Finance Committee on May 16th, 2017

[The Chair, Liberal, Wayne Easter]

I'll call the meeting to order. We're dealing with the order of reference for Bill C-44, an act to implement certain provisions of the budget tabled in Parliament on March 22.

I apologize to the witnesses for the delay. We will try to proceed with this panel for one hour and the next panel for one hour.

To start, we have the Canadian Union of Public Employees, Mr. Sanger, senior economist.

Toby, the floor is yours.

[Toby Sanger, Senior Economist, Canadian Union of Public Employees]

Thank you.

Thank you very much for inviting me.

I'd like to say at the outset that I welcomed this government's promise in the election and in ministerial mandate letters to establish the Canada infrastructure bank to provide low-cost financing for new municipal infrastructure projects.

I also strongly welcomed the promise to set a higher bar for openness and transparency in government and the promise to stand up for and strengthen the middle class and those working hard to join it.

I was very happy to hear the Prime Minister say that they'd end the undemocratic practice of using omnibus bills to prevent Parliament from properly reviewing and debating proposals. This is why I and others, I think, are so disappointed in these plans for the infrastructure bank in Bill C-44. They represent broken promise after broken promise.

Right from the outset, it won't provide low-cost financing for municipalities. That was the promise in the election campaign and in the ministerial mandate letters. Instead, the priority has shifted to leveraging higher-cost private sector capital. In a recent report that I wrote, I demonstrated how the higher cost of private sector finance could mean that these projects could cost twice as much. No one has disputed those figures. In fact, people have said that the rate of return on the private sector side is larger than that. This means we'll get half as much bang for our buck in terms of infrastructure—less infrastructure, not more.

The bank won't be open, transparent, or accountable to Canadians. The federal Auditor General has limited power to review the operations of crown corporations, less than direct public projects. This legislation also threatens anyone who discloses information about projects relating to proponents with a $10,000 fine and six months in jail. Investments are supposed to be in the public interest, but the legislation bars officials from being on the board.

It won't help strengthen the middle class and those working hard to join it. Yes, jobs will be created from infrastructure investments, but many more could be created if the money were to go to construction and employment and not to higher financing costs. Higher user fees associated with these projects will hurt middle and working classes the most. They'll also be bad for the economy, taking money away from other spending.

The bank was designed—as we'll find out—by a small, privileged group of financiers who stand to benefit the most from it, including BlackRock Inc., the biggest asset manager in the world, which recently hired top civil servants. As others have said, if this isn't a conflict of interest, I don't know what is. The infrastructure minister and the Prime Minister say they consulted with unions and others, but we know the design for this came from the finance minister's economic advisory council, which is dominated by CEOs.

And it's included in the budget omnibus bill.

Another concern is that the bank also won't help with the type of comprehensive national infrastructure planning that we need. Instead, private interests that dominate it will focus on what will maximize their private profits. Allowing it to entertain unsolicited proposals will mean that they'll also cherry-pick public assets to privatize for the greatest profit. It will result in a patchwork of privatized projects, driven by no other logic than private profiteering off public infrastructure. The initial $35 billion in federal public funding would just pave the way for this.

Now, I was very surprised to hear the finance minister say yesterday that cabinet would approve projects, because from my reading of the legislation—and I think that of most others—that's not the case.

Instead, the government should do what they promised and what Canadians voted for. It should establish a public infrastructure bank that provides low-cost financing—and that means public financing—for new municipal infrastructure projects. There's no shortage of financing available for the Government of Canada to borrow at low interest rates. Also, if this were done through a public bank and lending institution, such as the Business Development Bank of Canada, CMHC, or EDC, then its investments and borrowing wouldn't need to increase the deficit or net debt any more than the current proposal would.

Number two, it should also ensure much stronger accountability, transparency, and review by auditors general over the bank and its projects. It should provide full public disclosure of all details in business cases, value-for-money assessments, and contracts. It should also have public officials on the board so that it acts in the public interest. We should ensure that public infrastructure projects remain public and aren't secret deals.

You should also establish a public and transparent process, using evidence-based analysis for truly objective project planning of what should be the priority public infrastructure projects across the country. We should use this type of proposal to engage in truly sensible national infrastructure planning.

