On November 1, 2016, federal Finance Minister Bill Morneau released his Fall Economic Statement outlining changes to the federal government’s fiscal priorities in advance of the 2017 budget process. While reaffirming Canada’s commitment to infrastructure investment, the Fall Economic Statement recalibrates the government’s infrastructure priorities in the current economic environment.
Notable for potential funding recipients, infrastructure developers and investors, Mr. Morneau proposes:
- An additional investment of C$81-billion to be spread over 11 years, starting in 2017–18, for public transit (C$25.3-billion), green infrastructure (C$21.9-billion), social infrastructure (C$21.9-billion), transportation that supports international trade (C$10.1-billion) and projects that support Canada’s rural and northern communities (C$2-billion). Details regarding program architecture and specific allocations to follow in the 2017 budget.
- The creation of a new Canada Infrastructure Bank responsible for investing at least C$35-billion whose primary mandate will be to work with provinces, territories and municipalities to identify and deliver projects that will provide economic, social and environmental returns and facilitate significant additional investment by private capital. The government’s hope is that investments through the Canada Infrastructure Bank will have a multiplier effect when it comes to attracting institutional capital.
CANADA INFRASTRUCTURE BANK
The proposed structure and governance of the Canada Infrastructure Bank is drawn largely from a recent report of the Finance Minister’s Advisory Council on Economic Growth (Advisory Council). In their report, the Advisory Council identified two important trends: on the one hand, Canada’s continuing need for significant infrastructure investment to boost productivity and, on the other hand, a deepening pool of institutional capital (banks, pension funds, insurance companies, sovereign wealth funds and other long-term investors) ready to be deployed.
A key recommendation of the Advisory Council was for the government to bridge the infrastructure gap by facilitating infrastructure investment from institutional capital through the establishment of an arm’s-length development bank. As conceived by the Advisory Council, the bank would act as a centre of excellence for the financing and delivery of national infrastructure priorities, assuming the upfront planning necessary to de-risk projects and investing through subordinated equity and loan positions. Although arm’s-length, the government would be responsible for setting the bank’s overall policy direction and high-level investment priorities.
As outlined in the Fall Economic Statement, Mr. Morneau generally appears to have taken his advisors up on these recommendations with a few adjustments:
- The bank will be a federal Crown corporation under the Minister of Infrastructure and Communities.
- Although somewhat below the C$40-billion over 10 years recommended by the Advisory Council, Canada intends to capitalize the Canada Infrastructure Bank with an initial C$15-billion from the C$81-billion referred to above and within the categories specified above (public transit, green infrastructure, social infrastructure, transportation that supports international trade and projects that support Canada’s rural and northern communities). A further C$20-billion would be available for investment in equity or loans / loan guarantees to specific projects. It is unclear from the Fall Economic Statement whether the Canada Infrastructure Bank will focus on projects with an all-in cost in excess of C$100-million, as the Advisory Council recommended.
- While the Advisory Council emphasized investment through subordinated equity and loan positions, the Fall Economic Statement retains additional flexibility for direct investments, repayable contributions, unsubordinated debt and equity positions and loan guarantees.
- The Canada Infrastructure Bank’s mandate will include both revenue-generating infrastructure projects and plans that contribute to the long-term sustainability of infrastructure across the country.
- The Fall Economic Statement places less emphasis than the Advisory Council on a need for the Canada Infrastructure Bank to act as a centre of excellence for project procurement, delivery and financing, perhaps recognizing that Canada is already an internationally recognized leader in many of these fields by virtue of its extensive use of public-private partnerships as a delivery model for infrastructure at all levels of government, including by PPP Canada at the federal government level.
With the introduction of the Canada Infrastructure Bank, the appeal that largely de-risked infrastructure investments would have for institutional capital is evident, in particular if backed by an implicit or explicit guarantee from the federal Crown. Less obvious in the longer term is (1) whether the government will truly have an appetite to take the subordinated positions and development risks typically assumed by the private sector (and whether ultimately there is value to taxpayers in it doing so) and (2) what the effect will be on the private sector currently taking these positions and risks. An equally important question is the degree to which provincial, territorial and municipal governments will be required to cede control over the delivery of infrastructure projects in their jurisdictions in order to take advantage of new funding opportunities and their willingness to do so. This being said, the Canada Infrastructure Bank is a big idea and will doubtless evolve over time.
In terms of the infrastructure pipeline as a whole, while the emphasis on transit, green infrastructure and social infrastructure is clear in the Fall Economic Statement, the market will surely be awaiting specific project announcements in the coming months.