Disclosure: Mark Wiseman is a senior adviser at Lazard Ltd and was part of a team that advised Intel in its deal with Brookfield Infrastructure referenced in the article below.
Only during such periods as the Industrial Revolution and the Second World War has there been the kind of inflection point for industrial policy and infrastructure building that exists now.
In Canada and internationally, there is an abundance of private capital and increased appetite from institutional investors for innovative and reliable investments. At the same time, the private sector needs enormous amounts of capital to fund projects that will build and supply the industries of the future.
Economic uncertainty, geopolitical divisions and an urgent demand for renewable energy and digital services are all contributing. Just as public infrastructure such as airports and roads is critical to long-term economic success, so, too, is the development of corporate capacity to meet modern industrial needs.
Investors and corporations are scrambling to take advantage of private infrastructure investment opportunities. In Canada, institutional investors and pension funds are at the forefront of the wave of private capital that has become available for financing corporate infrastructure, as demonstrated by Brookfield Infrastructure’s recent US$15-billion investment with chip maker Intel INTC-Q to build a massive semiconductor fabrication facility in Arizona. The agreement was good news for the U.S. chip shortage, with promising implications for the country’s economy and the drive to reshore critical manufacturing.
The private capital to finance such projects is swelling, with US$3.3-trillion of dry powder for investments available at the end of 2021, and investors are increasingly seeking safe havens in infrastructure projects that provide long-term risk-adjusted returns and free up capital to fund corporate growth.
To tap into this, corporations are creating asset classes and cash flow models that meet investors’ needs. For example, an investor might get partial ownership of a production facility while the corporation maintains control of the assets produced, creating scale and allowing the corporation to focus on their core business – in turn producing returns for investors putting their long-term capital into action.
The advent of these deal structures has been made necessary partly because of geopolitical trends. The past few years have seen dramatic instances of decoupling and division in the global economy, precipitating demand for onshore industrial capacity. Look to Europe’s energy woes or Canada’s struggles with PPE and vaccines to understand why Western democracies want to establish supply chains and production capabilities at home or with trusted allies.
Washington is revitalizing domestic industrial policy, determined to become independent and superior to its global rivals. Foreign companies are also beginning to move manufacturing capacity to the U.S., as access to this lucrative market becomes more dependent on domestic production.
U.S. Secretary of Commerce Gina Raimondo floated the idea of “friend-shoring” last fall, whereby the country invests securely alongside trusted countries to facilitate new infrastructure and drive industrial policy. Combined with our expertise in infrastructure financing, this represents an opportunity for Canada.
Ottawa should focus on catalyzing private investment in renewable energy and digital infrastructure. The Canada Infrastructure Bank was established for infrastructure projects that are public, but government policy now needs to go further to facilitate private capital toward corporate ones.
Time is of the essence, given how long it takes to build these projects and increasing global competitiveness. The U.S. government rolled out the CHIPS Act, and other infrastructure legislation, aimed at pooling private capital efficiently for infrastructure projects. The EU has proposed a European CHIPS Act. Canada cannot afford to sit on the sidelines of this industrial revolution.
Specifically, we should focus on the value chains associated with renewable energy and digitization. Once considered emergent asset classes, renewable energy and digital capacity are on their way to becoming the dominant infrastructure classes of the next decade.
The infrastructure expertise of Canadian investors, such as Brookfield BAM-A-T and the Maple Eight pension funds, has not thus far equated to domestic innovation in these fields. A recent EY analysis ranked Canada 13th out of 14 countries for electric-vehicle readiness – an indictment on our ability to capitalize on our strengths in an industry that could contribute US$48-billion annually to our economy.
The need for improved digital infrastructure is equally as urgent. While many thought the digital revolution would take place in the clouds, applications from cloud computing to 5G adoption are becoming increasingly data-intensive, requiring physical infrastructure.
Analysts predict the data-centre market will be worth US$37.6-billion by 2026, compared with US$6.9-billion in 2021. Technology giants Amazon AMZN-Q, Microsoft MSFT-Q, Alphabet GOOGL-Q and Meta META-Q are more than doubling their data centre square footage every three years, but there are a vast number of companies who need a digital infrastructure ecosystem to provide their services.
This kind of opportunity, like the electric-vehicle industry, can be seized through the implementation of creative infrastructure financing arrangements between corporations and investors. As we rapidly enter a new economic and geopolitical era, the way we finance the projects of the future must adapt in tow.
Public infrastructure will continue to be critical for long-term productivity. But partnerships that allow companies to leverage their competitive advantages and incentivize investors to deploy their capital to increase capacity and reduce financial burdens for corporations will be the defining feature of this next industrial revolution.