One week ago, the Advisory Council on Economic Growth, of which we are both members, made its first report to the Minister of Finance. One of our key recommendations is to create an infrastructure development bank, a first for Canada.
Many who have looked at the proposal have rightly recognized that this institution will invest more money in Canadian infrastructure, and put the country on a better competitive footing to gather the ingredients necessary to improve productivity and growth – talent, jobs and investment.
But that’s not the end of the story. The new bank will indeed do all those things. But it will also do those things better, which will make a big difference to Canada. The gap between a great project and a poor one is vast, big enough to consume billions of taxpayer dollars.
Big sums are involved. Our proposal calls for $40-billion from the federal treasury over 10 years. By investing through a development bank, Canada can multiply the impact of every federal dollar. In our experience investing around the world, a bank such as the one we propose should be able to attract $4 of institutional equity capital for every government dollar invested. That’s $200-billion of new equity to build what we need, in addition to traditional debt financing.
As a magnet for capital, the bank can accomplish two critical financial goals. First, it can expand Canada’s investment in infrastructure and thereby stimulate some near-term growth, and boost economic productivity for decades to come. Second, it can free up federal resources for other municipal and social projects that cannot be financed with private capital. Why not let private capital foot most of the bill for major projects such as highways and bridges, high-speed rail, port and airport expansions, smart city infrastructure, broadband and the national grid? Private investors will take on a share of the risk, too. That will leave more money for municipalities, schools, First Nations infrastructure, social housing and other urgent needs.
The financial case seems pretty clear. Largely overlooked so far, however, is another essential part of the bank’s mandate: to act as a national centre of expertise on infrastructure.
The two roles, financial architect and centre of expertise, go hand in hand because success depends on a lot more than assembling the financing. Canada needs to build more infrastructure; estimates of the need range from $150-billion to $1-trillion. But it also needs to do a better job of delivering new projects on time and on budget. Several studies show that best-practice project selection and delivery can reduce costs by 15 per cent to 25 per cent. Many projects are plagued by waste and budget overruns. Fixing those problems provides real value for money, and that’s what this bank is about.
Doing infrastructure better requires substantial change. It requires thinking differently about planning, delivery and operation. We see five substantive ways that an infrastructure development bank can tip Canada’s efforts from “good enough” to great.
First, it’s remarkable that Canada has no national inventory of the state of our infrastructure. You can’t build tomorrow’s infrastructure unless you know where you are today. The bank should assemble that inventory.
Second, equally remarkable is the lack of a national infrastructure plan. The bank we propose would work with federal, provincial and municipal governments to develop a plan with two overarching objectives. One is connectivity – the transportation of people, goods, energy and data within and across our borders. Canada’s ranking on a leading connectivity index fell from eighth in 2012 to 13th in 2015. This has to be fixed. The other is revitalizing our cities. High-performing, highly livable cities are magnets for talent and investment, and the innovation, growth and job creation that follow.
Third, infrastructure investors have become highly sophisticated over the past 10 years. But many governments, including ours, have not kept pace. The bank we propose would hire world-class experts in finance, engineering, project management and procurement to ensure that the two sides of the bargaining table are evenly balanced. That’s essential to good outcomes. And speaking as institutional investors and Canadians, a fair outcome is critical.
Fourth, as projects such as Chicago’s botched parking-meter deal have shown, contractual details matter. A lot. In our experience, well-written contracts that anticipate every eventuality are critical. The proposed bank would negotiate the operating contracts that set the rules for service levels, capital requirements, pricing changes and so on. Getting this right is essential to the public interest and can’t be overemphasized. In many respects, it’s what separates a successful partnership with institutional capital from a one-sided deal. The bank will ensure we get this right.
Finally, the bank’s operational expertise – in procurement, in the management of tender processes and in the co-ordination of siting and permitting – would be available to governments for large investments, even on projects that the bank does not finance. In this way, the bank can act as a springboard, helping infrastructure managers raise their game.
Canada needs to improve national productivity to unlock more growth in the medium term. And we need economic stimulus to deliver growth now. More infrastructure will help a lot, and better infrastructure will help the most. Getting there requires a break with the past and bold steps in new directions.
Michael Sabia is chief executive officer of the Caisse de dépôt et placement du Québec. Mark Wiseman is senior managing director at BlackRock Inc.Report Typo/Error
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