Thank you very much.

[The Chair, Liberal, Wayne Easter]

Thank you, Mr. Sanger. You called it as you see it.

From the Institute of Fiscal Studies and Democracy, we have Mr. Khan, who is a director, and Mr. Bartlett, who is chief economist.

Mr. Khan.

[Azfar Ali Khan, Director, Performance, Institute of Fiscal Studies and Democracy]

Thank you so much.

Thank you, Chair, vice-chairs, and members of the House of Commons Standing Committee on Finance. It is an honour to be with you today.

I'll quickly comment on Bill C-44, in particular regarding Canada's critical infrastructure.

The Institute of Fiscal Studies and Democracy—of which I am the director of performance, and my colleague, Randall Bartlett, is the chief economist—recently published a piece on assessing the risks and opportunities associated with a Canada infrastructure bank. The key premise underlying our piece is that a national infrastructure plan and strategy is required, supported by evidence. This should be the first priority.

Our work in this area enabled us to identify three key factors. These factors form the basis of the steps needed to develop a work plan and national strategy for critical infrastructure.

First, a thorough assessment of our current infrastructure stock needs to be performed. Specifically, is this stock delivering, or on track to delivering, the benefits expected from it at the time it was approved? A report by the U.K.'s National Audit Office highlighted the cost and challenges of delivering major projects in government, with a number of recurring issues affecting performance.

Of the 149 major projects in the U.K. as of June 2015, with a total life-cycle cost of 511 billion pounds, successful delivery of 34% was considered to be in doubt or unachievable unless action was taken. Infrastructure investments alone are not a guarantee of infrastructure outcomes.

The second step is to conduct a strategic analysis of future infrastructure needs in Canada.

This analysis would identify the economic, social, and environmental benefits expected of infrastructure investments. It would consider factors such as demographic trends, population growth, current and projected economic activity, trade corridors and future drivers of economic growth, the environment, and any significant regional variations and needs.

Finally, by understanding the condition of our current infrastructure stock and our future needs, we can identify our infrastructure gap relative to the future infrastructure needs. This is the evidence base, at a minimum, that we feel is needed to develop a national infrastructure plan and strategy.

Currently, estimates of the national infrastructure gap in Canada range from zero to $1 trillion. While estimates always come with some uncertainty, this is a wide range by any measure, and not one on which to build a national infrastructure strategy.

It's critical to understand where we are and where we're headed. Only then can we draw a roadmap to help us reach our destination.

In fairness, budget 2017 identifies an ambitious data initiative on Canadian infrastructure to provide the intelligence to better direct infrastructure investments. Further, the budget implementation act identifies the collection and dissemination of data to monitor and assess the state of infrastructure in Canada as one of the functions of a Canada infrastructure bank.

In our view, this data initiative identified in budget 2017—and the function it gives to a Canada infrastructure bank—is precisely what is required first and foremost in order to have an evidence-based national infrastructure plan and strategy. Details on this initiative are to be announced in the coming months, and we are very much looking forward to understanding the details and timelines expected of this initiative. Let us develop the plan first, and then put in place the right strategies and instruments, such as the infrastructure bank, that are tailored to best achieve that plan.

Unfortunately, these initiatives are in the wrong order. We put the cart before the horse.

Thank you for your time and the opportunity to speak to you today. I look forward to answering any questions you may have.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Khan.

Mr. Dachis is next, from the C.D. Howe Institute. Welcome. The floor is yours.

[Benjamin Dachis, Associate Director, Research, C.D. Howe Institute]

Thank you very much.

My name is Benjamin Dachis. I'm associate director of research at the C.D. Howe Institute. We're a national non-partisan public policy think tank.

I'll be summarizing some of my recently published research that's available on the C.D. Howe Institute website. I've brought copies for anyone interested, and also some work that we're going to be publishing by Steve Robins of Harvard University next month.

The key message from our work is that the government's move to create an infrastructure bank is very much a step in the right direction, and it's now time to get the details right. We think the bank requires independent governance, a deep commitment to evidence-based decision-making, and less political involvement in negotiating with potential private sector and local and provincial government partners.

