Finance Committee on May 16th, 2017

[The Chair, Liberal, Wayne Easter]

Thank you.

We'll go to the first three questioners for five minutes, then we will see where we are.

Ms. O'Connell.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you, Mr. Chair.

Thank you, all, for your testimony.

I want to follow up on the last speaker on the question of value. I have two municipalities in my riding; next to Toronto it is suburban, and then it goes further north and becomes rural. Things like broadband, for example, are another major issue in infrastructure. We've talked a lot about transit. When it comes to value, Mr. Macdonald, you spoke about something interesting in regard to the potential increased costs.

If you're just looking at interest rates or borrowing rates, for example, my regional municipality had a AAA credit rating, so we could borrow relatively well. I think about that, and because I have a municipal background, it's interesting. That's not how municipal governments think. They tend to think this is a project and an initiative that they need.

I'll use broadband as the perfect example, because we know that if we can implement this the growth possibilities are endless. Also, if any of our municipalities had to pay for it—and the term my councillor always used to say was that it was with “hundred-cent dollars”—it would be out of the question. But even at a higher interest rate paid for with partners, if it were paid for with partners, and we had 25¢ dollars or 50¢ dollars, that made it much more doable. In the end the project might have had a higher interest rate, but we weren't paying for it alone.

Also, because there is only one taxpayer, if I went to the taxpayers in my community, and they might say, “If you you want this project, and we don't have an infrastructure bank, you'll have a lower interest rate, but we're paying 100% of the cost...”. Or, if there were private investments, the overall project might have a higher interest rate, but the taxpayers would be paying less and wouldn't bear all the risk.

That is part of the value in the price tag I can see in the grand scheme of things, but it's about adding partners and sharing that risk and sharing the costs to make something transformational happen. This isn't a sidewalk project, a park, etc.

I have limited time, so I'll leave it at that and then see if you have thoughts and any differences of opinion on that.

[The Chair, Liberal, Wayne Easter]

Mark, go ahead.

[Mark Romoff]

You raise broadband, which I think is an excellent example. You may be aware that in the case of the Northwest Territories, fibre is being laid right up the Mackenzie Valley through a P3 project. That's a project that went to market as a public-private partnership, and the intent there, of course, is to connect all the remote communities.

There is another project under way right now in Manitoba, bringing 57 first nations communities together. Again, it's a broadband project aimed at connecting those communities.

These are individual projects that are moving ahead as P3s. There's lots of interest by the private sector in financing thee initiatives and bringing them to fruition.

What would be interesting in the case of the Canada infrastructure bank is that if they went ahead with a national broadband strategy and took the potential of these smaller projects global, because Canada, as you may know, used to be a leader in broadband and has tumbled quite a way down now.... I think if we are serious about playing at a world standard with 5G or bigger, we need to put the infrastructure in place to make it happen.

You've raised what I think is a really interesting initiative.

I'll make just one other point. We at the council have been promoting what we're calling a “dig once policy”, by which we mean that every time the government puts a shovel in the ground, particularly for major projects, they should capitalize on that opportunity and lay fibre right then and there to ensure that we can get our gigabyte capacity up. It's a rounding error in terms of cost, relative to the main act that's taking place.

[The Chair, Liberal, Wayne Easter]

Mr. Macdonald, you're next.

[David Macdonald]

I think nothing is stopping municipalities from getting additional partners to come together on projects. The real question is what role the infrastructure bank will or won't play in that.

If the infrastructure bank forces you into a project with a 10% interest rate instead of providing you with an interest rate of 1%, that will make a huge difference for whoever is finally paying the cost, whether the taxpayer, a ratepayer, a user-fee payer, or a municipal government. There's a huge interest rate differential, particularly on longer-term projects. The longer the project, the more interest rate costs you're incurring.

I would see the role of the federal infrastructure bank as getting the best interest rate deal for municipalities such that they pay the lowest possible rate, as opposed to forcing them into structures where they pay, in essence, the highest possible rate because of the P3 structure.

[The Chair, Liberal, Wayne Easter]

Matti, go ahead.

[Prof. Matti Siemiatycki]

My question in this is what the ultimate funding source for it will be, not the financing of where the upfront money is going to come from, but the ultimate long-term funding, keeping in mind that these projects will have ongoing operating and maintenance costs that have to be covered.

If the broadband is not being provided today, it's probably because it's viewed by some to be uneconomical. There will have to be a subsidy from someone. Is the infrastructure bank going to be an agency that provides long-term subsidies, or are those going to come from a provincial or municipal government, or are there other ways of structuring the deal? That's will be the type of question that determine whether that type of project is viable.

[The Chair, Liberal, Wayne Easter]

Thank you all.

Mr. Liepert.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

Mr. Romoff, in the 25 years of the existence of P3s in Canada, has it been very rare for the government to be a financial partner in the P3 consortium?

[Mark Romoff]

If you're talking about financing, the intent is not for the government to be a financing partner. We're talking about projects where the private sector is taking on responsibility for some of that financing through private sources. That's critical to the project because they have skin in the game. You can be sure they're going to make sure that all the obligations under the contract are met and that timelines and outcome specifications are also met, because there are penalties at play.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

The real benefit here to the public part of the P3 partnership is that you don't necessarily bear all the upfront costs. They are spread out over 25 or 30 years, whatever it is, whereas the infrastructure bank.... I'm not going to call it a bank, because I don't think it's a bank. It's the infrastructure entity. By putting $35 billion into that entity, there is a strong likelihood that the taxpayer will become a public partner in some of these projects going forward. As Matti—and I'm going to call you Matti—rightly pointed out, these are the big gambles, and you're going to be deciding whether you take a political gamble or not. So you are gambling with public money in the infrastructure agency concept versus the P3, where there frankly isn't a gamble. It's a set contract, and you pay for it over 25 years.

