Finance Committee on May 16th, 2017

[Toby Sanger]

Randall has worked on a number of different sides of this, and he is an expert on that.

Those are the rates of return that would be expected by the private sector. Michael Sabia and others have confirmed that this is the rate of return they expect on this. If you are expecting that type of risk over a 30-year project.... I did the calculation in this report, and it shows that over a 30-year project, it could cost close to twice as much as it would if it was funded at the Government of Canada long bond rate.

[The Chair, Liberal, Wayne Easter]

Mr. Manahan, go ahead.

[Andy Manahan]

I want to provide one example, because it's really important.

I've been in touch with various people in the U.S. The investors down there, if they're doing a transit project.... Because of the sharing economy—car-sharing, where people take passengers to stations, let's say—nobody is investing in parking structures right now. The risk is too great, because in the next 15 to 20 years, we are entering a world of autonomous vehicles. Those self-driving cars will take someone there. They won't need to park.

This is the kind of stuff that the private sector will probably be more attuned to. You guys are hearing it first. This is pretty new information. None of the big investors in the U.S. are going to touch this stuff nowadays. That's the kind of stuff you have to look at.

[The Chair, Liberal, Wayne Easter]

Mr. Grewal, go ahead.

[Raj Grewal, Liberal, Brampton East, ON]

Thank you, Mr. Chair.

Thank you to the witnesses for being here today.

I come from a riding in which the growth is at a pace that the infrastructure can't keep up with. Houses are being built, people are moving in, but the infrastructure trails this quite a bit in terms of schools, roads, and public transit, which is most important. The infrastructure bank would give an opportunity for the City of Brampton to apply for funding through the bank. Because of our council's decisions, we gave up $400 million in funding to fund our brand new LRT. People in my area are applauding the Canada infrastructure bank because, at the end of the day, the government would be able to build better infrastructure.

I used to be a corporate lawyer, and we did a lot of work on P3 projects. They have their benefits and their disadvantages, which we've all heard a lot about. Can all of you, with your experience in the area, let me know of P3 projects that went bankrupt?

[Toby Sanger]

I'll start.

There was a large Metronet one in the U.K., and the U.K. government had to bail it out.

[Raj Grewal, Liberal, Brampton East, ON]

Sorry, I meant in Canada.

[Toby Sanger]

In Canada, the proponents of some of the first P3s here in Ottawa just walked away from it, and the government had to pick it up. They didn't go bankrupt. One was backed by a U.K. firm, the other by Sensplex. Three years into the 30-year project, they said they wanted more money because the revenue wasn't there. The City of Ottawa caved in and gave them more money.

There haven't been many bankruptcies, partly because they say they're going to need more money. I think there is a lot of money in it anyhow, partly because there isn't a demand risk. The problem here is that there will be that demand risk, the revenue risk with these infrastructure bank projects, so there is a higher possibility for them to go bankrupt.

Most of the P3s in Canada are backstopped. They have guaranteed availability payments from the government. There are a few exceptions, but most of them have guaranteed revenues, so there is less possibility that they would go bankrupt.

Hamilton water.... I don't know if that went bankrupt but it was started by Enron. There are a number of different examples there.

[The Chair, Liberal, Wayne Easter]

Mr. Dachis, go ahead.

[Benjamin Dachis]

You can think of bankruptcy as a project failure, but the other way to think of it is as a successful risk transfer to the private sector. If all our P3 projects made an attractive return, that would mean that we are overpaying for the transfer of risk, so a bankruptcy may actually be seen as a policy success.

[The Chair, Liberal, Wayne Easter]

Thank you.

I have one question, maybe two.

Mr. Dachis, in your presentation, on page 5, in effect you are talking about this bill and governance. In order to get the proper governance that you're talking about, does the bill need to be amended, or is it more of a process in terms of how that infrastructure bank would operate, either by regulations or by the policy of the bank?

[Benjamin Dachis]

That's the million-dollar question. Does it need to be done in the legislation? Do you need to reform the legislation, or are these the kinds of institutional safeguards that you can create in the actual practice of the bank?

A good example of where this isn't necessarily baked into legislation is with the Bank of Canada. If the Department of Finance decided to send a letter to the Governor of the Bank of Canada saying, “You must set interest rates in a certain way”, that would be like hitting the nuclear button. That would be a pretty serious breach of public trust.

The question then becomes whether you can design the arrangement of the Department of Finance, the Department of Infrastructure, and this bank outside of legislation, in a way that effectively creates that same sort of structure of making sure you have political independence. That's going to be the big question for this committee to think about going forward.

