Finance Committee on Oct. 8th, 2014

[Scott Brison, Liberal, Kings—Hants, NS]

That's an interesting point.

Mr. Beatty, could you explain how the Australian model of asset recycling, whereby the national government helps state governments recycle brownfield assets for greenfield investments, would work in Canada.

[Stephen Beatty]

The Australian model is fascinating. The federal government removes the tax disincentive associated with selling an asset by a state government, as long as the money is reinvested in new infrastructure or rehabilitation of infrastructure. This is a way to take some of the stock of capital and use it to finance new infrastructure or rehabilitation of infrastructure. We think it's a very powerful model for unlocking some of the inherent value in the assets. It creates a new incentive and a new source of financing to allow the federal and the state governments to build the new infrastructure that is necessary. Something similar to that structure of government could operate in a Canadian context, again having adjusted for all the institutional differences.

[Scott Brison, Liberal, Kings—Hants, NS]

For example, if a province sold a brownfield asset like office buildings to commercial real estate companies, say for $100 million, the Australian model would give them a 15% kicker from the federal government if they invested, say, $115 million into new infrastructure—the kind of greenfield space that pension funds may be averse to investing in, in the short term.

[Stephen Beatty]

Yes, but when we look at it, that is a provincial government recycling its assets, not necessarily its infrastructure assets. The Australian model is quite focused on infrastructure asset recycling.

[Scott Brison, Liberal, Kings—Hants, NS]

Assets that a provincial government would sell.

[Stephen Beatty]

It could be an electric utility, it could be a toll road, it could be whatever, but the Australian model is quite focused on infrastructure asset recycling. You could choose to broaden it, but again there are issues there. The Australian one appears to have achieved a real consensus around that.

[Scott Brison, Liberal, Kings—Hants, NS]

But it has enabled Australia to take $13 billion of federal money in last year's budget and leverage it to create $60-billion worth of infrastructure investments?

[Stephen Beatty]

I would use the present tense, rather than the past tense. It hasn't happened. It's in the process of happening.

[Scott Brison, Liberal, Kings—Hants, NS]

Okay, it's in the process of happening.

With our low interest rates today and the low cost of money, slow growth, soft job market, and massive infrastructure needs, we have the IMF, OECD, and David Dodge all telling us that this is the time for historic infrastructure investment. Do we have an opportunity to make the kind of infrastructure play, nationally led, that would be the biggest we've ever done in Canada? Would you agree there is the potential for that, that we can afford to do it, but that it just takes federal leadership to get it done?

[Stephen Beatty]

I think the scale is equivalent to the boom I was talking about in the late 1940s, early 1950s, and into the 1960s. Yes, absolutely.

[The Chair, Conservative, James Rajotte]

Mr. Brison.

[Scott Brison, Liberal, Kings—Hants, NS]

On housing, we talk about housing as infrastructure in a sense. Given that asset classes, in which people have an expectation of paying something, often work best in public-private partnerships, is there an opportunity for REITs and pension funds to invest in affordable housing in property-structured deals?

That's for Mr. Beatty or Mr. Shapcott.

[The Chair, Conservative, James Rajotte]

Okay.

Mr. Shapcott, could we have a brief response, please?

[Michael Shapcott]

There is an opportunity. I am not an expert on the structuring of financing, but there are actually some interesting practices. Also we know in the United States and the U.K. there have been some interesting practices I think we can bring forward.

[The Chair, Conservative, James Rajotte]

Okay.

Mr. Beatty, do you want to respond very briefly?

Okay. Thank you so much.

Thanks, Mr. Brison.

We'll move to Mr. Keddy, please.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

Thank you, Mr. Chairman.

Welcome, witnesses.

I have a couple of specific questions for Mr. Swedlove.

You talked about market demand for long-term bonds. In 2014 we created $2.5 billion worth of 50-year government bonds. What type of potential infrastructure expenditures could those help to leverage?

[Frank Swedlove]

We're very pleased with and supportive of the federal government initiative to introduce 50-year bonds. A number of provinces have already put those in place. It's a great opportunity for the government to finance its debt more cheaply. Also, it's a good opportunity for us to invest in longer-term assets. So we're very supportive of that. If there's anything we would like to see, it would be more of that activity so that it could become a benchmark that could be applied.

Separate from that, because it's essentially investing in government securities, is the opportunity to invest in P3 activities that have either a debt or an equity component. So it's quite different, but at the same time it would be equally useful.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

Thank you.

Somehow I knew there was going to be more in that answer.

One of the other things you mentioned, which we also heard about from the Federation of Canadian Municipalities and the Large Urban Mayors' Caucus of Ontario, was the standardization of documentation for projects under $50 million. How critical is that? Is that something that government can address simply without a legislative change? Is that a bureaucratic change?

[Frank Swedlove]

I think it's something that can be introduced. I think it would be significant. I think to us it's a starting point, because if you standardize documentation, then you can start looking at being able to bundle certain projects, for example. Also you could look at lowering the lens under which a P3 formula applies at present, which is $100 million—which is very high in our view—if you could get some standardization of documentation. We think that's a key first point and a key area that we could move on. It doesn't require any legislative change. What it requires is significant cooperation among the federal government, provincial governments, and private investors. We think PPP Canada could take the lead in that regard.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

The reality is we always talk about the huge projects, but there are lots of projects out there under $50 million, especially for some of the small more regional municipalities.

Mr. Romoff, I know you wanted to comment, so I'm going to give you the opportunity.

[Mark Romoff]

I was just going to add that you're absolutely right, Mr. Keddy, that the next iteration of P3s in Canada will be driven very much by municipalities and the aboriginal communities across Canada. They will by definition be equally complex projects, but significantly smaller. There is a real need now to think about how we might recalibrate the P3 model in order to accommodate that next wave of projects.

I would add that part of the challenge for municipalities is the cost of the services that are necessary to enable them to proceed, the cost of legal services, the technical services, and the advisory services. If we could bundle those together into essentially a one-stop shopping facility, a “plug and play” if you like, for municipalities so if they had a project, they could go to one place and get all of these services in an integrated fashion and at a far lower cost, it would make it a much more manageable proposition for them to move ahead with the P3.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

Exactly. Thank you for that.

Mr. Beatty, you talked a little bit about the British model and phases one and two of their infrastructure program. Can you relate for the committee the dollars for the first infrastructure that they rolled out, the cost of that, and then the cost of the second one and how much it's increased?

[Stephen Beatty]

I was actually referring to the programs, rather than the individual funding envelopes.

The first go round primarily focused on social infrastructure, then the financial crisis occurred. The second national infrastructure plan swung quite significantly toward economic infrastructure. It was more “what are the important projects, and in what order?” than a funding and financing envelope.

It's very much deciding what projects are to be built when, and I think that's the real message there. I would commend you to their website. It's actually quite a useful process.

[The Chair, Conservative, James Rajotte]

Thank you very much.

Thank you, Mr. Keddy.

Ms. Boutin-Sweet, you have the floor for five minutes.

[Marjolaine Boutin-Sweet, NDP, Hochelaga, QC]

Thank you, Mr. Chair.

Mr. Shapcott, your document contains three recommendations that you have not addressed. Could you please talk about them?