The Finance Minister’s Advisory Council on Economic Growth recently released its first report, concluding that its objective is to come up with ideas “that will more than double Canada’s growth trajectory”.

To that end, the Council has proposed the creation of an independent “Canadian Infrastructure Development Bank (CIDB). In his fall Update, the Finance Minister supported the Council saying “there is a great opportunity for the government to leverage its investments in infrastructure, by bringing in private capital to the table to multiply the level of investment”.

According to the Finance Minister “The CIDB will be accountable to, and partner with, government, but will operate at greater arm’s length than a department—working with provincial, territorial, municipal, Indigenous and investment partners to transform the way infrastructure is planned, funded and delivered in Canada”.

The decision to create an independent CIDB raises some questions.

First, why do it at all? There already exists an active federal agency-PPP Canada- committed to “a long-term performance-based approach to procuring public infrastructure where the private sector assumes a major share of the risks in terms of financing and construction…”

Moreover, virtually every province already has a special agency or department dedicated to funding PPPs. So why does the Finance Minister and his Advisory Council believe we need a new CIDB?  The Council did not provide a very strong rationale for a CIDB other than to claim, “public revenues alone cannot be expected to bridge the  (infrastructure) “gap”.

But that is not true at the federal level. The federal government funds its infrastructure projects by issuing 30 or 50-year bonds, which it currently can do at historically low interest rates. The costs are amortized over the service life of the project. The impact on the budgetary balance is spread over the lifetime of the investment, perhaps as long as fifty years. If it loans these funds, without concessions and covers its borrowing costs, there is no direct impact on the budgetary balance.

In other words, the government currently has access to unlimited and cheaper funding for public sector infrastructure investments.

It’s not hard to understand why the Council wants an independent CIDB. “Given the historically low, and in many cases negative interest rate environment that constitutes the global economy’s “new normal,” there is an abundance of institutional capital around the world waiting to be deployed. Canadian and global investors are looking for long-lived projects with appropriate risk-adjusted returns in which to invest”.

In other words, pension funds such as the Caisse de Depot, and other large investment funds need higher returns and what better place to turn to than public infrastructure? This would provide large financial institutions with secure revenue streams through the “ownership” and “control” of public assets. These public-private investments can yield private investors very high rates of return, while leaving the government take much of the risk.

The second question that requires an answer is why the Council and the Finance Minister believe that the CIDB should be at “arms length” from government.  According to the Council, the CIDB “will require an independent governance structure in order to attract institutional capital and to attract the level of talent required to deliver on its mandate”.  Apparently large institutional investors don’t like a lot of government rules and regulations. Governments are there simply to provide risk guarantees. 

The Finance Minister agrees. He states “The government will be responsible for setting the overall policy direction and high-level investment priorities for the Canada Infrastructure Bank, consistent with the commitments outlined in ministerial mandate letters.” In other words, the government is not going to get involved in how long term infrastructure contracts (LTICs) for public sector projects are drafted.

Why should the government not have a say in how the CIDB is governed and operated? Why should the government not be on the Board of the CIDB, and not appoint the chairman, which it currently does for other Crown Corporations. Why should the CIDB not report to a Minister?

Third, why does the Finance Minister want to create an independent CIDB that will focus only on “National Economic Development projects such as toll highways and bridges, high-speed rail, port and airport expansions, smart city infrastructure, national broadband infrastructure, power transmission and natural resource infrastructure?  Projects considered by the Bank should generally have an all-in cost in excess of $100 million to meet the minimum to attract institutional investment”.

In other words, the Council wants an independent CIDB that will concern itself with only about 2 per cent of the infrastructure gap. The remaining 98 per cent that is provincial and local is too small to attract large investors.

The Finance Minister should concern himself more with the 98 per cent and less with the 2 percent. It is at the provincial and local level where there are in fact revenue and borrowing constraints that could inhibit infrastructure investments.

The Finance Minister may want to consider a Crown Corporation Infrastructure Bank, modeled along the lines of the Export Development Corporation.  The federal government would borrow on behalf of this Crown Corporation by issuing 30-year bonds at historical low interest rates (around 2 %).  Ontario and Quebec both have a premium over this rate of around 1 per cent and other provinces higher.

Provinces could then borrow for specific infrastructure projects from this new Infrastructure Crown Corporation at rates below what they would pay.  As long as the Infrastructure Crown Corporation recouped its borrowing and administrative costs, there would be no incremental impact on the federal government’s budgetary balance.

The recommendation by the Council requires considerable more discussion and study. The Minister was too quick in adopting it without considering all of its ramifications.