Thoughts on the Canadian Infrastructure Bank

In today’s world of constrained budgets, regulatory paralysis, assertive local stakeholder groups, and conflicted voter opinion, it’s a struggle to get even small, local projects built. A new approach by government is adding a fourth “P” to P3 infrastructure funding: pension funds.

Funding for infrastructure was a centrepiece of the 2015 Liberal party campaign platform. It promised $187 billion over twelve years for new and improved roads, bridges, ports, terminals, and transit projects. Prime Minister Justin Trudeau also pledged to create the Canadian Infrastructure Bank (CIB) and endow it with a further $35 billion in capital that could be invested in industry-led projects with the potential to renew and strengthen the foundations of the Canadian economy.

Two budgets and eighteen months later, the money earmarked for infrastructure has been slow in coming, and few details have been provided about how the CIB will operate. The most recent budget shed little light on the subject. Presumably, the federal government in Ottawa is still contemplating the best way to design, finance, and deliver projects that promise significant economic and social impact.

Good. 

As someone who has spent the last several years working on infrastructure in both the public and private sectors, I have some thoughts and advice.

Before dispensing them, though, it is worth noting that big, bold “nation-shaping” projects are easier promised than delivered. In today’s world of constrained budgets, regulatory paralysis, assertive local stakeholder groups, and conflicted voter opinion, it’s a struggle even to get small, local projects built. The challenge was well summarized by an Ipsos poll in 2016, which showed that while 74 percent of Canadians agreed that investing in infrastructure was vital to the country’s future economic growth, only 35 percent wanted government to borrow the money for new builds.  

In recent years, one answer to this challenge has been public-private partnerships. Indeed, Canada has become a global leader in the design and execution of P3 structures. For the last decade, provincial agencies like Infrastructure Ontario and Partnerships BC have undertaken P3 projects based on a simple premise: if the private sector takes responsibility for the key risks associated with designing, building, and sometimes operating new public infrastructure, government is willing to reimburse them for capital costs and pay them a pre-agreed profit. 

This approach tacitly recognizes that government has historically struggled with delivering infrastructure projects on time and on budget. The logic is that we would rather pay $120 million for a $100-million hospital than accept the risk of cost and schedule overruns that could easily amount to more than $20 million. Although public sector unions reject the premise that government-led projects will, by definition, be delayed, several studies have shown the value created by transferring these risks off governments’ books. A more compelling and well-founded criticism might be that P3 contracts have included overpriced risks premiums, or that civil servants were insufficiently capable of enforcing the conditions of contractual agreements.

Generally, though, Canada is good at doing P3s. Risks are well understood for key classes of infrastructure (i.e., light rail, roads, hospitals, schools, courthouses). Most governments have demonstrated competence in translating project requirements and agreements about risk into robust contracts and effectively overseeing project execution. The annual Canadian Council for Public Private Partnerships Conference in Toronto attracts over a thousand representatives of companies from all over the world that build, finance, and operate public infrastructure. They compete vigorously for contracts from governments across Canada. 

But with its new infrastructure bank, it would appear Ottawa intends to do P3 deals very differently than in recent years. This new approach includes adding a fourth “P” to infrastructure funding: big pension funds. The premise is that there are countless infrastructure projects that these funds are investigating, each of which has the potential to enhance Canadian productivity while delivering returns to investors. But these projects, being risky, require some “first-loss capital” to convince investors to proceed. To this end, Ottawa has set aside $35 billion to catalyze them. If all goes according to plan, the returns on investment achieved will be reinvested in other non-revenue-bearing infrastructure projects.      

There are three reasons why I think it will be hard to develop and deliver projects using this approach:

First, there is no shortage of infrastructure capital in Canada or the wider world. Pension plans, insurance companies, infrastructure funds, and sovereign wealth investors have billions to spend annually on these types of projects. Given the scale of an average infrastructure project, it is unlikely that a minority investment from Ottawa will make or break the internal rate of return of any given project. 

What investors are interested in is getting the federal government to move projects forward by amending regulations when that is required and expediting permitting and approvals. That is where the risk of costly delays and overruns is highest. But if Ottawa is an equity investor, can it also be a credibly fair and impartial regulator? Stakeholders might not think so, and that could stir up public and political opposition.

Second, Canadians have an expectation that their taxes will go to pay for critical public-use infrastructure. They have been vocal in their resistance to tolls and fees associated with roads and bridges, and they are highly sensitive to fluctuations in transit and airport fees. But in order for CIB projects to deliver returns to private investors as envisaged, one of two things will need to be true: either Canadians will have to reach into their pockets to provide revenue directly, or the government will have to guarantee a return to its partners. While either approach is absolutely defensible given the potential economic and social value created by these projects, I suspect that this administration will find the politics difficult to manage. Their voter base is not traditionally enamoured of private companies making profits from public assets. 

Third, the governance structures of the bank will inevitably be complex. This may be why it is taking some time to create them. In traditional government procurements, government specifies precisely what it is trying to buy, and then competitively bids the contract. In this case now, proposals will arrive at the bank unsolicited and government will hear opinions from private companies about what they should buy. These companies will expect sole-source contracts if the decision to proceed is taken. How will government justify these investments? How will it determine what makes an investment in an airport more valuable than an investment in a pipeline? How will it explain that certain firms are being given a contract over others? These issues can all be resolved, but when you consider the public noise associated Bombardier receiving recent government loans, you can easily see how challenging the politics will be.

Ultimately, Canada needs to bring together financial and technical experts who really understand the sectors in which they are playing so that we can build the most productive infrastructure possible. The CIB can enable this, but I would argue for a very different focus for its activities. The CIB should assume a leadership role in defining, delivering, and managing traditional P3 contracts in federal jurisdictions and geographies. It should focus on getting the $187 billion in planned infrastructure grants spent as productively as possible, even if this comes at the expense of exploring partnerships between Ottawa and large institutional investors.