Federal budget expected to flesh out infrastructure bank plans

TheGlobeAndMail.com
March 20, 2017
Bill Curry

This week’s federal budget is expected to include new details on the government’s planned Canada Infrastructure Bank as debate heats up over the merits of Ottawa’s efforts to attract billions in private capital.

Two reports to be released Monday outline conflicting visions of what the bank will mean for Canadians. TD Bank economists say it has the potential to build large new infrastructure while the Canadian Centre for Policy Alternatives warns the plan risks costing taxpayers billions more in the long run.

Finance Minister Bill Morneau announced last November that Ottawa will commit $35-billion to a new infrastructure bank aimed at partnering with private investors on major infrastructure projects. Sources told The Globe and Mail that the budget is likely to include new details on that funding, such as how it will be broken down into specific categories such as transportation and green projects.

The government wants to have the bank running this year and sources say legislation to create the bank is expected to be introduced before Parliament rises in June.

However, a report released Monday by the left-leaning Canadian Centre for Policy Alternatives raises strong concerns. The report, by economist Toby Sanger, argues the idea for the bank as originally proposed in the Liberal Party platform had merit when it was described as a source of low-cost financing for new projects that would benefit from the federal government’s strong credit rating and lending authority. The platform pledge did not make reference to private funding partners.

“The federal government’s plan has taken a 180-degree turn,” the report states. It warns that relying on private-sector financing will incur interest-rate costs of 7 to 9 per cent at a time when the federal government has the ability to finance debt at a rate of less than 2.5 per cent over 30 years.

“No homeowner in their right mind would commit to a loan or mortgage at a rate of 7 per cent when they can borrow at 2.5 per cent,” Mr. Sanger said in the report. “So why would the federal government make the Canada Infrastructure Bank rely on higher-cost private finance?”

Running deficits to boost infrastructure spending was a central campaign pledge of the Liberals, but the original promise was to keep deficits under $10-billion a year and to balance the books by 2019. Deficit forecasts have grown considerably since and federal finances are now on track to stay in the red until the 2050s unless Mr. Morneau takes new steps to reduce spending or boost government revenue.

TD Bank economist Brian DePratto, who co-authored a separate report on the infrastructure bank that will also be released Monday, said a comparison of rates of return should be placed in a broader context. Private investors in these scenarios would also be taking on added risk in terms of debt and potential cost overruns that need to be taken into account. Mr. DePratto also said that similar institutions internationally have shown that an infrastructure bank is a promising model for Canada to follow.

“On its face, this would deliver a much-needed boost to Canada’s aging system of infrastructure,” the TD report states.

The 2017 budget is not expected to announce funding for major new infrastructure projects given that the total size of the federal spending plan has already been released. Mr. Morneau’s fall update said the government will spend $186.7-billion on infrastructure over 12 years. The budget is expected to provide more details about that spending plan.

The government has said the infrastructure bank would be funded with $15-billion from the $186.7-billion for infrastructure and would also receive $20-billion in the form of equity or debt.

After the budget is tabled, federal officials are expected to keep working with provincial and municipal officials toward a common 10-year plan of priority infrastructure projects that would receive funding.

Mr. Sanger suggests that one of the main factors driving the Liberals to embrace private funding through an infrastructure bank is political concern over running even larger deficits. The political benefit of private financing is that the debt is not on the government’s books. Mr. Sanger argues that Ottawa’s accounting rules create a perverse incentive to embrace private debt, even though it will be more costly in the long run. The report suggests Ottawa should account for long-term capital projects separately – as is done with municipal budgets – so that long-term infrastructure spending is reported independently of the government’s annual operations budget.

“This may appear to be good politics, but it’s terrible policy,” Mr. Sanger stated in the report. “We could build almost twice as much infrastructure through the Canada Infrastructure Bank if financed at the lower rates available for direct public borrowing instead of using higher-cost private finance.”

Brook Simpson, a spokesperson for federal Infrastructure Minister Amarjeet Sohi, responded to the criticism by noting that municipalities will have the choice of whether to finance projects through the bank.

“The bank is designed to help attract private capital to new projects so that we can build more infrastructure across Canada, though the vast majority of our plan will be delivered through traditional infrastructure funding models,” he said in a statement. “We will have more to say about our plan and the infrastructure bank after the budget.”