The Canadian government launched late last year two reviews to consider proposed privatisations of port and airport assets in the country. The privatisations could provide additional capital for new infrastructure in the country, but have met with opposition from Canada’s airport and port authority bosses.

If the privatisations do go ahead they are likely to attract significant investor interest, with domestic public pension plans particularly well-placed to win assets. Canada’s airports have been enjoying significant growth in passenger volumes in recent years, at a rate far in excess of that seen in the US, making them highly attractive to infrastructure investors.

Funding future infrastructure

Liberal Prime Minister Justin Trudeau, elected in October 2015, inherited David Emerson's review of the Canada Transport Act, commissioned under the previous Conservative administration. But Emerson's recommendations for airport privatisations, published in February 2016, could prove useful to the PM.

The Trudeau government’s latest budget in November 2016 set an infrastructure spending target of C$186 billion ($142 billion) over the next 11 years and announced the creation of an infrastructure bank to which the government would contribute C$15 billion. Due to these spending commitments, the government may well be casting around to raise money.

The government signaled its intent to consider Emerson's proposals by appointing Credit Suisse as financial adviser to the airport sector in September 2016 and Morgan Stanley for the ports sector in November. 

Emerson points to the model of asset recycling for outdated or legacy assets, as the UK, Australia and US have done, to fund infrastructure investment. While Canada's regional government have long used PPPs to fund social infrastructure projects, and increasingly transport, selling off control of operational core infrastructure has not been a general policy.

Emerson’s report recommends federal government move “within three years to a share-capital structure for the larger airports with equity-based financing from large institutional investors”. Canada’s five largest airports handle roughly 70% of airport traffic.

Emerson also recommended “adopting a share-capital structure for Canadian port authorities, including receiving proposals from institutional investors or private equity investors”. The 18 port authorities are landlords of the largest ports, that handle 61% of total tonnage. A large amount of infrastructure at ports themselves, such as the container terminals, are already in the hands of shipping majors who ride with the commercial ups and downs of sea trade.

Public pockets are more connected to the airports. However Dylan Foo, AMP Capital's head of infrastructure equity in the Americas, says: "My view is airports are a little less politically sensitive than other {sectors} such as electricity, water and schools. Generally airports have more commercial analysis and upside: there can be variables on aviation and passenger revenue which can be correlated to the economy, as well as non-aeronautical revenue from concessions and parking."

Contract structures

Options are likely to include a long-term concession route, a revenue sharing arrangement, or a sale of the asset itself.

Foo says: “Of course a key gating item is to make sure the deal is attractive enough to pursue… As an active investor, we would need to determine whether there are real opportunities for us to add value to the passenger experience and partner with stakeholders."

Cherian George, managing director and head of Fitch’s infrastructure group for the Americas, says infrastructure investors would be “champing at the bit” if privatisations of hubs come up in Canada, as they are “looking for more diversification”. Major global infrastructure fund managers such as Brookfield and Global Infrastructure Partners (GIP) have in the last 12 months raised record sized OECD-focused core infrastructure equity funds, further piling up the market dry powder.

George says: “Canadian P3s have tended to be a small piece of the pie as they have small equity stakes. With these large airports you could finally have large equity chunks and that would be very attractive to the Canadian pension funds and equity from around the world… There would also be lots of debt funds looking for investment.”

Canada’s pension plans have over $1.5 trillion of assets, a Bank of Canada report said in June 2016, and naturally for a privatisation would be less controversial buyers than foreign capital.

Sales of international airports in developed markets have attracted many suitors in recent years, pushing up valuations. In February 2016, GIP sold the freehold-owned London City Airport to three Canadian pension funds and Kuwait’s sovereign fund for an earnings before interest, tax, depreciation and amortisation (EBITDA) multiple approaching 30x.

Regional airports under concession have also sold at high prices. The Nice and Lyon airports were sold to European strategic operators at valuations implying 19-20x EBITDA.

Investors are likely to be drawn to the 50% growth in passenger traffic volumes achieved by Canadian airports between 2000 and 2014, according to a Fitch Ratings report from May 2015. During the same period air traffic grew 5% per year on average, which was three times the rate for the US, the report noted.

Of Canada’s five largest airports, George says: “The year 2016 shows significant growth at the major international gateway airports Vancouver, Montreal and Toronto, and not surprisingly tepid growth and declines in Calgary and Edmonton, where Alberta is having issues with oil industry declines… This is important maybe as the assets that have declines would attract less interest as there’s some risk associated over time, which would factor into the price the government might get.” Edmonton’s 2016 traffic was 5.7% down year-on-year.

Opposition

Though selling off airports and ports could raise significant capital for the government, undertaking sales will not be without political risks. As the concept of privatisation is so alien to the Canadian public, the proposals have met with vocal opposition, not least from transport authorities. Many have complained that the deals will result in worse service and higher costs for passengers due to pressures to make dividend payments to shareholders.

The airport authority bosses of Ottawa and Vancouver also pointed to the combined C$13.3 billion of debt in Canada’s airports which would be factored into sale prices. Calvin Rovinescu, president and CEO of Air Canada, has said “…airport privatization is likely to further drive up the already high usage costs of Canadian airports and, with it, ultimately airfares. Therefore, it’s not a good thing for airlines or our customers.”

As the government stays quiet pending the reviews’ conclusions, the authority voices against privatisation are the loudest, but expect the private infrastructure community to clamour for any assets which do come up for sale.