Canadian cities push back on plans for infrastructure bank

TheGlobeandMail.com
Oct. 25, 2016
By Bill Curry

Canada’s municipalities are pushing back against plans for a $40-billion federal infrastructure bank, warning Ottawa that it should not be capitalized with the billions of dollars the Liberals have already promised cities for transit, bridges and other projects.

Finance Minister Bill Morneau’s advisory council on economic growth - which has worked directly with top federal officials for months - released a report last week calling for the creation of a new infrastructure development bank that would bring public and private money together to build major projects across the country.

The council said Ottawa should capitalize the bank with at least $40-billion over 10 years and predicted that would leverage a further $160-billion - if not more - in private capital.

The report was silent though as to how the federal government should come up with the $40-billion. In interviews, two members of the council - Mark Wiseman, senior managing director of BlackRock Inc. who was recently the head of the Canada Pension Plan Investment Board, and Michael Sabia, president and CEO of the Caisse de depot et placement du Quebec pension fund - said that decision is up to the federal government. But both suggested the money could come from the existing federal pledge to spend $60-billion in new funds on infrastructure over 10 years.

The challenge for the federal cabinet is that some of that $60-billion has already been spent on what it called Phase 1 of its infrastructure plan. Negotiations toward a second phase that would allocate the remaining $48-billion are already well-advanced with provinces and municipalities, who are expecting to hear details this fall. Federation of Canadian Municipalities president Clark Somerville said Monday the proposed bank should be funded independently of the Phase 2 infrastructure plan.

“FCM has been working closely with the federal government to ensure Phase 2 provides predictable funding for urgent local priorities like transit, housing and green infrastructure,” he said in a statement to The Globe. “Based on these conversations, we expect the infrastructure bank would serve as an additional financing mechanism, above and beyond the $48-billion core investment committed for Phase 2.”

The pushback from municipalities highlights how difficult it is for the federal government to reach agreements on infrastructure proposals and get projects off the ground.

While Mr. Morneau has said the idea of an infrastructure bank makes “eminent sense,” he has not formally committed to the concept. That could potentially happen either on Nov. 1, when he delivers a fall economic update, or Nov. 14 when government officials meet with the leaders of several institutional investment funds to talk about Canada’s infrastructure plans. A spokesperson for Mr. Morneau said it is too early to discuss how the minister might respond to the council’s recommendations.

In an interview, Mr. Sabia - the head of Quebec’s $255-billion pension fund - said Ottawa doesn’t need to find the entire $40-billion right away. He said the priority should be to get the institution running as soon as possible so that it can gain investor confidence as a professional and independent source of expertise.

He described the concept as one that would avoid political intervention because the bank would be free to manage a project once it has been approved by government.

“This is a really important change in how infrastructure would be done in Canada,” he said.

Mr. Sabia said criticism of some public-private infrastructure projects, such as the initial contract for Ontario’s 407 toll highway, is valid, but an infrastructure bank staffed with experts could negotiate contracts that are positive for investors and the public interest.

“It’s wrong to think about this bank purely as a financial institution. This bank is intended by us to also be a national centre of expertise on infrastructure,” he said.

Canadian pension funds have been steadily adding infrastructure investments to their portfolios, buying airports, toll roads, bridges and shipping ports around the world.

But direct infrastructure investing is still relatively new for the country’s largest institutional investors. CPPIB did its first infrastructure investments in 2004, but had $21.3-billion - or 7.6 per cent of the $278.9-billion CPP fund’s assets - allocated to infrastructure at the end of March this year. The Caisse had about $13-billion worth of infrastructure in its portfolio at the end of last year, while the Ontario Teachers’ Pension Plan had $15.7-billion invested.

The pension funds are less often involved in public-private partnership deals to develop local infrastructure such as hospitals, prisons and transit because these are debt-heavy financings where the equity portion of the deal isn’t large enough to move the needle for the big plans.

Mr. Wiseman, who left as head of the CPPIB in June to join BlackRock, said the council proposed $100-million as a minimum size for projects that would be supported by the bank because institutional investors need scale.

While the council said the infrastructure bank could raise $4 in private capital for every $1 invested by Ottawa, he outlined several scenarios where federal investments could be leveraged to even greater amounts.

Institutional investors are looking for large projects and predictability in terms of revenue and regulation, he said.

“This is about building the type of national infrastructure, the type of urban transportation, that will essentially serve the country for decades to come,” he said.

Andrew Claerhout, head of infrastructure and natural resources at Teachers, is heavily in favour of the infrastructure bank proposal. However he expressed concern that the plan could “get whittled down in multiple places, such that it’s no longer effective. That would be the thing that would keep me up at night.”

The most important facets of the plan are its size, its independence from government and professional management, he said.

Mr. Claerhout added that the government should not only share in the risk of the projects, but should also share in the rewards to avoid leaving the bad taste in any mouths that private investors profited at the cost of government. If the government can turn a profit, support for future projects with an institution such as Teachers is more likely, he reasons.

With a report from Jacqueline Nelson in Toronto