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Budget Implementation Bill, 2017, No. 1—Fourteenth Report of Standing Senate Committee on Banking, Trade and Commerce Committee on Subject Matter

Budget Implementation Bill, 2017, No. 1—Fourteenth Report of Standing Senate Committee on Banking, Trade and Commerce Committee on Subject Matter

Budget Implementation Bill, 2017, No. 1—Fourteenth Report of Standing Senate Committee on Banking, Trade and Commerce Committee on Subject Matter

Budget Implementation Bill, 2017, No. 1—Fourteenth Report of Standing Senate Committee on Banking, Trade and Commerce Committee on Subject Matter

Published on 13 June 2017 Hansard and Statements by Senator Paul Massicotte

Hon. Paul J. Massicotte:

Honourable senators, I’m going to make some comments on certain sections of our Banking Committee report on Bill C-44. In particular, I’m going to talk to you about the federal infrastructure bank that we have talked quite a bit about already, but I want to add my comments.

I would like to start by giving my support to the creation of the Canada infrastructure bank. I applaud the government’s effort to attract private sector and institutional investment to much-needed public interest infrastructure projects.

That will not stop me from also sharing with you some of the concerns that I have with regard to the bill on the Canada infrastructure bank. Those concerns have to do with the bank’s governance framework, as it is presented in the proposed legislation and as it was described to the Standing Senate Committee on Banking, Trade and Commerce by the Minister of Finance and his staff.

The main purpose of this infrastructure bank is to better meet Canada’s need for new strategic infrastructure. Just to give you an idea, estimates for the existing infrastructure gap range from $150 billion up to $1 trillion.

Through the infrastructure bank, $35 billion in public funds will be used as leverage to attract billions more in private investments for large projects, such as roads, bridges and transit systems.

Ultimately, the infrastructure bank is also a key tool for economic growth. Investing in infrastructure is one of the most efficient economic stimuli. For every $1 billion invested, 18,000 jobs are created the first year, and the GDP grows by about $1.5 billion.

Investing in strategic infrastructure will also reinforce our economic capacity. Spending on productivity-and trade-enhancing infrastructure systems will bolster Canada’s long-term competitiveness.

That would result in semi-permanent growth in our productivity, our GDP, and our standard of living. That is significant given that Canada’s demographic situation is dragging economic growth down and creating significant health care costs. Investing in infrastructure is one of the most efficient economic stimuli. For every $1 billion invested, 18,000 jobs are created the first year, and the GDP grows by about $1.5 billion.

As such, it is quite easy to agree that strategic infrastructure spending is a smart investment. The more difficult debate, though, is about the best way to get there.

Let us first acknowledge that private industry, municipal and provincial governments are the most important infrastructure investors in Canada. They directly invest in pipelines, roads, public water systems, mostly without any financing support from the federal government. It is important to stress that the federal government does not expect these parties’ direct investment in infrastructure to diminish. But still, this won’t be enough to fill the important investment shortfall in strategic infrastructures in our country.

So, as some critics suggested, why doesn’t the federal government use its own balance sheet to fund these needs? After all, the cost of capital for the government is as low as 2.2 per cent. It is way cheaper than the 6 to 7 per cent expected by outside investors. This financing cost difference is significant, so why bother with outside investors?

In my opinion, this financing cost difference does not outweigh the expected significant savings from having third-party professionals and investors planning and assume most of the construction risks of new infrastructure. Also, the private industry’s management of the completed project will expectantly add important further savings and advantages. Experience corroborates this assertion; and, after all, the government’s balance sheet also has its limits regarding the amount of debt it can reasonably carry.

The Minister of Finance confirmed that outside investors would only invest in projects that generate revenues in a user-pay format so they can allow a reasonable return on their investment. Economists have illustrated that user-pay is a financing model that ensures a more efficient allocation of capital in projects best deserving of value for the users.