[The Chair, Liberal, Wayne Easter]

Thank you.

There is another thing that I had on infrastructure. You pretty near all agreed on the high-speed rail. However, a concern I have—and probably the folks here from Alberta, or anybody outside of central Canada has—is that a $5-billion project may be what you need in central Canada, but a $1.5-million project in my riding is as important to my economy as that big project.

We know an area in Alberta where the municipality is charging—I forget what the fee is—so much a head for cattle in order to take care of the bridges in that municipality, and it just can't be handled by the producers. Without some political involvement....

Everybody always wants to take the politicians out of it, but we have a responsibility to the country as a whole. How do you handle that?

[Andy Manahan]

That's a really important question.

We do have, for example, current gas tax programs, building Canada programs, that are done on a criterion such as population, or other criterion, such as ridership for transit.

I don't think that the infrastructure agency we're talking about should have a mandate to spread projects across the country based on population or making sure that every province gets a project. That should not be the mandate. It should be the highest return on investment and where the evaluation makes sense.

The high-speed rail may not even make sense in central Canada. That would still have to be looked at.

[The Chair, Liberal, Wayne Easter]

Okay.

With that, Mr. Khan, did you want to comment?

[Azfar Ali Khan]

I just want to add that I think that is one of the reasons we're advocating for that future needs analysis.

As I said in my presentation, it needs to be mindful of the regional needs and variations. If you want to have a really good understanding of the overall needs, you have to have a local, bottom-up driven, strategic needs analysis, so it does reflect those regional needs and variations. You want to look at the overall outcomes for Canadians as a whole, not just where the population centre resides.

[The Chair, Liberal, Wayne Easter]

Okay.

Mr. Sanger, do you have a point?

[Toby Sanger]

I would agree on that.

A point I'd like to make is that if you did have a bank publicly financed with a lower cost of financing, some of the smaller areas of the country that are facing a higher cost for borrowing could benefit the most.

In response to your previous question, I was a bit struck by what the Minister of Finance said yesterday, that the projects would receive approval. That's not in the legislation, as far as I read it. If there is that confusion over it, then definitely this legislation should be separately worked out instead of being rushed through in an omnibus bill.

Thanks.

[The Chair, Liberal, Wayne Easter]

Okay, with that, thank you all for appearing as witnesses.

We will suspend and bring the next panel forward.

[The Chair, Liberal, Wayne Easter]

Order. Could we get the members to the table?

We are going to be under a fairly tight time frame because when the bells ring we have no choice but to go, and there are seven minutes left.

As people know, we're meeting on Bill C-44 and we appreciate your coming to make your presentations.

We'll start with you, Mr. Macdonald, senior economist, national office, Canadian Centre for Policy Alternatives.

[David Macdonald, Senior Economist, National Office, Canadian Centre for Policy Alternatives]

Thank you very much, Mr. Easter, and thanks so much to the committee for their invitation to speak on Bill C-44.

With any budget implementation bill there is always something interesting to say and plenty to say about it. Briefly, I would like to commend this committee on Bill C-44 for closing several of the boutique tax cuts that have been opened over previous years. I hope this committee will continue forward and tackle several of the larger and more regressive tax loopholes later on, like the stock option deduction, or the capital gains inclusion rate.

Today I would like to focus my remarks on the proposed infrastructure bank. First, it's important to note that whatever the structure of the infrastructure bank, loans are a poor substitute for federal funding, and there has been a substantial shift in infrastructure investment and responsibility over the past century. In 1955 the federal government spent 35% of every infrastructure dollar. Today it spends 15%, and it is municipalities that have picked up this slack. They used to spend one-quarter of every infrastructure dollar in 1955. Now they spend close to half. Provincial contributions have remained roughly the same over this period.

The federal government continues to pay the lowest interest rate of any level of government, and enjoys the broadest tax base. Municipalities, on the other hand, face the highest interest rates and the smallest tax base. This cost shift leads to fewer dollars spent on infrastructure, and the costs that are shifted to this lower level of government are shifted to the level of government that is least able to pay them.

As I see it, the main functions of a properly constructed infrastructure bank are, first, to lower interest rates for municipalities, and second, to facilitate the borrowing process. Smaller municipalities, or municipalities unfamiliar with larger projects, would particularly benefit from these functions. However, neither of these straightforward functions is part of the proposed functions listed in the infrastructure bank in Bill C-44.

