Take That to the Bank

10 July 2017 The Canadian Infrastructure Bank is nearly up and running. Dan Colombini reports on how the new facility can harness P3s to deliver further growth in Canada

“To state the obvious, government is not in a position to fund all of the infrastructure needs in this country,” said Canadian Council for Public Private Partnerships (CCPPP) president and CEO Mark Romoff at the end of May.

“The historic and ambitious federal investment of $186bn over the next decade or so merely addresses a fraction of the required funding.”

So where does the rest come from? Under previous regimes in Canada, this question may have been a bit more straightforward. Over the past decade, particularly under the Conservative leadership of previous Prime Minister Stephen Harper, the country has relied upon the use of P3s to make up the shortfall and plug the country’s infrastructure gap.

But things are now a little different in Canada. Since the landslide victory of the Justin Trudeau-led Liberals in the October 2015 election, the direction of the country’s infrastructure drive has taken a more nuanced path.

First came the removal of the P3 Screen from the Building Canada Fund, which raised a few eyebrows across the industry. This was followed by Infrastructure Minister Amarjeet Sohi making it abundantly clear that regional governments would be left to decide their own infrastructure fates, as opposed to being led down the P3 path by federal government as they had been under the Harper regime.

None of this, of course, spelled the end for P3s in Canada. After all, the model has played a key role in the advancements made in the infrastructure space over the past decade and is firmly entrenched as a vital tool in the sector.

For the Liberals to simply disregard that would have been rash to say the least. However, the new government certainly made it clear in good time that it would be doing things its own way, and that the P3 market would have to adapt.

Nowhere was this more resonant than with the launch of the Canadian Infrastructure Bank (CIB). First announced in 2016, the CIB had originally been touted as a tool for the government to attract the attention – and investment – of the large pension funds.

Finance Minister Bill Morneau reaffirmed his commitment to the initiative earlier this year, confirming plans to spend $35bn over the next 11 years through the facility. Despite initial concerns from the industry, the government has been clear that it will seek to work with the private sector on the development of the bank, as well as on the projects it creates.

Morneau particularly emphasized that collaboration with all levels of government will be essential to its plan to spur long-term growth through infrastructure investments, highlighting the work that can be achieved through the private sector and municipalities.

Over the next 12 years, the federal government will invest more than $180bn to help communities fund high-priority transit projects, ensure cleaner air and water and foster better neighborhoods – with the CIB being the spearhead of these plans.

“It is very important that all levels of government and the private sector work together to bring our best ideas forward when planning and implementing infrastructure policy,” Morneau said.

So, despite initial concerns from the industry, the government has certainly left the door open for P3s. The question is how exactly can the market operate alongside this new avenue for financing?

The topic was certainly a key theme at P3 Bulletin’s third annual P3 Hub Canada event in Vancouver on May 31 and June 1. While there is acknowledgement from the bank and the P3 industry of each other’s existence and inevitable durability, there still seems to be a slightly anxious air around how the two can co-exist.

The enthusiasm to make this work from the market is clearly there, though. “[The} establishment of the CIB is such an intriguing, innovative and, we believe, welcome idea,” says Romoff. “The bank’s mission is to deliver revenue-generating infrastructure by attracting private capital investors.

“The injection of private financing means government is in a position to make better use of public funding for a broader range of infrastructure projects such as new water systems, social housing, recreation and cultural facilities, and on-reserve infrastructure.”

Encouragingly, the bank’s hierarchy has moved to separate the role of the bank from existing investors in the market.

“As a starting point the bank will not have a profit mandate,” says senior director of the CIB Transition Office, Steven Kuhn. “It will, by design, be given $35bn of capital and will run down that capital.

“We have worked hard not to crowd out existing investors that are willing to invest in infrastructure. So, one of the key things to remember is that the bank’s primary role is not to invest in projects that are commercially viable on their own.

“We will instead be investing in projects that are not commercially viable in the first place, for which there may – for example – not be a revenue stream strong enough to attract the private sector.”

This provides at least some clarity for the market, with the bank seemingly willing to approach ground where many investors fear to tread. Providing another avenue for financing for governments in Canada is no bad thing. Not only will the industry now have the expertise and clout of the regional procurement agencies to call on, but also an additional route from central government that can filter support and knowhow down to lower levels of government.

