Banking on Infrastructure

There’s concern about the newly announced Canada Infrastructure Bank. But if it’s done right, the CIB could provide a much-needed boost to spending.
CANADA IS CONSIDERED best in class in the P3 market, and the Canadian Council for Public-Private Partnerships’ (CCPPP) annual conference is world-renowned, Minister of Infrastructure and Communities Amarjeet Sohi told attendees of a CCPPP luncheon in Toronto in April. “P3s will continue to play a critical role as we develop Infrastructure across the country,” Sohi said. “We have seen the value the private sector has brought to the table” in terms of quality and delivery.

The federal government plans to leverage those P3s in its ambitious plans for Infrastructure investing. In the government’s Budget 2017 document, it announced an investment of $180 billion in Infrastructure over the next 12 years. This will nearly triple the federal investment over the next decade, the minister said.

The Investing in Canada Infrastructure plan will focus on five main Infrastructure areas: Public Transit; Green Infrastructure (including water and sewer systems, and reducing greenhouse gas emissions); Social Infrastructure (including affordable housing, cultural and recreational facilities); Trade and Transport; and Rural and Northern Communities. Details of Investing in Canada will be worked out by the first quarter of next year and will “give the provinces and territories the certainty and resources they need to plan their long-term investments,” said Sohi.

Included in the Investing in Canada plan is the proposed Canada Infrastructure Bank, which was announced in April and will, if it is eventually approved by Parliament, invest $35 billion into “transformative Infrastructure projects” through public-private partnerships. Fifteen billion dollars would come from Investing in Canada, to be divided equally between public transit systems, trade and transportation corridors, and green Infrastructure projects.

The Bank’s stated objectives are to invest in Infrastructure projects that have revenue-generating potential and are in the public interest; to attract private-sector and institutional investors to projects so that more Infrastructure can be built in Canada; to serve as a centre of expertise on Infrastructure projects in which private-sector or institutional investors are making a significant investment; to foster evidence-based decision-making and advise all orders of government on the design of revenue-generating projects; and to collect and share data to help governments make better decisions about Infrastructure investments.

The term “bank” may be a bit of a misnomer, suggests Timothy Murphy, whose practice with McMillan LLP in Toronto focuses on transactions with a public component. “Really what this is, is … an enabler of large [government-funded] Infrastructure projects to proceed in partnership with large pension funds,” and to encourage them to invest in Canada, Murphy says.

Some critics see the proposed Infrastructure Bank as redundant, given the existence of  the Crown corporation  PPP Canada and its P3 Canada Fund — a merit-based program that encourages P3 innovation and “inexperienced governments” to consider P3s in public Infrastructure procurements.

To date, the government hasn’t shared with the Infrastructure community how the proposed Canada Infrastructure Bank will work, says Douglas Younger, chair of Aird & Berlis LLP’s national Infrastructure team in Toronto: “I think the government so far has been pretty sketchy in how the Infrastructure Bank will be structured, and how it will provide financing. … There’s lots of speculation in the market, and amongst people in the industry, and quite a bit of skepticism. The mantra you’ll hear is that there is more than enough funding, but not enough opportunities. It’s a solution to a problem that doesn’t exist.”

Will the new Canada Infrastructure Bank replace PPP Canada? What will its mandate be? “It’s been speculated in the press that it will focus on revenue-generating projects,” Younger says. “It’s also been speculated that this may be a way of inducing the major funds to invest in green projects.”

Younger questions whether there are enough profitable Infrastructure projects out there to invest in, noting that public transit systems are very expensive to build and dependent on government funding; as an example, he points to Toronto’s Eglinton Crosstown light rail transit (LRT) system, now in development, which carries a price tag in excess of $6 billion.

But Murphy believes that the Bank may play a useful role in public transit projects, citing the “classic example” of Toronto’s Union Pearson Express airport rail link, completed in time for the Pan American and Parapan American Games held in the city in 2015.

The project was intended to have been a public-private partnership between the province of Ontario and the Union Pearson Airlink Group, which is a subsidiary of SNC-Lavalin.