Municipalities do face higher interest costs than the federal government. I looked up the bond rates this morning for the City of Ottawa, which pays 2.25% on five-year bonds. Halton Region, just outside Toronto, pays 2.54% on five-year bonds. This would be compared with the federal interest rate for federal government bonds of 0.82% on five-year bonds, roughly 1.5% lower than the cities. As with a mortgage, higher interest rates mean higher costs for cities and/or higher user fees for Canadians.

An infrastructure bank could effectively lower borrowing costs close to the federal rate. For its part, the federal borrowing rate is close to a record low, given the incredible demand for federal government bonds. Put another way, investors are desperate for more federal bonds, thus driving up their price and driving down their yield. An infrastructure bank could take advantage of this and pass the savings on to cities.

However, I'm concerned that as structured, the infrastructure bank would not achieve the goal of reducing borrowing costs for cities, but in fact would do the exact opposite. The proposed infrastructure bank appears to serve the needs of investors, not those of cities. In fact, the input of any government is explicitly and oddly not necessary for accessing funds through the infrastructure bank. It appears that public-private partnerships, or P3s, and not low-cost financing will be the focus of the bank. The likely impact will be interest rates to cities of 7% to 9% on infrastructure bank projects instead of 0.08%, the current federal borrowing rate. In other words, the proposed structure will increase interest costs by a factor of 10.

As with a mortgage, substantially higher interest rates mean higher interest rate payments over the life of the project, and those higher costs will be borne by governments or by higher user fees, or both.

Municipalities are not blind to this issue, often preferring public financing due to lower costs as opposed to P3s. This is not a hypothetical problem. In 2014 the Ontario auditor general examined the 26 billion dollars' worth of P3 projects undertaken by the Government of Ontario, an amount, incidentally, similar to what the federal infrastructure bank is considering. She concluded that the P3 structure would add an additional $8 billion in costs over and above the $26 billion of the projects themselves, almost entirely due to higher interest-rate costs, and these much higher costs would be borne by the Ontario government, and ultimately, by Ontarians so that P3 consortiums could see higher profits.

I encourage the committee to refocus the infrastructure bank on driving down interest rates for municipalities while accelerating their access to infrastructure loans.

This refocusing of the bank's priorities on what cities need instead of on investors' needs will best serve Canadians by keeping costs and user fees down, while encouraging cities to use the bank due to its competitive rates.

Thank you very much for your attention, and I look forward to your questions.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Macdonald.

With the Canadian Council for Public-Private Partnerships, we have Mr. Romoff, president and CEO.

[Mark Romoff, President and Chief Executive Officer, Canadian Council for Public-Private Partnerships]

Good afternoon.

Thank you, Mr. Chair, co-chairs, and committee members, for inviting me to appear here today.

I'm pleased to speak before the committee on behalf of the council, which is a not-for-profit, non-partisan, member-based organization, with broad representation from across all levels of government in Canada and the private sector. Its mission is to promote smart, innovative, and modern approaches to infrastructure development and service delivery, through public-private partnerships. The council is a proponent of evidence-based public policy, educates stakeholders and the community on the economic and social benefits of public-private partnerships, and facilitates the adoption of international best practices to make sure we continue to be the very best at what we do.

I should emphasize that the council is not a lobby group. Rather it works as a partner with governments, to enable them to achieve the best outcomes and the best value for taxpayers from their respective infrastructure investments.

The council is pleased to speak today in support of Bill C-44, in particular the act to establish the Canada infrastructure bank.

I know committee members are well aware that, irrespective of the size of Canada's infrastructure deficit, which some estimates peg at about $1 trillion, and the fiscal challenges all governments across the country face, continued investment in infrastructure is absolutely critical, because it drives job creation, productivity, economic growth and prosperity, and global competitiveness. That's why the council has supported long-term infrastructure programs by successive governments to tackle the infrastructure deficit in this country. Notable in this regard, of course, is the unprecedented and ambitious federal investment of $186 billion over the next 12 years.

We will be the first to say government cannot do this alone. Governments at every level do not have enough money or expertise to build the world-class infrastructure needed to grow Canada's economy and improve the social well-being of our citizens. That's why the establishment of the Canada infrastructure bank is such an attractive, innovative, and timely initiative.

The bank's mission, as you know, is to deliver revenue-generating infrastructure by attracting private capital investors. The injection of private financing means government is in a position to make better use of public funding for a broader range of infrastructure projects, such as new water systems, social housing, recreational and cultural facilities, and on-reserve infrastructure.

