Efficient and sustainable infrastructure that meets the needs of citizens and users is one of the key targets and bedrocks of our modern society. Communities are defined by the quality of their infrastructure. Governments at all levels the world over are faced with intense pressure to deliver new and improved infrastructure assets. More and more, they are turning to private-sector expertise and seeking innovation in project financing.
As the traditional debt market is stagnating with low returns, institutional and private investors are increasingly looking for investments that provide stable, long-term, reliable returns. And infrastructure fits this description perfectly. The Canadian Infrastructure Bank (CIB) may very well become a catalyst to moving Canada beyond its successful P3 model.
There has been much discussion of late about the CIB and sourcing of institutional capital into infrastructure deals. All valuable goals but in today’s world, there is no shortage of capital; it is, rather, the lack of bankable long-term revenue generating projects that are the challenge.
The C.D. Howe Institute Commentary No. 473 breaks down current financing sources by infrastructure sectors. One immediately sees how transformational a role the provincial and municipal authorities will need to play in adapting their respective capital expenditure programs to create a flow of bankable projects. Short of producing a master strategy, the CIB may assist in setting socio-economic preferences together with investment guidelines. This exercise should guide all levels of government in developing project pipelines aimed at transferring further economic risks to private sponsors and investors.
Although all recognize the need to channel these prospective projects through a robust procurement process, the CIB would not become a procurement agency, as expressed in many occasions, nor would it displace the existing entities that have developed valuable expertise over the last two decades. This is good news and an invitation for all governments to call on the procurement framework currently in place and further support the development of various concession models.
Fortunately, Canada is already on the right path and recognized as one of the world’s success stories in terms of infrastructure P3 execution. It can count on solid provincial agencies such as Infrastructure Ontario and Partnerships BC. The track record of P3s in delivering “Value for Money” (VFM i.e., meeting the required performance standards within the specified budgetary restrictions) is well documented.
Recent reports prepared for Infrastructure Ontario by the Altus Group and Hascomb found that 97% and 98% of the surveyed alternative financing and procurement (AFP) projects were completed on budget. Altus Group concluded this approach “exceeds generally accepted industry benchmarks” and provides “almost absolute cost certainty.” VFM may be delivered by transferring risks to the private sector with the latitude to adopt a cradle-to-grave solution based on meeting performance standards and required outputs. In addition, over the last two decades, the domain of project management knowledge and certification has flourished in Canadian universities unlike anywhere else in the world.
The other piece of good news is that indications were given that the CIB will not attempt to become an all-things-to-all-people body. A limited but efficient role is welcomed in a world that fears more bureaucracy. Surely, infrastructure projects entail complex multi-party transactions and our Canadian investment bankers have proven their expertise in working that out. As a tight centre of infrastructure excellence, CIB may help put together the various moving parts, including the integration of public grants that are not private-sector material. However, this is more a means than an end. We would hope that Ottawa may envisage a more decisive role for the CIB, one by which it would become the catalyst referred to earlier.
We would welcome the idea that the CIB consider investing at times at subordinate levels, ready to take a higher risk, but yet with limited return expectations such that revenue-generating projects, otherwise marginal for good reasons, could get off the ground and produce broader socio-economic benefits, important and measurable to the CIB but not necessarily relevant to private-sector investors. The analysis of the recent federal and Quebec budgets has provided hints that the CIB may play such a role. We would welcome that concept as a project multiplication factor.
Naturally, one must be prudent and ensure that such a subordinate play does not detract from the original intent and become a means for private investors to generate unbalanced returns. Therefore, clear investment policies, market benchmarking and arm’s length relationships with government, at all times immune from political changes, become key features for the CIB.
Overall, the CIB’s mission is not a substitute for the existing ecosystem but rather a foundation to build upon and expand further into more crucial socio-economic projects. At present, a number of such projects would not go ahead due to their risk-reward profiles. The CIB may be able to provide the right enhancement piece and, if so, it may be successful in accelerating the much-needed renewal of our infrastructure base, create new and inventive infrastructure models while attracting broader equity contributions.
For Canada, this would represent an enhancement of the traditional public-private partnership model and hence more of a mutually beneficial relationship between the public and private sectors to deliver essential public assets. The CIB has a key role to play in our country’s future, not only to provide infrastructure but also as a growth enabler and value creator.
SNC-Lavalin Capital is responsible for the investment and asset management activities of the SNC-Lavalin Group.
This article originally appeared in P3 Bulletin on April 18, 2017.