First of all, it's really important to remember the benefits of using private investment in place of taxpayer-supported debt. Government funding for infrastructure has two hidden costs on the economy. The first is greater risk on the taxpayers, and the second is the economic harm of taxation.

One of the common arguments that you're going to hear favouring government infrastructure investment is a lower borrowing rate compared to pretty much everyone else. It sounds like the government should do the borrowing, right? Well, not so fast. All this lower borrowing rate is a result of lenders viewing taxpayers as the guarantors of any cost overrun or late delivery. Sharing risk with institutional investors instead can be a better deal for everyone.

Second, every taxpayer dollar the government uses for infrastructure has to come from someone's taxes, and those taxes mean some businesses don't make an investment, and some people work less. Governments can reduce the economic harm of this by relying on users instead to pay for infrastructure rather than taxpayers, with institutional investors providing the financing in place of governments. That is the case for private investment infrastructure.

The question now is how we do it right. First of all, where necessary, Ottawa and the provinces should be creating independent regulatory bodies overseeing infrastructure assets to ensure that their owners, either governments or private institutional investors, act in the public interest and for long-term sustainability. Importantly, that should not be the role of the bank.

Our forthcoming work is going to point to a number of key design elements of the proposed infrastructure bank. First, on governance, the bank should have a single objective in its mandate clearly defining what projects the bank should pursue. Its independence should be enshrined in the legislation in a way that protects it from day-to-day political influence, and it should have an independent board with fixed terms.

Second, the federal government is going to need to create standardized project planning and create consistent cost, benefit, and risk metrics. It should also require the collection of this data receiving federal funding and having more than, say, $100 million in capital costs. Budget 2017's commitment to better data collection in infrastructure is definitely a positive step in this direction.

Finally, for the bank's analysis to be viewed as credible, rigorous, and fact based, it must be seen as independent of the political needs of the government of the day. Australia's experience with Infrastructure Australia is very instructive. When it was first established, it operated with a board with limited independence and even had members from government departments on the board. That discouraged states and municipalities there from participating. They saw the bank as being insufficiently independent. In 2014 the Australian federal government amended this mandate to create a truly independent board to address the concerns of states and municipalities. Board members now can only be replaced for cause, and one-quarter are appointed on advice of other levels of government.

Statutory independence means that the minister may not give direction to the bank on the content of any analysis nor require the bank to proceed with projects with negative net benefits. Any initial deployment of public resources should be approved by the Minister of Infrastructure and Communities or together with cabinet. That's absolutely needed to have the appropriate level of democratic oversight, but that kind of ministerial approval should happen at the very beginning of the process. Once the bank begins to procure with private or other government partners, the bank should have the ability to proceed to close the transaction without further ministerial approvals, and that will ensure market confidence in the procurement process.

In sum, the government's proposal for an infrastructure bank is an excellent idea if done correctly, and the broad strokes of a good proposal are in the legislation. More institutional safeguards are necessary. The best way to do so is an important question for this committee to consider as it investigates this bill.

With that, I look forward to your questions.

[The Chair, Liberal, Wayne Easter]

Thank you very much.

Turning now to Mr. Manahan, with the Residential and Civil Construction Alliance of Ontario.

[Andy Manahan, Executive Director, Residential and Civil Construction Alliance of Ontario]

Thank you, Chair Easter, vice-chairs, and members of this committee.

My name is Andy Manahan. I am the executive director of the Residential and Civil Construction Alliance of Ontario, and I have been in that position for about 11 years.

Obviously, we are a provincial association so this is a rare opportunity for me to speak in Ottawa and I really appreciate it.

One of the things that's different about our organization is that we're a labour management organization. I'm not aware of any other across Canada that has both contractor associations and construction unions, so our members will be the ones who will be building some of the projects through the Canadian infrastructure investment agency or other infrastructure funding programs that are already in existence or may exist in the future.

I should say right off the top that we did commission a report independently, about 2009, and it did recommend an infrastructure bank but it didn't flesh it out, so when we heard in 2015 that the government in Ottawa was contemplating an infrastructure bank we decided to commission a report, and we actually used the “infrastructure bank” phrase. That particular report resulted in a round table where the deputy infrastructure minister and an assistant deputy minister from Ontario and many other bright lights, including Ben and others, participated in that round table to hash it out.