Canada has a strong record of success when partnering with the private sector. Engaging the private sector in the design, construction, financing, maintenance, and even the operation of critical public infrastructure is not a new idea in Canada. We have a long and successful history of public-private partnerships in this country. The Canadian model has delivered high-quality infrastructure, built on time and on budget, and demonstrating exceptional value for taxpayers. This is primarily because of the rigour and discipline the private sector brings to the procurement process.

There are currently 258 P3s across Canada. Those facilities that are already in operation or under construction have a value of more than $122 billion, and include a broad range of projects, like hospitals and long-term health care facilities, roads, bridges, public transit, and water and waste-water treatment facilities. It's important to stress that these projects in every instance remain publicly owned and publicly controlled. This is in no way privatization of government assets.

The Canadian Centre for Economic Analysis has independently estimated that P3s have saved Canadians as much as $27 billion over the 25 years that they have been in play. These projects have been demonstrated to be built 13% faster than those brought to market in the traditional way, which has added a further $11 billion in value to the Canadian economy.

Most importantly, P3s are creating 115,000 jobs and generating $5 billion of additional wages on average every year. This strong track record of success has resulted in the Canadian P3 approach being recognized around the world as best in class.

Over the years, Nanos Research has shown that seven out of 10 Canadians consistently support P3s and recognize that the private sector is better equipped than government to deliver high-quality projects on time and on budget.

The Canadian P3 experience is evidence that there is no shortage of private capital waiting to be invested in Canadian infrastructure and that the private sector is willing and prepared to take on significant risk to support these projects. We have a funding problem in Canada, not a financing problem. We believe, if structured appropriately, the Canada infrastructure bank can leverage public dollars further by transferring revenue risk and reducing overall public expenditures, while ensuring projects are delivered on time and on budget and that they are well maintained over the life cycle of the asset.

When I say “structured properly”, I mean that each project that comes to the infrastructure bank must first and foremost have a strong business case, and the procurement process that follows must be competitive, efficient, transparent, and fair. It must also be recognized that not all governments have the capacity or expertise to successfully procure the large, complex, revenue-generating projects that will be the purview of the bank.

In these instances, we would urge government to establish a project preparation fund that would be available to less-experienced provinces, territories, municipalities, and indigenous communities in order to enable them to acquire the consulting services and advisers necessary to successfully take their projects to market.

The council sees the Canada infrastructure bank as another tool in the tool kit for governments to deliver more high-quality infrastructure for Canadians and greater economic stability for communities across the country. We believe the bank can draw in more private capital and build on the successful Canadian P3 model. We are the first to say that P3s are not a panacea, but when done for the right reasons and on the right projects, they deliver real results for Canadians.

Now that the location of the bank has been decided, the important next steps are to recruit a high-quality and experienced chair, a board of directors, and a CEO, who together will put the flesh on the bones of this new institution. My council is confident that under strong, capable leadership, the Canada infrastructure bank will be well positioned to continue the country down this path of success, and the council is pleased to support the act that is being considered by this committee.

Thank you very much. I'm happy to take any questions.

[The Chair, Liberal, Wayne Easter]

Thank you very much.

Next we have, as an individual, Mr. Siemiatycki.

[Professor Matti Siemiatycki, Associate Professor, University of Toronto, As an Individual]

My name is Matti Siemiatycki, and I am an associate professor of geography and planning at the University of Toronto. I've spent the last 15 years studying infrastructure, with a focus on public-private partnerships. Over the last year, I've been delving into this idea of an infrastructure bank.

I've written two reports on the infrastructure bank, which go into some detail about the role and structure of this institution. Since I've been studying the infrastructure bank, the role of the bank has shifted. From low-cost financing to municipalities, this role has moved to attracting private capital and investing in revenue-generating infrastructure.

In my studies one of the questions I keep returning to is this: what is the value of this bank? When you read the public commentary and debate around the bank, there is this question of establishing the public value, assessing the benefit of proceeding with this type of institution. In particular, we want to find out what types of projects are going to be invested in. From my vantage point, let me spend a few minutes talking about these ideas, both the public value and the types of projects.

I think the place to start is by understanding a few fundamentals of the infrastructure sector in Canada. The first point is that most infrastructure assets in key sectors that Canadians are concerned about, sectors that the government has prioritized, do not support their operating costs, let alone their capital costs, through user fees. This includes public transit, most roads that have no tolls on them, many of our water systems, and our affordable housing stock. Most of those assets do not cover their revenues through user fees, and that also includes VIA Rail.

