Exclusive

Inside Ottawa’s plan to attract trillions in private sector investment to build infrastructure across the country

iStock
article-aa

The Canada Infrastructure Bank (CIB) was announced to much fanfare in April 2017, but since then, almost no information about the bank’s activities has been public—until now.

Confidential government reports obtained by The Logic detail which projects the CIB is considering funding with the $35 billion they were allocated in Budget 2017, along with a mandate to use the funds to bring in many more billions of dollars from the private sector to get large public infrastructure projects built.

The documents also outline how the bank could take on nearly all the early risk in the hopes of encouraging private-sector investment, and most importantly, the safeguards the CIB has implemented to sideline government objections and ensure projects actually get built that could include immunity from political interference after an “early veto” period.

Subscribe to read the full article

By entering your e-mail you consent to receiving commercial electronic messages from The Logic Inc. containing news, updates, offers or promotions about The Logic Inc.’s products and services. You can withdraw your consent at anytime. Please refer to our privacy policy or contact us for more details.

Already a subscriber?

Talking Point

Documents obtained by The Logic outline that all federal infrastructure projects will be considered by the Canada Infrastructure Bank for potential private-public partnerships. The documents also suggest that cabinet would only have an “early veto” on projects after which they are designed to be immune to political interference, thereby ensuring returns for investors.

The Logic obtained six reports, via access to information requests, prepared by the Economic Growth Council. The council, which is led by Dominic Barton, former global managing partner of McKinsey & Company, is an advisory group tasked by Finance Minister Bill Morneau with coming up with innovative ideas to promote Canada’s long-term economic growth.

What could be funded

A February 2017 memo from the council to Morneau calls for infrastructure that encourages trade both within Canada and between Canada and other countries.

“This will often mean investments required to move our natural resources, energy, foodstuffs and products more efficiently,” reads the memo.

In the reports, the council repeatedly suggests that trillions of dollars in private assets from pension funds, banks and sovereign wealth funds could be used for traditional infrastructure like public transit, toll highways and bridges, high-speed rail, power transmission, natural resource infrastructure and port and airport expansions.

“Unlocking our educated, multicultural human capital’s potential requires infrastructure that allows efficient data communications and physical travel within Canada and abroad.”

The council encouraged the bank to focus on projects with a national scale. For instance, there was interest in doubling how many goods can flow through the Asia-Pacific Gateway, a transportation network of ports, roads and airports in Canada’s western provinces focused on trade with Asia.

For local projects, there was particular focus on trying to reduce congestion in Canada’s largest cities. The council pointed out that Toronto, Vancouver, Montreal and Halifax are among the 10 most congested cities in North America.

“Congestion not [only] affects the cost and quality of life of everyday Canadians, but it also affects the competitiveness of our export-oriented sectors. In quantified terms, studies show that congestion leads to costs in the vicinity of 0.8 per cent of GDP in a developed country like ours,” reads the report.

The council was also interested in getting the bank to make investments in First Nations communities, where they said there was a notable infrastructure gap. Those investments could include improving housing, roads, and access to clean drinking water, according to a 2016 report prepared by the Canadian Council on Public-Private Partnerships.

“The gap in First Nations infrastructure alone is estimated to be $25 to $30 billion; a large deficit considering that First Nations account for 4.3% of the Canadian population,” reads a September 2016 report from the council.

The council also suggests investment in technological innovation, including converting Canada’s largest metropolitan areas to smart cities and setting the entire country up with 5G broadband connectivity.

How it could be funded

As The Logic reported last week, Morneau’s Economic Growth Council identified 23 public assets—including Canada Post, major highways and the country’s largest airports—that could collectively be sold off for over $200 billion.

According to reports prepared by the council, the money generated through those sales could be used by the CIB to build new infrastructure, for which the CIB would assume nearly all the upfront costs.

“The bank will play a critical role in addressing early stage risks associated with large infrastructure projects. This ‘de-risking’ will often entail investing equity upfront to complete technical drawings, specifications, risk assessments, social impact analyses, early permitting, etc.,” reads a February 2017 report.

The council estimates that the bank could bring in between US$1.7 trillion to US$2.5 trillion in private sector investments for infrastructure projects. They also suggest that CIB-backed projects would bring in savings of about 23 per cent compared with traditional government infrastructure investments; eight per cent savings through better project selection and 15 per cent savings through “streamlined delivery.”