I should say there was certainly not a unanimous position that this is the way to go, but overall we thought that if it were done correctly the bank or agency would have a lot of merit.

As a result of that round table we commissioned Matti Siemiatycki, who will be here later this afternoon to talk about and provide more detailed recommendations on how this organization could be operationalized. I'll let Matti talk in more detail about that.

I want to keep it very simple in terms of what our organization and I think are some of the key roles of this agency. I think project evaluation, as we've heard from Ben, is a critical function.

I just got the KPMG report yesterday that talked about various things like the infrastructure funding gap or the deficit across Canada, and to my mind... You know, some people are still using the $123-billion deficit, even though that figure is about 10 years old. Some of the infrastructure modelling work that we have done is agent-based modelling, and it looks at it from a different perspective. Rather than how deep the hole is, what are we spending on infrastructure in relation to the GDP? Currently across Canada we're at 3.1% GDP. An optimal point from a macroeconomic point of view would be 5%, so it's an aspirational target.

I think where you want to get into what the dollar amounts are is when you get to local or regional-level budgets, but I find that using those sorts of assumptions in terms of engineering, full replacements, or other aspects like that, is not very helpful. I would suggest that the big boy kind of management consulting firms get off that track of talking about how big the deficit is, because it doesn't really help us.

While there exists a large infrastructure gap, there is likely a long list of projects that meet criteria, such as of social and environmental importance, but how do we determine the best sequence of projects among so many worthy projects? I think we could probably, all across your ridings, come up with projects that are really good right now, but I think it's critical that we also look at projects that have a positive ROI, return on investment, from a variety of perspectives.

Secondly, I want to talk about revenues. I think Matti will get into this as well, but it's really important that projects generate revenues. I know this is sometimes politically toxic in terms of things like road pricing, or tolling, but gas tax revenues are declining. We've seen that in the U.S. with respect to the highway trust funds, both federally and locally. It's probably not as severe in Canada, but we're heading in the same direction because cars are becoming more fuel efficient and there are more electric vehicles, so there has to be a transition.

I think May of 2016 was when I heard the finance minister talk about bold ideas and policy approaches. I'm thinking now that we're getting into an era of connected vehicles, autonomous vehicles, and more electric vehicles, and I think that's really going to link together very nicely with road pricing.

What's happening in the States—and I just found out about this on Friday at a conference I was attending—is that there are 14 western U.S. states that are looking at how to transition from gas taxes to road pricing. It's an experiment without any real dollars—it's like a Monopoly money game—but they have over 5,000 participants in this voluntary program and they're trying to figure out what's going to happen. The results aren't out yet, but I think this is something we need to watch in terms of the Smart Cities initiatives that are happening in the U.S., and now here in Canada.

I want to mention that one of the reasons Ben made some of the points that he did about the independence is that sometimes politicians do things that can send out really negative signals.

To my mind, during the 2015 campaign, when a decision was made that the Champlain Bridge was not going to be tolled, that sent out a negative signal regarding whether or not we could count on revenues in the future. I can give you many other examples, but the one I want to highlight is the Scarborough subway extension. The agencies that did the business case analysis for that alignment looked at it and said light rail transit was the way to go. Because of former Mayor Ford of Toronto and the popularity of that gentleman and the premier of the day and then the connection of Ford to former Prime Minister Harper and Finance Minister Flaherty, all of a sudden a political decision was made, despite the best evidence, that we needed to build a subway, which has now turned into a one-stop subway. Our members are probably going to build that and we're going to benefit, but, quite frankly, if you have an LRT with more stops, at each stop you're going to have residential construction. How would you do an innovative finance on that? Value capture. There are a lot of creative things that get hurt when there's that kind of negative political interference. I'm not saying it's across the board, but I just want to provide those examples.

With respect to governance, that's probably the overarching important issue out of all of this. Metrolinx had a situation in which its president and CEO, I think, was put in a position of conflict, because he had to report both to the Metrolinx board of directors and to his political masters at Queen's Park. If he had had that independence, he probably would have been more forceful in saying LRT, light rail transit, was the way to go.

