Finance Committee on Nov. 6th, 2017

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Finally, when the government made the decision to proceed with participating.... I apologize, I was just walking in and sitting down when you mentioned this. When was the agreement tabled in Parliament?

[Nicole Giles]

It was in May and June of this year.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

I'm guessing the government did a review of all the projects that were being considered by the bank in terms of financing before making a decision on whether or not to join, to see if these projects fit within the government's intentions internationally. Is that correct? Was there a review done of all the projects that the AIIB was financing or considering financing?

[Nicole Giles]

There's a constant review of the projects, because the list of projects is not stagnant. There are constantly new projects in the pipeline, which are being considered and brought forth. There's a constant examination of the projects. If it would be helpful to the committee, we could provide some examples of the projects that have been funded to date.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Sorry to interrupt you, but there are only two lists available online. One shows 21 projects approved, including the approval date of the project, and there's also a list of proposed projects that includes searchable documents.

I ask this because within the 21 approved projects, two are pipelines. One is actually a natural gas pipeline project in Bangladesh, and the other one is in Azerbaijan. We've had such great difficulty in getting pipeline projects approved and built in Canada. Why are we facilitating the construction of regional infrastructure in these countries?

When you go into the definition of why they're building them and the purpose behind them, the Bangladeshi one is to integrate it into the southeast Asian market, and the Azerbaijani one is to integrate it into the southeast European market. I just don't understand how this fulfills Canada's foreign affairs goals, especially at the price tag we're talking about.

[Nicole Giles]

I think the pipeline projects are very interesting, in particular the Azerbaijan one, because that's a project that was not exclusively financed by the AIIB and speaks to the enormity of the costs of bringing these pipeline and infrastructure projects forward. The Azerbaijan pipeline is a project that not only involves AIIB but is also funded by the World Bank, by EBRD—the European Bank for Reconstruction and Development—and by the European Investment Bank. That's an example of the enormity of investment that's required and the broad consensus that is being built.

I think there are strategic considerations to those projects that some of our colleagues in other parts of town would be better able to speak to, but it may provide you with some comfort to know that when the projects are brought to the banks—including the Azerbaijan one, which we vetted from the EBRD side because we weren't yet members of the AIIB—the Canadian directors at the bank who are involved in the consideration bring those projects back to the Department of Finance if the Minister of Finance is the governor of that bank, or to Global Affairs Canada if the Minister of Foreign Affairs is the governor. Then a careful assessment of those projects is done jointly between the officials at Global Affairs Canada and Finance Canada, which is exactly the type of assessment you are asking about.

There is a very careful process by officials, and then advice is given back by officials to the people who are representing Canada at the banks. That allows us to ask questions and look for certain safeguards before a vote is taken.

[The Chair, Liberal, Wayne Easter]

Mr. Kmiec, we can come back if we need to.

Mr. Poilievre, go ahead.

[Pierre Poilievre, Conservative, Carleton, ON]

Thank you.

Can we sell our shares in the Asian Infrastructure Investment Bank at any time and for any reason?

[Nicole Giles]

The AIIB articles of agreement do include exit provisions, and a country could sell its shares back to the bank. I do not believe there is any restriction around timing.

[Neil Saravanamuttoo]

That's right.

[Nicole Giles]

There is no restriction around timing.

[Pierre Poilievre, Conservative, Carleton, ON]

Who would buy them back, the bank?

[Nicole Giles]

I believe they would be reopened to other shareholders who are looking to increase their shareholding in the bank. The bank would retain them and then open them up according to the allocation formula.

[Pierre Poilievre, Conservative, Carleton, ON]

At what point would Canada be paid back for its shares? Is it at the moment when the bank sells them to another buyer or at the moment when Canada decides to dispose of them?

[Neil Saravanamuttoo]

Canada would be repaid when we return the shares to the bank.

[Pierre Poilievre, Conservative, Carleton, ON]

Would we be repaid the book value of the shares, or do we expect that the value of those shares would fluctuate in the marketplace?

[Neil Saravanamuttoo]

Essentially, we would be paid the market price. By that I mean.... All countries have contributed a certain amount of capital to the bank. The bank will invest that in loans and other projects that will have a return. Most of that return will go back into the bank's retained earnings. Our share of those retained earnings would be reflected in the sale price back to us, or any members who chose to sell back their shares.

[Pierre Poilievre, Conservative, Carleton, ON]

The only intrinsic value of any share ever is in its ability to pay dividends. There is literally no other intrinsic value to a share. There is speculative value, but that value is based only on the presumption that some day, somewhere down the road the share will result in dividend payment.

You said earlier that it's very unlikely that this bank will ever pay dividends to any of its shareholders. How is it possible, then, that the share value will maintain the same level as the book value after we purchase the shares?

[Neil Saravanamuttoo]

We have the benefit of the experience of having invested in other multilateral development banks over a number of years, starting with the World Bank in the 1940s. We've been able to see the track record of those institutions. They have protected the capital that the shareholders have invested, and they have grown their retained earnings. The growth of the total value of that institution has worked out to as low as 2% a year and up to much higher returns in some cases.

Although we've said that it has not been the case that multilateral development banks have paid out dividends, that has been a conscious choice of shareholders, including ourselves, in that the purpose of these banks is to advance some of our collective foreign policy interests around the world, including global development. We felt that the funds are better retained within the bank to allow for an increased capacity to lend and to support projects, as opposed to paying back dividends to shareholders on a regular basis.

[Pierre Poilievre, Conservative, Carleton, ON]

That further proves that there's no intrinsic value to having the shares. If they're not paying dividends, then they're not worth anything to anybody other than a nice goodwill gesture. No person would use his or her own money to buy those shares if it weren't possible to extract dividends in return for the purchase. How is it that you expect these shares to retain any value for resale down the road?

[Neil Saravanamuttoo]

The articles of agreement specify exactly what those share prices would be or how they would be determined should a member choose to withdraw.

[Pierre Poilievre, Conservative, Carleton, ON]

Can you explain to us what those articles stipulate about the determination of share value?

[Neil Saravanamuttoo]

Yes. They say that if a member were to withdraw from the bank, they would be entitled to, for the return of their shares, the book value of those shares plus that member's pro rata share of the retained earnings.

[Pierre Poilievre, Conservative, Carleton, ON]

You expect there would actually be a profit for Canada if it sold its shares from this bank.

[Neil Saravanamuttoo]

There would be growth, yes.