Fred Di Blasio is co-founder and chief executive of Longhouse Capital Partners. He is a member of the Huron-Wendat Nation.
Indian country, and the politicians roaming within it, is awash in talk about the loan guarantee program announced by the federal government on Tuesday and the panacea they represent for First Nations anxious to gain a foothold in energy and infrastructure projects as full, equity partners.
There’s only one problem: While these guarantees are an important part of the funding tool kit, they are but a small part of it.
In Canada, the loan is typically provided by one of six large banks, and would be backstopped by the full faith and credit of the federal government. The AAA-rated credit support afforded by the Government of Canada loan guarantee makes it the lowest-cost debt available to a company or First Nation.
However, just as individuals cannot access unlimited amounts of debt, the same is true for the Canadian government. If you co-sign a loan for a family member and they do not repay it, you are on the hook. Notably, the loan guarantee is reported to the credit agencies. It may not reduce your credit score, but it does affect your ability to borrow in the future, even if the loan guarantee is only a contingent liability.
In the case of the Canadian government, rating agencies pay attention to the amount of direct Canadian debt and the country’s contingent liabilities. Hence, the government’s capacity to provide loan guarantees has a finite limit if it wants to avoid having all its national debt rerated. There’s a risk that loan guarantees push the country’s debt beyond what the rating agencies deem appropriate for a AAA rating category. A ratings downgrade for Canada would increase the interest cost for all of Canada’s liabilities, not just the debt of the loan guarantee.
How do we close the First Nation private capital gap/financing gap and move toward economic reconciliation – a Government of Canada-backed commitment – while minimizing the impact of loan guarantees on this country’s debt situation? Well, we can go back to a simple tool used by previous governments in this country.
Canada’s largest pension funds currently have approximately $2.2-trillion in assets under management. The legislated mandate of the pension plans is twofold: Maximize long-term investment returns without undue risk, and invest in the best interest of their contributors and beneficiaries. The second half of the mandate seems to be de-emphasized.
Increasingly, there have been aggressive investments made by Canada’s most significant pension funds outside of the country. The flight of this capital dates back to the changes in the Income Tax Act back in 2005, which removed the Foreign Property Requirement (FPR), capping foreign investments at 30 per cent of the pension plans’ assets.
If the federal and provincial governments were to reinstitute a modified version of the FPR to require a minimum of 5 per cent to 10 per cent of these pooled pension assets to be invested in Canada over a period of 10 to 20 years, equity available for infrastructure investments would be between $110-billion and $220-billion.
If we use that dry powder as an equity investment in Canada, ample global pools of capital would become available to fund the debt component of Indigenous ownership stakes. Indigenous communities would be able to obtain private loans on more favourable terms and would not need that much in federal guarantees because lenders look more favourably on projects that already have significant equity investment.
Using a conservative debt-to-equity ratio of three times, this equity investment from pension funds would act as a catalyst to unlock $330-billion to $660-billion of debt funding. This would dramatically narrow the funding gap of more than $1-trillion (and a $349.2-billion gap for First Nations alone) needed in Canada to address the housing shortage and crumbling infrastructure, ensure energy security and develop a systematic approach to the energy transition.
Canada has the lowest anticipated cumulative productivity growth from 2020 to 2050 relative to 37 other developed countries. By bringing investments back within our borders while including First Nations as part of a new Canadian pension investment portfolio strategy, we can be rightfully recognized as a top producing G7 country.
Two years ago, the Canadian government ratified the United Nations Declaration on the Rights of Indigenous Peoples. Article 32.2 describes the concept of “free, prior and informed consent,” which has materially changed Canada’s legal and development landscape.
If properly supported by our federal government, loan guarantees of 20 per cent to 50 per cent on First Nations’ equity investments could be substantive enough to act as a catalyst for attracting private market funding for viable economic infrastructure projects.
With a true economic partnership with Indigenous peoples, we can recapture Canada’s productivity and prosperity, leading the country to a more sustainable future.