The pitch to private sector investors: projects that will bring in reliable revenue for decades through user fees like tolls on highways, which would be split between the private sector investor and the bank.

The council recommends that the bank use a wide range of financial instruments to entice private investors, including performance bonds and loan guarantees.

The bank would also work with provincial, territorial and municipal governments, both to secure additional funding for projects, and to ensure the projects wouldn’t be blocked by their objections.

Ensuring projects get built

The council warns that Canada lags behind peer countries in terms of the “connectivity index,” which measures the ability of goods, services, finance, people and data to move both within Canada and to other countries. It argues that infrastructure is good for short-term growth, bringing in a $1.59 change in real GDP for every $1.00 spent, as well as long-term growth, amounting to an approximate 25 per cent increase in sustained GDP.

“In short, no other area of federal government investment can compare with infrastructure in terms of reach, effectiveness and scale,” reads the report.

Canada has struggled to build large infrastructure projects, such as oil pipelines and liquefied natural gas terminals, for several years now. The Energy East pipeline, which would have run from Alberta to New Brunswick, was cancelled in 2017 following years of protests and legal challenges from Indigenous groups and environmental activists. The Trans Mountain pipeline was purchased by the federal government in 2018, in an attempt to mobilize the project after years of delays.

To mitigate the risk of an investment bowing to public pressure, a council report marked “confidential” recommends that under the new system, the government will only be able to veto a project at the very beginning of the selection process.

“Once a project has passed this ‘early veto’ point, it is essential that the government not interfere further. Were it to, it would substantially erode the market’s confidence in the independence of the bank and create a level of uncertainty that would render the bank largely unable to attract private capital to finance projects,” reads the report.

This recommendation isn’t mentioned in the founding legal framework of the Canada Infrastructure Bank Act or in former Infrastructure Minister Amarjeet Sohi’s statement of priorities letter.

However, when asked if such a system is in place, Brook Simpson, a spokesperson for current Infrastructure Minister François-Philippe Champagne, didn’t rule it out, saying that the bank “will receive an early signal from cabinet” if the government approves, but after that, “any decisions made from there on deal structuring and project approval are the bank’s alone to make.”

Jeni Armstrong, a spokesperson for Morneau, said that all projects proposed to the government will be shared with the CIB, and the bank will decide if it wants to fund the project, meaning the ‘early-veto’ has the potential to affect all infrastructure projects that the federal government undertakes.

Some recommendations not included

Not all recommendations to ensure the independence of the CIB appear to have been adopted, however. The council recommended that the chair serve for a minimum of five years, that the government only select board candidates from a shortlist presented by the existing board, and that a new chair be selected by the board, not government.

“This institution will need to be viewed by executives, investors and other market intermediaries as independent in order to attract the right talent and to attract the magnitude of institutional capital needed to undertake a substantial number of projects,” reads the report.

None of those safeguards are mentioned in the Canada Infrastructure Bank Act or the minister’s statement of priorities letter.

Armstrong pointed to the Financial Administration Act, which identifies exemptions for certain Crown corporations that handle significant sums of money, including the Bank of Canada and Canada Pension Plan Investment Board. The CIB is not listed as exempt.

The federal government also appears not to have heeded a number of other recommendations the council made to ensure the CIB’s effectiveness. The council recommended there be seven to nine board members to keep the bank nimble; there are currently 11 directors. The council also recommended the CIB receive a minimum of $40 billion over ten years in public funds; the CIB got $35 billion over eleven years.

Pierre Lavallée, CEO of the CIB, declined to be interviewed by phone. He also would not answer questions by email, including whether he felt the bank had enough independence from government.  

“Pierre will not comment on any differences between the council document and the mandate of the bank. He does not feel it is appropriate. He joined the bank once it was created and the mandate set,” said David Wills, a spokesperson for the CIB.

The council envisioned the CIB could become a way to see infrastructure projects through, regardless of a change in government and any consequent shift in political priorities.

The bank is already significantly behind schedule; Lavallée was only appointed in May. At the time, he said it could be up to 18 months before the bank is ready to announce its first investment. That would place the first announcement about one month after voters head to the polls for the next federal election in October 2019.