Matti, would that be a fair way of assessing the differential?

[Prof. Matti Siemiatycki]

I would actually see them as different models on a continuum. You can think of project delivery being on a continuum from greater public sector responsibility to greater private sector responsibility. Traditional build sits at the public end, and full privatization sits at the private end. P3 and the varying degrees of P3 are somewhere in the middle. This is moving closer to the private sector end of the spectrum. What we're going to see, then, is the ways in which the deals are structured, and where the funding is coming from. It's not just about the financing; it's about the funding sources that underpin these types of projects and what role the government is going to play in them.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

The ongoing funding is something that happens through many current P3 models, but what I'm hearing you say is that there's a likelihood the new entity will be aiming at projects that probably wouldn't get off the ground under the traditional model because they're a bigger risk.

[Prof. Matti Siemiatycki]

I think that's right, and I think these are going to be the projects that really push the boundaries but have the potential for very high rewards. In the P3 models that we've seen in Canada, the goal in the P3 is to optimize private finance, not to maximize it, because private finance is expensive. The reason you use private finance is to lock in the risk transfer mechanism. In the infrastructure bank model, we're moving to a different approach. We're actually trying to raise new capital through projects that can bring in new revenue sources to increase the size of the pie. That is a different approach that's being conceived here.

[The Chair, Liberal, Wayne Easter]

Thank you, Mr. Liepert.

Mr. Masse.

[Brian Masse, NDP, Windsor West, ON]

Thank you, Mr. Chair.

To all the witnesses, the infrastructure bank itself is going to require staffing, advertising, and maintenance. Should that be shared with the private sector? Should we also include our lower borrowing costs, what we bring to the table, with these? Our lower borrowing cost is certainly a very, very important part of the entire picture of a good value asset.

I'll start with Mr. Macdonald. Should the cost of the infrastructure bank itself be borne entirely by the taxpayers as an expense? Should it be something like 50-50, or some type of a structure? What do we count, then, as we're going into the arrangement with the important asset of a lower borrowing cost that nobody else can get? Is that something to consider in the overall costs to taxpayers to pay for the infrastructure bank itself?

[David Macdonald]

Maybe we'll see. There is probably broad agreement that the costs of the infrastructure bank should be borne by the infrastructure borrowers at the end of the day. It's a real question for this committee as to this bank's goal. Is it to reduce interest rate costs, to use the position of the federal government's low interest rate in order to reduce costs for the cities that are going to use this money? Is it a vehicle for investors to get the 7% or 9% they need to pay back the needed returns on the pension plans? It could go either way. It's the decision of this committee.

At present none of the functions as listed in Bill C-44 state that the goal of the bank is to produce rock-bottom interest rates for municipalities. Interest rates are not discussed in the functions of the bank. The investors and the needs of the investors are discussed in the functions of the bank.

[Brian Masse, NDP, Windsor West, ON]

Mr. Romoff.

[Mark Romoff]

Thank you.

I see this arrangement as similar to the establishment of any crown corporation. If your question is who pays the day-to-day operating costs of the entity, I think that belongs with the government because it is a crown corporation.

The key, with respect to the mandate, the types of projects, and the work that it would do, is clearly a function, as I mentioned earlier, of choosing the right chair of the board and the right CEO. They are going to be the ones who are going to take a concept that is still in a state of evolution and bring it to fruition.

[Brian Masse, NDP, Windsor West, ON]

Just before your answer, I'm going to ask a couple of quick questions so you can return back again. In terms of the profit returns now on the P3s, are they going to Canadians, our Canadian companies? Are the profit returns from P3s exiting the country to other foreign investors? Both questions are for you, and then back to provide the proper time.

Thank you, Mr. Chair.

[Prof. Matti Siemiatycki]

On your first point, we already have institutions whose role at the provincial level is to lower borrowing costs. Six or seven provinces already have municipal borrowing corporations. They recover at least some of their costs by charging a small premium on their borrowing to the municipal government that takes on the borrowing. So we already have those types of institutions.

The key thing to keep in mind at the municipal level is that their problem is not finding access to capital. The world is awash in capital, and there are people who even want to take municipal bonds. The problem with our municipalities is that they don't have the money to pay it back. When they take on extra borrowing that raises their annual costs, they don't have the capacity within their tax load to pay it back. The infrastructure bank then, as another low-cost lender, might bring down the costs marginally, but that's not going to change the game for these municipalities, especially those already facing very tight budgets.

On your question about where the money from P3s is going, P3s in Canada have attracted financing from global investors. They've attracted Canadian financiers but also debt and equity investors from around the world. So the money is spreading widely.

[Brian Masse, NDP, Windsor West, ON]

Mr. Romoff, and then Mr. Macdonald.

[Mark Romoff]

Matti is absolutely correct. The competitive process that is a hallmark of P3s in Canada has, in fact, resulted in all the global players converging on Canada, because this is where the market and the pipeline of projects has been. Increasingly, with any major project in Canada, the consortia that bid on these projects are international by definition; there are good Canadian components, but there are lots of international players. In the end, there will be that sharing of revenue.

One thing I would also say with respect to—

[The Vice-Chair, Conservative, Ron Liepert]

Mark, could I get Mr. Macdonald to answer that question? Then we have to move on because the bells are sounding.