Finance Committee on Nov. 6th, 2017

[Pierre Poilievre, Conservative, Carleton, ON]

If that's the case then why aren't there private investors able to do this?

We know that there are literally trillions of dollars of infrastructure investments that slosh around world markets all the time, people using their own money, pension funds, private equity firms, investment banks—that's what they do for a living. Why wouldn't they invest in this if, as you say, the minimum return we should expect is 2% and returns could be much higher than that on an annual basis?

[Nicole Giles]

First of all, Neil can speak to the investment of some major institutional investors from the private sector in particular projects, but because these are international financial institutions, private sectors cannot actually become members of these banks.

[Pierre Poilievre, Conservative, Carleton, ON]

Of course not.

[Nicole Giles]

It's a sovereign-to-sovereign guarantee. If you're asking about specific projects, we can provide some information about private sector involvement.

[Pierre Poilievre, Conservative, Carleton, ON]

If these are commercial transactions designed to generate a rate of return, then why can't the underlying activity just remain with the private sector?

[Nicole Giles]

There's a series of quite detailed thinking that's surrounding this where the finance officials have provided a lot of the thought leadership around this internationally. It involves things such as being able to create recognizable classes of infrastructure for emerging markets.

Neil has led most of the work on this and can give you a bit of a flavour for some of the challenges.

[Neil Saravanamuttoo]

Yes. It's a very fair question as to why public funds are required if there's a possibility that private funds could fund some of these investments. The purpose and the mandate of multilateral development banks is to invest where it hasn't been proven for commercial interests.

When MDBs make investments, including for the Asian Infrastructure Investment Bank, they're required to pass an additionality test. That's asking the question, "What does the MDB bring to this project that would not otherwise occur through purely commercial finance?”

In some cases, it's as simple as the returns to private interests would not be high enough, but we recognize that there are public benefits here that justify a public investment. It could be that the risks are too high to a private investor, and there might be an opportunity for public finance to find ways to reduce that risk.

[Pierre Poilievre, Conservative, Carleton, ON]

We can't reduce the risk. We can't reduce it at all. We can simply transfer it from them to us. In other words, for the wealthy investor who wants to profit off of the project, he will no longer face the risk, but this taxpayer-funded bank will take it off of his books and put it on ours.

[Neil Saravanamuttoo]

In fact, what the MDBs would respond is to say that, because they operate with a range of actors, including the sovereigns in the country in which they're operating, they're able to have certain risks addressed at a regulatory level so that those risks are taken off the table before the investment even goes ahead. They're able to have policy reform and regulatory reform that makes it a much more stable investment for everybody.

[Pierre Poilievre, Conservative, Carleton, ON]

It's a risk-free environment, so then, in that case, we don't need the bank because there's a risk-free investment for a private sector investor to make.

[Neil Saravanamuttoo]

No. It's the role of the bank to come in to create that environment. They can do that through project finance.

[Pierre Poilievre, Conservative, Carleton, ON]

That sounds magical to me, that there's this international bank that's able to go in and remove the risk of an engineering failure or a natural disaster or a cost overrun, which are inherent in every single infrastructure project that occurs. Maybe the folks in these international banking systems have found ways to eliminate all of those risks. It sounds to me more like we're taking $100 billion of taxpayers' money from around the world and using that money to relieve the risks of the private sector investors who seek to profit from these projects.

[Nicole Giles]

I think another consideration in terms of how the multilateral development banks work and how they're able to both de-risk individual projects and make them of more interest to private sector investors is the technical assistance and the capacity building that goes along with it. There's the ability on a particular project for an MDB to go in and provide support in terms of how to do the environmental assessment, how to assess whether indigenous rights are being respected, and how to set up separate special-purpose allocation accounts to be able to track the investment for the project, moving in and out. There's a lot of technical capacity that the multilateral development banks provide that, for example, pension funds would not be able to provide—or be willing to provide, quite frankly—if they're moving in to invest on a particular project.

I think another consideration as well is that the books of the banks are more balanced internationally. There's a different ability to balance risk because it's such a varied portfolio.

[Pierre Poilievre, Conservative, Carleton, ON]

Listen, some of these wealth management firms that invest in infrastructure projects have $1 trillion under management. They do this for a living. They are extremely sophisticated. I find it very hard to believe that we require an intergovernmental system to replace that. It seems like those investors don't want to carry the risk. There is this fake magic trick where the risk all of a sudden vanishes from sight. It doesn't vanish in reality. It just goes on to taxpayers.

I want to return to the issue of the gap between the $256 million that the budget presentation allocated to the bank and the $375 million U.S. that is authorized in this bill. As I understood your earlier testimony, the $256 million is the initial purchase, but you are seeking this authorization because we have the potential to purchase more shares later on. Is that accurate?

[Nicole Giles]

Correct.

[Pierre Poilievre, Conservative, Carleton, ON]

When would you expect the Government of Canada to purchase the additional almost quarter of a billion dollars' worth of shares?

[Nicole Giles]

It would depend entirely upon when other prospective bank members made their decision about whether or not they were purchasing their full portion of shares.

They're not available at the moment. If another prospective member chooses to not purchase their full shares, then at that point Canada would have the option.

[Pierre Poilievre, Conservative, Carleton, ON]

Where will these purchases be accounted for in the accounts of Canada? Will they be considered an expenditure in this fiscal year?

[Nicole Giles]

For the current purchase...?

[Pierre Poilievre, Conservative, Carleton, ON]

Yes.

[Nicole Giles]

Part of it would be for this fiscal year and part of it would be for subsequent years.

[Pierre Poilievre, Conservative, Carleton, ON]

Right. Is it over the next five years?

[Nicole Giles]

Correct.

[Pierre Poilievre, Conservative, Carleton, ON]

Each purchase is considered an expenditure, correct?

[Neil Saravanamuttoo]

Technically, we're purchasing an asset, but we fully expense it based on the expectation that.... The public sector accounting rules require this to be treated as a concessionary investment.