What this means is that the bank is not going to be providing new money in those sectors. This is not additional money. Any money invested through the bank is going to have to be paid back somehow, and that money is going to come either from user fees that don't exist on those asset classes, or from some other government source. With the exception of projects that generate user fees, this is not new money to expand the pie. This is a financing technique, not new funding. We have to be clear about that.

If the bank is going to be focused on revenue-generating projects, that narrows the scope of the types of projects that are really going to be viable and of interest. Keep in mind, we've been talking a lot about institutional investors. The reason institutional investors have not so far invested in Canada to a significant extent is that there's not the project deal flow. These are not the types of assets they are interested in. They are interested in very large projects, typically with a minimum value of $500 million, and often up to a billion dollars in value. They want very large projects that they can take an equity stake in. To this point, those types of projects have not often existed in Canada.

The third point to raise is that the provinces and municipalities provide most of the infrastructure in Canada. The federal infrastructure bank is going to have to be a collaborative organization. It is not going to be bringing forward projects on its own. It's going to have to work with both private investors and governments at the provincial and municipal levels, which are ultimately responsible, in many cases, for approvals and for operating and maintaining these assets.

The fourth point is that there are existing institutions across the country that provide many of these services. Provincial and first nations financing authorities already provide low-cost financing to municipalities. There are also public-private partnership agencies across the country that provide expertise and support, keeping in mind that most of the public-private partnership projects in Canada are provincial, not federal. We have to understand these organizational overlaps and make sure we're getting the collaboration right with this institution.

Finally, as Mark mentioned, we have been using P3 models widely across the country, so we already have private capital in play in infrastructure.

With that survey of the landscape, the question is this: what role can the infrastructure bank play? From my vantage point, the real opportunity is to go for unconventional projects that are innovative and of national significance. I'm talking about real big projects, the game-changers, the moon shots, the projects that are going to launch Canada in a different direction, the projects that are unconventional in the way they are financed and paid for by user fees.

This is not going to be for your typical road or transit project, from my vantage point. This is going to be for projects that are very large and long term; for projects that often involve multiple partners, and so there's a risk and requirement to bring these partners together. They will have revenues from multiple sources, not only from user fees, but, perhaps, also from a combination of sources that then together pay for both the capital and operating of the infrastructure. Finally, these are going to be high-risk projects that are high-risk for all the partners, both the private sector and, potentially, for the government, but then also have a potential for major rewards for all the parties involved.

I can give you a few examples of the types of projects I'm thinking about in order to really zero in here. One project is waterfront regeneration. We can think about a project like the Port Lands redevelopment in Toronto. By investing in the flood protection of that area in the eastern part of the downtown of Toronto, we unlock billions of dollars in land redevelopment potential. No investor will be able to come to the fore and invest in the flood protection, but they might and will become involved in the real estate, transportation, and the business opportunities once that land is in place. The bank could provide a role in catalyzing that type of development.

Transit projects are another area where we could see the bundling of transportation and land use into the same type of deal. Typically, we've seen transportation and land use done separately. There's an opportunity to bring those together to generate revenues, not only from the transit fares but also from the redevelopment potential around the stations, and potential rents that can be accrued from those developments. These are creative types of transit projects.

Community hubs are another opportunity where we're bringing together multiple uses of land into areas where we can bring together public schools or recreation centres, and try to fund and finance some of that through development. In our fast-growing communities, there are real opportunities to leverage development to pay for some of the infrastructure and build stronger and smarter communities.

In green energy, there's opportunity for waste and water. There's an opportunity for district energy type of systems in some of these fast-growing areas. There was a project in Toronto where they were going to bring forward a district energy plant, and they just couldn't get the capital to put the project in place. It would have been paid for by the redevelopment of the land and the condo units over time, but they couldn't get the money together to pay the upfront costs.

Finally, there is social infrastructure. There are some incredible examples of projects that are bringing together uses that are very creative and that you wouldn't think of. There's a project bringing together a condominium with a homeless shelter in the same building, using the condo revenue in part to pay for some of the land costs of that development.

These are the types of opportunities I think the bank can play a part in. I want to echo what everyone on this panel has said, which is that evidence-based planning has to be at the core of this. How do we prioritize and select between the different options and different projects? I ask because there will be a lot of calls on this revenue and the money in the bank. How do we pay for it?

The other point is that the bank is the centre of excellence role that's in the legislation. This could be a real opportunity.

Thank you.