Written by David Dodge and Jane Bird
In his fall economic statement on November 1, Mr. Morneau, the federal Minister of Finance, committed the federal government to deliver an additional $81 billion between 2017 and 2027 to fund public infrastructure with an emphasis on public transit, green, social and rural infrastructure, and trade and transport. While the details of this funding will only become available in his spring budget, the minister's most important commitment is to deliver $15 billion of this initiative ($35 billion total cash) through a newly established Canadian Infrastructure Bank (CIB). This note describes the salient features of this innovative federal institution, its implications for Canadian economic development, and the possible opportunities it opens up for Canadian businesses.
The bank has four major purposes:
- to structure, negotiate and deliver federal support for infrastructure projects with revenue generating potential;
- to attract private sector capital to key national and regional infrastructure projects. To accomplish this, the Bank will have the authority and flexibility to use innovative financial tools including debt (including loan guarantees), equity and hybrid finance;
- to serve as a single point of contact for unsolicited proposals from the private sector, and very importantly;
- to provide evidence-based advice to governments (federal, provincial, and possibly municipal) on the design, structure, and negotiation of revenue-generating projects.
This announcement is consistent with the October recommendations about infrastructure of the Advisory Council of Economic Growth.
Of the $35 billion of available authority, it is contemplated that up to $15 billion be available in some form of direct or implicit subsidy to revenue generating projects which would entail a budgetary expense.
The name "Bank" is somewhat of a misnomer for this new agency as its mandate goes well beyond just providing loans for new projects. It will provide some amalgam of consulting advice to governments, investment banking, and private equity services and contract management services. The CIB would build the capacity needed to execute on the delivery of multiple large-scale regional or national projects.
The CIB will have an important degree of operating independence but major strategic decisions will be made by governments, although at this point it is not clear exactly what role the provinces will play nor is the structure of the Bank's Board of Directors fully defined. It is hoped that the bank will develop an "audit" of public infrastructure needs, either directly itself or perhaps through a related federal-provincial analytic agency similar in structure to the Canadian Institute of Health Information.
While the precise nature of the projects that the CIB might support is not nailed down, the government has made it clear that the following sorts of revenue-generating projects could be supported based on merit:
- integrated multi-year urban road and transit projects;
- intercity rail links;
- regional transport hubs around major airports;
- major port and gateway upgrades;
- electricity transmission interties, and
- large infrastructure projects to deliver on climate change mitigation.
The focus of the Bank will be on revenue-generating infrastructure that in practice should be able to attract private debt and equity in addition to CIB Equity and the Debt and provincial contributions. It is contemplated that the cost of ongoing operations of projects, debt service and returns to both private and CIB equity would be paid from user charges. However, when a valuable project does not initially offer a viable return to the equity holders, it is contemplated that the CIB (and provinces or major municipalities) could make a capital grant to make the project attractive to private equity participants. Alternatively, the CIB might provide a loan guarantee or concessional forgiveness to attract private debt.
Generally speaking, considerable room is being given to the CIB to develop creative forms of finance to support productivity enhancing infrastructure over its whole life cycle. However, these projects must generate direct and/or dedicated revenues to be supported by the CIB.
The government hopes that the private sector (in particular large pension funds) will finance up to 80 percent of the life-cycle cost of projects. Social infrastructure projects and smaller municipal projects will continue to be supported in the traditional way by the Government of Canada contributing up to one third of the capital cost. Provinces and municipalities would provide the other two thirds of the capital cost on full ongoing support for operations and maintenance.
The establishment of the CIB signals that the federal government, through this new, relatively independent, professionally competent agency, will play a more active role in the selection and execution of nationally significant infrastructure projects. It also signals that the federal government is putting much more emphasis on user charges as opposed to general taxation to pay for public-use infrastructure.
Opportunities for Business
The continued commitment to infrastructure, in particular the focus on attracting private sector investment in revenue generating projects, represents an opportunity for Bennett Jones clients: for those investing in infrastructure, the field just got bigger.
The mandate of the CIB ”to provide advice to government, banking and private equity services ”will hopefully mean that multiple large projects will come on stream quickly and that they will be well structured. Those who are experienced and prepared will have an advantage. Though the details are not clear at this early stage, the signal that the government will be receptive to unsolicited bids represents a new opportunity for those experienced in project development. We think the energy transmission, water, wastewater and transportation fields are well suited to this initiative.
The Decade Ahead
The establishment of the CIB has important implications for Canadian economic development in the decade ahead. First and foremost it demonstrates a federal commitment to see public infrastructure partly supported by user charges rather than completely by taxation as has been the past custom. The commitment to rely at least in part on user charges has three important implications. First, it means that at least part of the initial capital cost and all of the operations costs can be sourced from the private sector rather than the government budget. Second, it means that projects with a real economic return and that enhance overall productivity are first in line to be funded; economic efficiency will trump political expediency. Finally, it means that both the planning and execution of major capital projects will be done efficiently by a quasi-autonomous arms-length institution. These three factors should, over time, generate higher economic growth while preserving sound government finances.
We cannot emphasize enough the focus on projects with a revenue stream, and the shift from the general tax base to user fees to finance projects. Those who are creative in identifying a revenue stream, structuring projects over the full lifecycle, and being clear about the role of a federal investment will have significant opportunities.