I have no doubt that private investors will be prepared to fully fund some of the projects without any government support. Quite frequently, though, past experiences have shown that the user-pay revenues in public-interest infrastructure projects are not adequate enough to attract and fully fund the project investments. Yet, the benefits to our society and economy from some targeted projects may very well justify some government support to incent adequate outside private investment. Where this is the case, the government has confirmed that the main focus of the infrastructure bank will be to organize the financing of selected projects with the minimum amount of public funding support.

Some critics also ask: Why do we need an infrastructure bank, then? Why don’t we continue to organize public and private funding one project at a time, as the federal government and most provinces have been used to?

The federal government argues that a separate entity such as the infrastructure bank will be better suited to attract the required expertise, increase the number of transactions, access more outside capital and better leverage its own contributions. According to the government, this will be a genuine and smart way to get more bang for the buck.

All this is admittedly quite possible, in my opinion, but will work only if the governance of the infrastructure bank is structured in a way that attracts the required expertise and outside capital.

The government’s Advisory Committee on Economic Growth , chaired by Mr. Barton, who is also the global managing partner of McKinsey & Co., did in fact recommend the creation of an infrastructure bank. But the advisory committee emphasized that “the bank will require an independent governance structure” and that “this should include the appointment of a highly independent board of directors and a CEO with world-class, relevant experience.”

Outside infrastructure financing experts also confirmed that in order to attract the capital, one needs to ensure that projects are chosen on their merits. Our own recent history has too many examples of projects that disappointed because they were influenced by short-term electoral considerations. Investors are always concerned about the impetuous nature of governments and of their motivations.

In this respect, I have strong reservations toward the governance structure of the infrastructure bank as proposed in the legislation. The recent declarations of the Minister of Finance at the Senate Banking Committee add to this concern.

In the bill, the government gives itself the right to appoint every member of the board of directors and the chair of the board. It also gives itself the right to appoint the CEO with the help of the board of directors. The government also reserves the right to dismiss the CEO as it sees fit, even without just cause.

On the other hand, the Minister of Finance confirmed that every investment will require government approval.

Like some witnesses who appeared before the Standing Senate Committee on Banking, Trade and Commerce, I am worried that the governance framework will not allow the infrastructure bank to be as independent as it needs to be. I acknowledge that the bank must be held accountable since it will be using tax dollars, but how can it attract an experienced CEO and the necessary investments with this type of governance structure that is so open to political influence?

We must not repeat the mistakes of the Northern Australia Infrastructure Facility whose initial governance framework was dangerously similar to the one we have here. It is good to know that the Australian government had to change it in 2016 because it made it impossible to attract the desired investors.

The crux of the issue is this: how can we meet the objectives of the infrastructure bank while still satisfying the need for transparency and accountability for taxpayers? How can we strike that balance?

In testimony, Minister Bill Morneau said he understands how important it is to ensure that the bank appears credible to foreign investors.

I therefore urge the government to immediately adopt and formalize governance measures and practices to that effect. The bank’s very success is at stake.

You may have gathered that I do not want to complicate things by amending the bill at this stage, but I will make the following suggestions, which will contribute to mending the gaps in governance proposed in the bill.

First, is it not superfluous to get approval for every investment the government makes regardless of the size and nature of the investment? I would remind senators that the government will already be receiving and approving the bank’s annual budget and business plan.

Second, shouldn’t the bank’s CEO be hired under general contract law, which stipulates they can only be dismissed with cause?

Finally, should we not also publish the required skills and experience for future members of the board? All of this is standard good governance.

There are a number of different infrastructure models around the world. I truly believe that the new governance structure of the Northern Australia Infrastructure Facility, adopted in 2016, is an excellent benchmark for Canada.

In closing, I want to reiterate that the Canada infrastructure bank is an important project for our country and our economy. That is why I fully support its creation, despite the reservations I just shared. It is because I believe strongly in the objectives of the infrastructure bank that I want to see it get the means it needs to be successful. I hope that my suggestions for helping the fund achieve its full potential will be heard by the government and adopted immediately. Thank you.