I won't belabour that, but I think you get where I'm coming from. Is this an extreme example? No. I think even with further evidence that you've probably all heard, that ridership numbers are not as high as they should be and that costs continue to rise and are exorbitant, there seems to be no course correction on this particular thing.

I think as the agency evolves, there should be not a go-slow approach but an approach that looks at specific sectors. Should it be trade and transportation or transit? Should we look at water in the future for those communities that have full-cost pricing or conservation-oriented pricing? Yes. Do we need to look at green energy transmission? Yes.

There are lots of different ideas, but to ensure that we're successful as we roll this program out, we need to take those sort of evolutionary steps.

I'll end it at that. Thank you very much.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Manahan.

I have a question for the committee before we go to questions, which will be five-minute rounds. Because of the delays in the House today due to tributes and other matters, that is really going to run us late tonight, to the extent that we probably can't do the witnesses for part 4 divisions that aren't done yet.

The question is when do we do it? We have two panels tomorrow afternoon. We have two panels Thursday afternoon. We could do them before we start on the bill on May 29, but we're already going until nine o'clock that night, so we would crunch ourselves for time. Would it be possible to do the divisions on Thursday morning? Are we okay with that?

[Raj Grewal, Liberal, Brampton East, ON]

If we're sitting on the 29th anyway, what does it matter if we sit for another 30 minutes that night?

[The Chair, Liberal, Wayne Easter]

It might be longer than 30 minutes if one of those witnesses is....There are service fees, on which there are already three or four people on the question list. There's the infrastructure bank, and I believe there's Infrastructure Canada, so they could be lengthy.

If we meet on Thursday morning, then if we have to meet on the 29th, we can, but I don't think we can do a thorough hearing unless we do it Thursday morning.

Is Thursday morning Okay?

All right, so we'll inform them.

Sorry, folks, for the interruption. We'll go five-minute rounds, starting with Mr. Sorbara.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you, Mr. Chair.

Welcome, everyone. Please excuse the delay today. I have two or three comments, and then I'll ask a quick question.

I've heard some viewpoints on infrastructure. I'm very familiar with the P3 model in Ontario. I was on a bond desk for one of the major banks, and I understand how the financing works for P3s and the different models of the build to maintain, operate, and so forth. We're having the York Spadina subway extension come up to Vaughan and, starting in a couple of weeks, we'll have a brand new hospital being built in the city of Vaughan, which is a P3 model. As well, our government here has put forward a historic plan to invest over $180 billion in infrastructure over the next 12 years.

A saying I've heard that struck me as important is this one: progress over process. We want to get projects built. We don't want to chat about them for a long, long time. I think that's been one of the causes of the infrastructure gap or deficit, however you want to measure it and whatever relative means you want to measure it by. This progress over process means basically getting the shovels going as quickly as possible.

When I tack back to the infrastructure bank, I say to myself that this is one tool to accelerate and broaden the infrastructure build and the capital that's going to be utilized to build this infrastructure. That's the way I humbly look at it. I understand the importance of governance and evidence-based decision-making for the projects, but the idea is a very powerful idea. I applaud our government for putting it forward. I applaud our government for having the flexibility in governing to look at this mechanism in addition to the other models out there in Canada. Also, I applaud ourselves for looking at process, but more importantly, looking at progress.

I have a quick question for the C.D. Howe Institute.

When you look at infrastructure build-out, you see that the role private capital can play is very powerful. I'd like you to comment on that, please.

[Benjamin Dachis]

When it comes to the importance of private investment, it can't be emphasized enough that the public debate here misses the really core benefit, which is that transfer of risk. In Canada, when we have public procurement entirely led by the public sector and we have projects like this—a good example is the York University subway extension in Toronto—that go massively over budget and are severely delayed, guess who's on the hook for that? When you have the public sector leading the procurement, taxpayers pay the costs at the end of the day.

When you move to a model where you have private finance so you have that kind of risk-sharing, the risks of the project don't go away, but the key, though, is that it's not the taxpayers in the end who have to pay the bill. This goes to the key importance of making sure that, in Minister Sohi's words, we're investing in “shovel-worthy” and not just “shovel-ready” projects.

