Ottawa lays out path for pensions to invest in Canada’s airports #CanadaFinance

The federal government has laid the groundwork for pension funds to invest in Canadian airports with a new policy statement, and at least one major fund has taken notice.

“We’re interested in looking at airports as an investment opportunity,” Jeff Wendling, chief executive of the Healthcare of Ontario Pension Plan (HOOPP), said. “We’re very interested in looking at more investment opportunities in Canada and infrastructure is an area where we’d love to do more.”

Transport Canada on Friday issued a policy statement that said pension funds can enter commercial subleases to invest in and develop airport lands with not-for-profit airport authorities across the country that operate 22 major facilities, including Toronto’s busy Pearson International Airport.

Airport authorities can also create subsidiaries to encourage pension investment on airport lands — from terminals to hotels and shopping centres. The for-profit share-capital subsidiaries would allow private investors to buy or be issued shares so long as the airport authority maintains a controlling interest.

“By working with subsidiaries, private investors can build or operate new facilities at … airports, which may be for aeronautical or non-aeronautical purposes,” the document said. “Private investors and airport authority subsidiaries can also undertake joint investment projects that will support the development of new airport facilities, like terminal buildings.”

With ministerial approval, airport authorities could also sublease terminal facilities and operations to a pension fund or other investors, even where formal partnerships or joint ventures are not permitted under existing ground leases.

“Subleases, which can involve aeronautical activities such as cargo facilities or non-aeronautical activities such as energy generation, can be used to drive real estate development on airport lands and in the community, which benefits the airport and others,” the document said.

A third avenue for investment would allow institutional investors to provide subcontracted services for certain aspects of airport operations.

Twenty-six private airports across Canada are part of the National Airports System (NAS), which was created in the early 1990s, and 22 of those — including Pearson and airports in Vancouver, Calgary and Edmonton — are operated by not-for-profit airport authorities on federal land through long-term ground leases.

Transport Canada‘s policy statement said the government is also looking into negotiating extended lease terms with those airport authorities, which could make investments more palatable for long-term investors, both in terms of the horizon for returns and the amortization of costs.

As part of that process, the government plans to look at making other changes to the ground leases to smooth the way for third parties to invest in and develop projects on airport lands.

“Such amendments could make it easier for NAS airport authorities to enter into joint ventures, or arrangements like limited partnerships, where the risks and rewards of land and infrastructure development projects can be shared between … airport authorities and investors,” Transport Canada said.

The policy statement was issued following a request by former Bank of Canada governor Stephen Poloz, who was given a broad mandate by the government last year to find ways to persuade Canada’s large pension funds to deploy more of their billions in investment dollars in Canada.

Last month, Poloz said he had concluded there was an immediate path to pension investment in Canadian airports via “adjacent” assets such as parking garages and freight services, as well as new developments like sustainable aviation fuel facilities, which aren’t core to the business of an airport.

Michael Wissell, HOOPP’s chief investment officer, said the government’s clarification on how such investments would work is “very welcome” and that he expects it to pique the interest of other Canadian pensions, several of which have invested directly in airports in Australia, the United Kingdom and Europe.

“We anticipate HOOPP and, quite frankly, many of the other plans in Canada will really take a good look at this emerging opportunity,” he said. “It’s a good example of (how) when you present opportunities for long-term pools of capital to invest in Canada, they’re going to look at it.”

A spokesperson for the Caisse de dépôt et placement du Québec said the policy statement represents a step in the right direction to make Canadian airports “more investable” for institutional investors.

“Airports can be attractive assets, and our team, which has a 20-year track record of investment in the sector, has been monitoring the situation closely, keeping an eye out for opportunities,” Kate Monfette said in an email.

Some pension veterans, however, don’t think the policy statement will move the needle much, given that some of Canada’s largest pensions, such as the Ontario Teachers’ Pension Plan, the Ontario Municipal Employees Retirement System (OMERS) and the Caisse, are accustomed to taking large and controlling stakes in airports in other countries, either as part of consortiums or on their own. That isn’t possible under the terms laid out by Transport Canada.

“This falls short of what was hoped for. Outside of Canada, the Canadian pension plans can and do own and operate the entire airport,” said Jim Keohane, a director on the board of Alberta Investment Management Corp., the province’s $169-billion pension and endowment investor. “This does not allow for that. The airport authorities will still be the owners and operators.”

There may be some interest in partnerships to build and operate peripheral facilities such as warehouses on the leased land, he said, but these will be relatively small projects and won’t provide for the scale of investments that the large funds were hoping for and can get outside Canada.

Even less compelling, Keohane said, is a condition that any facilities or assets constructed on leased airport lands would become the property of the federal government following the termination or expiry of the land lease.

“This would certainly make these projects less attractive than alternative projects,” he said. “It remains the case that there are more attractive alternatives outside of Canada.”

Another veteran pension executive, who requested anonymity because he wasn’t authorized to comment on the policy statement, said the opportunities to invest appear to be peripheral and he does not expect that much will come of it unless the government and aviation authorities open up the possibility of directly buying an airport.

Officials at the Canada Pension Plan Investment Board and Ontario Teachers’ said they need to study the policy statement and its implications before making any comment on their interest. OMERS could not be reached for comment.

The Canadian Airports Council (CAC), which represents 100 airports including all the privately-operated NAS airports, said the airports have been advocating for greater financial flexibility in their ground leases and extensions to unlock investment opportunities.

“We are pleased to see this policy statement that will allow airports to explore the extension of airport ground leases, which would provide the long-term stability needed for significant capital projects and infrastructure development on airport lands and business parks,” Monette Pasher, president of the council, said in a statement.

Canadian airports plan to invest $28 billion over the next 10 years to accommodate growing passenger demand and diversify markets, according to the CAC.

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