In its first report, released last October, the Finance Minister’s Advisory Council on Economic Growth recommended the creation of an independent “Canadian Infrastructure Bank (CIB)”. In his fall economic and fiscal update, the Finance Minister supported the Advisory Council’s recommendation, saying that that this represented “a great opportunity for the government to leverage its investments in infrastructure, by bringing in private capital to the table to multiply the level of investment”.
The Infrastructure Bank is intended to leverage $35 billion in public funds to attract about $140 billion in private capital. Of the $35 billion, $20 billion is not expected to have an impact on the government’s bottom line, with the remaining $15 billion expected to affect the budgetary balance, over the next ten years.
According to the Finance Minister, “The CIB will be accountable to, and partner with, government, but will operate at greater arm’s length than a department—working with provincial, territorial, municipal, Indigenous and investment partners to transform the way infrastructure is planned, funded and delivered in Canada”.
There has been considerable public support for a CIB. There is an accepted, but unproven, proposition that the private sector is better at infrastructure spending than the public sector. But the decision to create an independent CIDB raises some important questions that have not been adequately answered.
The first question is, why create it at all? There already exists an active federal agency – PPP Canada – committed to “a long-term performance-based approach to procuring public infrastructure where the private sector assumes a major share of the risks in terms of financing and construction…”
Moreover, virtually every province already has a special agency or department dedicated to funding public-private partnerships. So why does the Finance Minister and his Advisory Council believe we need a new mechanism such as the CIB? The Council did not provide a very strong rationale for a CIB other than to claim, “public revenues alone cannot be expected to bridge the (infrastructure) gap”.
But that is not true at all at the federal level. The federal government funds its infrastructure projects by issuing 30 or 50-year bonds, which it currently can do at historically low interest rates. The costs are amortized over the service life of the project. The impact on the budgetary balance is spread over the lifetime of the investment, perhaps as long as fifty years. If it loans these funds, without concessions and covers its borrowing costs, there is no direct impact on the budgetary balance.
In other words, the government currently has access to unlimited and cheaper funding for public sector infrastructure investments than the private sector.
Nevertheless, it’s not hard to understand why the Advisory Council wants an independent CIB. “Given the historically low, and in many cases negative interest rate environment that constitutes the global economy’s “new normal,” there is an abundance of institutional capital around the world waiting to be deployed. Canadian and global investors are looking for long-lived projects with appropriate risk-adjusted returns in which to invest”.
In other words, pension funds such as the Caisse de Depot, and other large investment funds need higher returns and what better place to turn to than to public infrastructure? This would provide large financial institutions with secure revenue streams through the “ownership” and “control” of public assets. These public-private investments can yield private investors very high rates of return, while leaving the government to take much of the risk.
The second question that requires an answer is why the Council and the Finance Minister believe that the CIB should be at “arms length” from government. According to the Council, the CIB “will require an independent governance structure in order to attract institutional capital and to attract the level of talent required to deliver on its mandate”. Apparently, large institutional investors don’t like a lot of government rules and regulations. Governments are there simply to provide risk guarantees.
The Finance Minister agrees. He states “The government will be responsible for setting the overall policy direction and high-level investment priorities for the Canada Infrastructure Bank, consistent with the commitments outlined in ministerial mandate letters.” In other words, the government is not going to get involved in how long term infrastructure contracts (LTICs) for public sector projects are drafted.
But why should the government not have a say in how the CIB is governed and operated? Why should the government not be on the Board of the CIB, and not appoint the chairman, which it currently does for other Crown Corporations? Why should the CIB not report to a Minister?
Another unanswered question, is why does the Finance Minister want to create an independent CIB that will focus only on “National Economic Development projects such as toll highways and bridges, high-speed rail, port and airport expansions, smart city infrastructure, national broadband infrastructure, power transmission and natural resource infrastructure? Projects considered by the Bank should generally have an all-in cost in excess of $100 million to meet the minimum to attract institutional investment”.
In other words, the Council wants an independent CIB that will concern itself with only about 2 per cent of the “national” infrastructure gap. The remaining 98 per cent that is provincial and local is too small to attract large investors.
Perhaps the Finance Minister should concern himself more with the 98 per cent of infrastructure needs and less with the 2 percent. It is at the provincial and local level where there are in fact revenue and borrowing constraints that could inhibit infrastructure investments.
Despite the Finance Minister’s enthusiasm for the CIB, there was very little in the 2017 Budget for the CIB. Some limited funding was provided but there was no information about structure or operation, or what these funds were earmarked for. This, despite the fact that the amounts provided are very specific, indicating that the Government has a good idea as to how this tranche of funds is to be used. The budget simply said that more information would be provided later in the year and that a process would be started to choose a CEO and a Board of Directors. Maybe Mr. Morneau is rethinking the CIB?
Instead of a CIB, the Finance Minister may want to consider a Crown Corporation Infrastructure Bank, modelled along the lines of the Export Development Corporation. The federal government would borrow on behalf of this Crown Corporation by issuing 30-year bonds at historical low interest rates (around 2 %). Ontario and Quebec both have a premium over this rate of around 1 per cent and other provinces higher.
Provinces could then borrow for specific infrastructure projects from this new Infrastructure Crown Corporation at rates below what they would pay. As long as the Infrastructure Crown Corporation recouped its borrowing and administrative costs, there would be no incremental impact on the federal government’s budgetary balance.
C. Scott Clark held a number of senior positions in the Canadian Government, including Deputy Minister of Finance from 1998-2001. He has a PhD in Economics from the University of California at Berkeley and is currently President of C. S. Clark Consulting.
From 1990 to 2005, Peter C. DeVries served as Director, Fiscal Policy Division, at the Department of Finance. In that capacity he was responsible for overall preparation of the federal budget. He is currently a consultant in fiscal policy and public management issues.
Their Blog is 3dpolicy.ca