It's really important to be picking the right projects. Rushing ahead to get things built without putting in place the proper business plan, which the private sector can help with in establishing what makes some sense, because a private investor is going to have to do a lot of due diligence on projects.... All these sorts of things are really important in making sure we're getting the best bang for our buck.

[The Chair, Liberal, Wayne Easter]

You have time for a very short question.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Mr. Manahan, I'm not going to touch the politics of the Scarborough subway—

[Andy Manahan]

Sure.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

—so don't expect that. I would like to get your comment on how important governance is in terms of getting the infrastructure bank mechanism in place correctly.

[Andy Manahan]

Yes, I've read the recent media about the changing circumstances. I think the view we have is that true arm's length is much better than veto power, or recall, or second-guessing about whether an evaluation was done correctly. That's our view. You can do that with other kinds of infrastructure programs, but this bank should be sacrosanct that way.

[The Chair, Liberal, Wayne Easter]

Thanks to both of you.

Mr. Deltell.

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

Thank you, Mr. Chair.

Gentlemen, welcome to your House of Commons.

I would like to emphasize what I would call the risk-taker situation that we have to address when we talk about this new bank.

Mr. Bartlett, we all know and we all recognize that when you invest in the private sector, you take a risk in the hope of getting a reward.

In short, we have results.

This is key in the capitalist situation: the risk-taker. In this case, we're talking about infrastructure, which you cannot sell somewhere else. It is built there and it is for a public purpose. Can you explain to us your vision of the risk-taker situation in the infrastructure bank? Who should be taking the risk, the people or the private investor?

[Randall Bartlett, Chief Economist, Institute of Fiscal Studies and Democracy]

Ultimately, if you are bringing the private sector into these contracts and arrangements, the risk should be transferred to the owner of that asset. The private sector should be pricing into the contract and the risk-adjusted returns what the risks are of those investments. That applies to both the risk on the return and the capital appreciation of the asset. That is where you'd expect the risk, ultimately, to be transferred as a share of the ownership.

One of the concerns that we have, in looking at the P3 model, is that some of that risk is often not transferred to the private sector. Some of that return risk, some of that demand risk, is still borne by the public sector, even with the intent of the transfer. The concern we brought up in our recent piece was whether assets were being correctly priced when you weren't actually getting the full transfer of the risk from the public to the private sector.

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

Mr. Dachis, what are your thoughts about that?

[Benjamin Dachis]

I think that's correct. We have not in Canada moved our P3 model so far as to really take into account that demand risk. Most P3 projects in Canada, historical P3 projects, were starting to move a little bit more in this direction. Governments and taxpayers, by definition, are on the hook for demand not materializing. What consistently happens is that governments overestimate the potential demand. A transit line, a road—all these sorts of projects can leave taxpayers on the hook. When you start bringing in private sector investors, they have a lot more incentive to make sure that they're projecting demand more accurately. It's their company on the line, whereas in the public sector you don't really have risk borne by an individual.

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

Mr. Sanger.

[Toby Sanger]

Mr. Bartlett also articulated this. What we've found about the transfer of risk is that basically all the P3s in Canada have been justified on the basis of transferring risk to the private sector. We haven't been able to get the details on that because they keep them secret. That's a real concern. When the Ontario auditor general reviewed 74 P3s in Ontario, she found that there was not one shred of evidence that the risk was being transferred, and she found that at least $3 billion of the risk was double-counted. There was not one shred of evidence on that. They're all justified on it. I could make up those numbers to show risk was being transferred, but the risk was not transferred. The private sector generally has only about 10% to 50% equity in it, and they assume that a lot more risk is being transferred.

Another thing is that if these are public infrastructure projects, if they're delivering a public service, the public sector will be responsible for keeping the projects going. Just about all of these projects, all P3s, are set up as what they call SPVs, special purpose vehicles. They're separate. There may be big companies behind them, but they're set up as limited liability corporations. The people backing these projects can walk away from them with little at risk. Who has to pick up the pieces to provide the service? It's the public sector, if they want it to keep on operating. That's how it has operated in a number of different places.

This whole idea about risk transfer, I don't think there's a lot of credibility behind it. It's a real problem. It might sound good in theory, but in reality it doesn't happen.