The House of Commons is about to pass the 2017 budget implementation bill, which contains the government's proposal for the new Canada Infrastructure Bank (CIB). However, some fundamental questions about the CIB remain unanswered.
First, what is Canada's infrastructure vision and plan?
The Finance Ministers' Advisory Council on Economic Growth and Prosperity recommended the development of a focused federal infrastructure strategy. This point was reiterated last February by the Standing Senate Committee on National Finance, noting the need for "clear priorities, concrete objectives and specific performance measures," and again by the Institute of Fiscal Studies and Democracy (IFSD) in May, 2017.
This strategy would require a future-needs analysis and an assessment of our current infrastructure stock to produce a data-driven evaluation of our infrastructure gap. We currently lack this basic information in Canada. Britain is taking 18 to 24 months to perform a National Infrastructure Assessment to address decades of poor strategic decision-making. Canada should follow a similar path.
Second, what is the purpose of the CIB?
On the face of it, the intention to attract private investment toward projects that have an attached revenue stream seems a reasonable value proposition. But a credible business case has yet to be made. Indeed, what financing gap is the CIB looking to fill? Certainly not one at the federal level, as the Government of Canada has a triple-A bond rating and the lowest net debt-to-GDP ratio in the G7. Could it be to support lower levels of government in bridging financing gaps? Maybe in the case of municipalities, but provinces can similarly access debt markets at historically low interest rates. Further, other instruments exist that can achieve the same ends.
Third, how will risk and pricing be managed?
In a recent interview with The Canadian Press, Finance Minister Bill Morneau said the intent of the CIB is to attract additional infrastructure investment while "de-risking infrastructure projects." However, documents obtained by CP suggest that Mr. Morneau was told the CIB could take on a "significant" portion of the risk to help projects come to fruition and that the bank's "return on investment will only materialize if defined institutional investor revenue thresholds are met." This means the returns to taxpayers will be subject to higher risk than will those of their private-sector investment partners.
On pricing, the minimum return threshold of pension funds in Canada is generally set at around 6 per cent, and they will rightly look to earn more than that on most of their investments. This amount is in addition to the return needed to recover the costs of the investments, and is at the bottom end of the range of infrastructure return expectations estimated by JP Morgan Asset Management. Further, the business case for these projects will be predicated on the willingness of Canadians to pay new user fees (i.e., taxes) for infrastructure. Changing culture in this respect may prove challenging and yet largely underpins the success of private investment.
Put this all together and Canadians will be carrying more revenue risk than their private-investment partners while paying more to use the infrastructure funded through the CIB.
Fourth, why has the governance and operating model of the proposed CIB shifted from an arm's-length-bank concept to a granting-agency concept that is more or less controlled by the federal government?
Is this a self-sustaining Crown corporation like the Business Development Bank of Canada, or a granting agency like the Atlantic Canada Opportunity Agency? And how will this evolving governance structure impact the due diligence and transparency of investments undertaken through the CIB?
Fundamental questions remain unanswered in the House of Commons review, notwithstanding the significant taxpayer money ($35-billion) at play. Responsibilities for scrutiny will now shift to the Senate and there is talk of wanting more time to review the legislation.
A lack of oversight and financial due diligence at the front end rarely ends well. A long list of failures, such as the gun registry in the nineties to current problems related to pay systems, shared service and military equipment, show up in the newspapers on a daily basis.
Let us develop the strategy first. Launching the CIB subsequently would ensure its role, governance and operating model are aligned to these national and sectoral plans, and that projects are selected based on their merit.
The Senate has the parliamentary responsibility to get the answers to these basic questions. Failure to move forward without these answers will end undoubtedly in failure.
Kevin Page is president and CEO, Azfar Ali Khan is director, performance, and Randall Bartlett is chief economist at the Institute of Fiscal Studies and Democracy at the University of Ottawa.