Pension funds watch from the sidelines as Trans Mountain pipeline nationalised

Canada’s federal government is hoping that nationalising a huge pipeline project will attract institutional investors. Joel Kranc reports

Infrastructure projects can offer secure, long-term revenue streams for pension funds and other large investors working to cover future liability costs. However, recently in Canada, the Kinder Morgan Trans Mountain pipeline expansion, a proposed C$7.4bn (€4.81bn) project with great promise as a potential large-scale investment, has fallen into a political quagmire.

The object of the pipeline, from Kinder Morgan’s point of view, was to expand and add approximately 980km of new pipeline between Alberta and British Columbia providing more opportunities to ship oil to refineries in the US (and elsewhere). However, Kinder Morgan suspended non-essential spending on the expansion after the British Columbia government and many indigenous groups raised opposition to the project, citing environmental concerns and land protection issues. What took place after was a commitment by the federal government to purchase the project for more than $4bn from Kinder Morgan, guarantee its construction, and offer an indemnity to future investors interested in taking ownership in the project once completed.

The question becomes: can the pipeline project be made attractive again to large-scale investors?

The director of communications at Alberta Investment Management Corp (AIMCo) provided a statement to IPE Real Assets: “The importance of Kinder Morgan’s Trans Mountain Pipeline expansion to Alberta, and to all Albertans, cannot be underestimated. While we do not comment on potential interest in any investment opportunity, as Alberta’s investment manager, AIMCo is supportive of prudent measures to enhance investor confidence and address market uncertainty. The announcement by the Federal Government to acquire the Trans Mountain Pipeline is a positive step towards ensuring the future of this vital initiative.”

This is not surprising given the two sides of the argument, where Alberta a strong supporter of the pipeline expansion and British Columbia is opposed. However, there are some in the industry who think the federal government’s action of essentially nationalising the project will be a good thing for investors in the long term.

“The government has stepped in, because it has proved challenging, and has developed a political nature to it all,” says Mark Romoff, president and CEO of the Canadian Council for Public Private Partnerships. “I think the government wants to ensure that project goes ahead and they are clearly fully committed to it… that is a motivation for why the government decided to buy the asset and move ahead with it.”

And while he notes there are such things as bad infrastructure investments, the Trans Mountain pipeline expansion has the conditions, at the moment, to make it attractive. “Once the pipeline is completed, I would be surprised if there wasn’t interest by institutional investors. And once you take away that political risk, which the government is doing, it becomes much more interesting for the investment community.”

The Canadian government has already reached out to many of Canada’s largest institutional investors and has hired Greenhill, a New York-based investment bank, as its advisor.

Mark Machin, CEO of the Canada Pension Plan Investment Board (CPPIB), told MPs in Canada’s parliament that CPPIB had been approached. He was quoted  as saying, “we obviously have an obligation to assess every major investment opportunity that comes along and fully understand the risks, fully understand the potential returns and understand how it might fit into our portfolio”. In regard to the pipeline, Machin said, “we’re still evaluating the situation”.

Other large funds appear to have the same wait-and-see attitude towards the investment. Ron Mock, CEO of the Ontario Teachers’ Pension Plan, speaking at a conference in Toronto this summer, said: “If it’s an opportunity for our members and for our organisation in support of our fiduciary duty, then we will take a look. But where we sit today, it’s still very very early days. It’ll be looked at and looked upon through the lens that we look at with anything else we invest in globally.”

Keith Ambachtsheer, pensions expert and president of KPA Advisory Services in Toronto, told IPE Real Assets that investors will carefully scrutinise the risk of the project before any concrete investments are made.

“Whatever they acquire they will look at as a total package,” he said. “It has a financial side to it but it still has a risky side and the question is to what degree have the legal sides been settled and to what degree have the protestors accepted that this thing will be built.”

He adds that investors will have some difficulty assessing the risk-reward profile but agrees with Romoff’s assertion that government guarantees will help investors make decisions more easily in the long term.