Trudeau Set to Lift Hood on $35 Billion Infrastructure Bank

2017-03-21 15:57:41

by Josh Wingrove, Bloomberg NewsInfrastructure is Canadian Prime Minister Justin Trudeau’s biggest spending commitment. But he needs help.

Canada is preparing to launch a government infrastructure bank to spur development of projects across the country, from roads to subways, by drawing in private capital from pension funds and other institutional investors. To do it, Trudeau will directly subsidize some projects, and agree to take a back-seat stake in others.

What began as an election promise is expected to be further fleshed out in the March 22 budget before the bank is launched later this year. But questions remain, such as how many projects it will handle, what kind of return private capital will demand and where the bank itself will be headquartered.

What is it?

The Canada Infrastructure Bank will be set up with C$35 billion ($26 billion) from Trudeau’s government. That includes C$20 billion in repayable capital to take stakes in projects, and C$15 billion in non-repayable funding, part of the C$180 billion in total infrastructure spending the government is planning over the next 12 years.

The government hopes it can stretch its dollars by attracting private-sector investments, with Finance Minister Bill Morneau saying they’ll look for five or six times as much private money as federal in some projects.

The bank will have a hands-on role in helping cities, provinces and even the federal government come up with financing models for projects, know-how the Trudeau government fears is lacking. “The infrastructure bank will be a place where we have high level of expertise in infrastructure, preparing projects that could potentially be invested in,” Morneau said in a March 16 speech in Frankfurt.

How will the money work?

The C$15 billion is “concessional capital to make projects that might not quite be economic, economic,” Morneau said in the speech. But it’s also split among different categories — such as those in the remote North, or so-called green projects — that will tie the hands of the bank.

With the C$20 billion, the government will take equity stakes in projects. The federal money would be considered subordinate capital, helping to attract private investors by lowering their risk.

These principles already have Trudeau on the political defensive, with opposition lawmakers accusing him of privatizing public infrastructure. Tom Mulcair, leader of the left-leaning New Democratic Party, told Canada’s House of Commons Monday the initiative was a “massive privatization bank that could double the cost of infrastructure to Canadian taxpayers.”

Matti Siemiatycki, an associate professor of Geography and Planning at the University of Toronto, says the bank’s purpose has evolved. First proposed as a method of providing low-cost funding to municipalities, the bank has become much more focused on attracting private investment, in particular pension funds and other institutional investors, he said.

“That’s a pretty significant shift in perspective and goals for the bank,” Siemiatycki said in a March 20 telephone interview. “That does then take this into quite a different direction that has quite a wide variety of other implications,” he said, adding private participation in infrastructure globally has a “mixed record, and has to be handled with extreme care to make sure the public interest is protected” in any large deals.

Siemiatycki says one unanswered question is “what gap is the infrastructure bank trying to fill?”

What kind of projects?

Roads, water treatment plants, railway corridors, public transit systems and ports all jump to mind. Anything that drives economic growth and, ideally, has an ongoing revenue stream that would attract investors. On Tuesday, Trudeau cited public transit and power grids as examples and said more detail was coming in the budget. “We understand there is room for global investment of private capital in Canadian infrastructure,” he said.

The main government criteria is that they’re greenfield — new builds — rather than expansions, upgrades or straight acquisitions of existing sites, known as brownfield projects. It’s a preference that could hurt investor interest. Pension funds prefer the certainty of snapping up existing things such as ports and roads, and would demand a risk premium — higher returns — to come on board for a new development.

“This is a key distinction that has to be understood with the infrastructure bank,” said Siemiatycki. “When we talk about leveraging four dollars or five dollars to one, what are going to be the revenue streams that pay back that original borrowing.”

Most infrastructure sectors in Canada aren’t fully funded through user fees, he said, citing as examples transit systems, roads, and social housing. He said there’s a “relatively small area” where this type of leveraging deal is feasible, such as federally-owned airports. “You really have to ask, what’s the public interest benefit.”

The politics

Politics complicate all government initiatives, and the bank is no different. One factor is simple: location. Toronto is the obvious choice as Canada’s financial center, while Calgary, the corporate heart of the country’s energy patch, has lobbied to be made the bank’s home. There’s another option: Montreal, the biggest city in the French-speaking province of Quebec and site of Trudeau’s electoral district.

The final decision on the bank’s location is said to be Trudeau’s personally, and he’s considering awarding it to Montreal to woo political support in Quebec, a swing region that has the second-most electoral districts in Canada.

The second factor is trickier. Trudeau’s government has shepherded an expansion of the Canada Pension Plan that will double the funds under management by 2040. The Canada Pension Plan Investment Board — among the largest public pension funds in the world — is independent but federally regulated. Trudeau officials have been leaning on Canada Pension nd others to eye buying into projects, and privately grumble that the fund should do so after government spent its own political currency to expand contributions.

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