also intensifying.
Executives stressed that while the government might be keen for them to participate, they will only do so if the terms are right. The funds, including the CPPIB which invests on behalf of the national pension plan, have traditionally been fiercely protective of their independence.
But they also noted they are under-invested in domestic infrastructure, and local deals would reduce currency risk given they pay out benefits in Canadian dollars.
"Canada is the home country for our beneficiaries and of course we would have to look at suitable projects if and when they are ready," said Cressida Hogg, CPPIB's Global Head of Infrastructure.
For its part, the Canadian government, which declined to comment on the talks, faces a tricky balancing act. It needs to ensure taxpayers are not left with a hefty bill if projects go wrong, but also avoid a public backlash if pension funds are seen to have been treated too generously.
Ontario Teachers' CEO Ron Mock said in June that talks were progressing, with the government keen to move ahead, but warned it was too early to say when the projects will come to fruition.
"I wouldn't put a time frame on it at this point but what I would say is we are seeing a lot of movement. We're seeing at a federal level that they're taking this seriously," he told Reuters.
Some Canadian funds have already begun to take some 'greenfield' risks. Caisse de depot du Quebec, Canada's second biggest public pension fund, agreed in April to invest C$3 billion building a new public transport system in its home province. And Ontario Teachers' has begun making 'greenfield' investments in wind, hydro and renewable energy.
Reporting by Matt Scuffham; Editing by Tomasz Janowski