But the issue of the pension funds is one that continues to linger for many P3 investors already in the market. It is an understandable concern with the bank at this relatively early conceptual phase, particularly when the opportunity to establish operational details in the latest Budget was seemingly ignored.

As a result, many existing investors want answers. “The politicians in Canada have the perception that there is a shortage of capital to invest,” says Plenary Concessions CEO Mike Marasco. “When you speak with my colleagues, we are all interested in the same deals, so hopefully whatever the bank does will be on an open and level playing field and not just tailored to cater to the large pension funds.”

“The challenge is to get new projects into the market,” adds one investor. “If that happens, there will certainly be no problem attracting the capital. The first concern is whether we will lose out, especially among pure equity investors.

“The second concern is that part of the challenge for many investors is the way that many deals have been structured. [This] has not allowed them to write a big enough equity check to make it worth their while. If there isn’t a big enough check for the existing investors, it certainly won’t be for the pension funds.”

Kuhn, though, is keen to establish that there will be a role for P3. “There is no size limit for equity tickets or size of project that the CIB will supporting,” he says. “We talk about large projects but that is not all. We like to look at a practical scale that will attract equity investment from all quarters to participate in the project.

“What we are trying to do that is different from the more traditional models for P3s, which have been successful, is to extend that further and highlight that there ought to be value that can be brought to bear with the private sector taking revenue risk as well. That is what is at the heart of the CIB.”

Traditionally, the pension funds will be looking to the larger brownfield projects, which will not be on the radar of the CIB, according to Kuhn.

Instead, the bank will be targeting greenfield deals and looking for investors to take on the revenue risk – something that dovetails nicely with the interests of many P3 equity players. Traditional P3 investors are well positioned and experienced enough to take on these deals, with the bank potentially providing enough cover to turn previously too-risky projects into investable propositions.

In theory, no one appears to be arguing that the creation of an independent bank, set up to provide another avenue for financing, will not assist infrastructure development in Canada. This is, after all, what the feds promised from the outset. But eyebrows continue to be raised at the announcement made in March that despite the intentions for the bank to operate independently from government, the CIB will need approval from the Cabinet to proceed with its projects.

“We will always need to have some level of oversight,” Morneau said at the time. “We will need to have approval to make sure those projects make sense for Canadians, of course. But the organization, the financing and the management of those projects will be left to the Canada Infrastructure Bank to execute.”

The bank will be based in Toronto in a move to maintain its independence from the government, but many in the industry remain concerned that this stipulation will hinder the bank’s progress and overly politicize potential new deals that could come to market.

“The government said that they wanted to create an arms-length Crown Corporation, which we can appreciate,” explains one investor. “But then everything still has to be approved by the Cabinet, which makes it a political animal.

“You make it a Crown so you can pay the kind of wages that will attract private sector people, but it’s a shame that, from a governance perspective, they didn’t take it to the next step.”

But Kuhn thinks that the organization is on the right track. “I think that the government, with the legislation that is being debated in Parliament right now, has struck a very careful balance,” he says. “On the side leaning towards accountability, what is important to understand is that we are talking about public infrastructure projects in people’s neighborhoods. And we are talking about investing in them, in part, with taxpayer’s dollars, so there will always be a political reality or democratic imperative that legislatures will have some role to play.

“In terms of independence, the story has sometimes not come out as clearly as it could. The CIB, although it will have some ties back to government, as set out in legislation, will have the autonomy and authority to execute specific transactions. And that will be important to not have political interference at that point in the negotiations. There isn’t going to be anything that overrides the arms-length nature of the bank.”

One political question that still seems to be up in the air, however, is the role of P3 Canada. The feds have made it clear that they continue to support P3 as a means of driving value for infrastructure projects, but exactly where P3 Canada fits in seems somewhat unclear at this stage.

The organization has performed an important role in shaping the success of the Canadian market over the past few years, but as has been made clear under the Liberals, things are likely to be different going forward – although in what way remains something of an open question.

The CIB is now set to be operational at some point this year after Sohi announced in May that the selection of management roles at the organization was underway.

Legislation to support the bank will be passed before the end of June, with a basic operational structure, including a CEO and board, in place by Labour Day – just a few months away. Only then will we start to properly see the next chapter in the Canadian infrastructure market.

This page was last updated on:
18 December 2017.

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