“It was meant to be a revenue-risk project,” he says. SNC-Lavalin was to build and operate the rail link as a commercial operation, paying the capital costs and recouping them from the fare box. But after two years of failed negotiations — including, says Murphy, the Ontario government’s refusal to cover the risk of the project — SNC-Lavalin’s Union Pearson AirLink Group walked away, and Crown agency Metrolinx took over the ownership and operation of UP Express.

“If the Bank had been around it could have provided support to the project, and even if the project was not economically successful, the province would have been better off in two ways,” says Murphy. “First, it would have had the expertise of a private-sector entity looking to operate it efficiently and well so as to encourage riders, and second, even in the circumstance where the project did not succeed, the project would still have benefited from the contribution of the SNC equity.”

The Bank will not take over the business of granting Infrastructure money, says Jane Bird, who works in complex public and private construction and Infrastructure initiatives with Bennett Jones LLP in Vancouver.

“The vast majority of [granting] will come through the traditional source: Infrastructure Canada.” A small portion of that funding will be available through the bank, which can play a significant role, she says, through direct investment of money allocated and facilitating private-sector investment, and by acting as a source of expertise on structuring larger, more complicated commercial structures.

The case for the Infrastructure Bank goes beyond a simple cost-of-borrowing analysis, says Catherine Doyle of Blake, Cassels & Graydon LLP in Toronto, whose practice focuses largely on Infrastructure and public-private partnerships. Governments can borrow at a lower rate, but they can also operate at a loss “forever,” unlike the private sector. So, the case for the Bank is “based on how to use federal capital appropriately,” and how to use the private sector effectively “for the long-term benefit of the country.”

The five focus areas of Investing in Canada support that the majority of Infrastructure in Canada is not federally owned or controlled, Doyle says. “The vast majority is either provincially or municipally controlled or owned.” So, focusing on public transit, green space, social Infrastructure and other municipal/provincial projects makes sense. Doyle “would have preferred to see First Nations explicitly called out” in the list of five priorities; “they are the communities that least have the tools to build that Infrastructure,” she says, while noting that they may be included under the rubric of rural and northern communities.

The Bank will concentrate in areas where projects are not as financeable, she says. “There’s lots of money now for LRT, roads, those types of things,” and yet water treatment systems are in dire need of financing, and impose a significant cost on municipalities. “There the Bank can play a role.”

Indeed, in his speech to the Canadian Council of Public-Private Partnerships in April, Minister Sohi noted that Canada’s Infrastructure demands have outpaced investment, that seniors have a harder time accessing essential services, and that there is a lack of affordable housing and child care. This underscored the need for investing in social Infrastructure as well.

If the Bank succeeds in developing best practices, it will have achieved an important objective, says William Osler of Bennett Jones LLP in Calgary, who practises in the areas of public and private M&A, securities law and corporate governance matters, with a focus on the oil and gas sector. Oil and gas ventures don’t constitute public projects, but Calgarians are nonetheless “dreaming big,” he says, perhaps for a new hockey arena to support a bid for the 2026 Winter Olympics. But the Bank’s stated goal to foster evidence-based decision-making “makes me think the feds are saying, ‘we’ll spend dollars on good projects, but we’ll also be a centre where we’ll be leaders in how this kind of thing is done.’

“Across the country people are trying to get big projects done, and there is continuous concern about red tape and bureaucracy,” he says. Fostering evidence-based decision-making “would be an example of where the CIB is doing good work beyond the specific projects, to develop best practices.”

Meanwhile, it is still early days. The government’s omnibus Bill C-44, which includes the Investing in Canada plan and its Infrastructure Bank, has yet to be passed in Parliament, and has been dubbed the “privatization bank” by more than one MP who has stood in the House to oppose it.

“I don’t think people out here are too worried about … whether they bury or include [the Bank] in the Budget Bill, or if it’s carved out of the current Bill” to pass in separate legislation, says Osler. “But they’re waiting to see what this will look like, who’s on board, who the CEO is.” Once the legislation is passed (if it ever is) and senior executive appointments have been made and the Bank makes its first investment, the Infrastructure sector will learn how the Bank can be used as a tool,” says Doyle.

We’re all waiting with bated breath.”
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