Led by the youthful prime minister, Justin Trudeau, the Canadian government has pledged a combined total of more than CA$180 billion (equivalent to US$134 billion) worth of investments in infrastructure through to 2028.
To support this plan Canada’s federal government has decided to create next year an infrastructure bank to identify and fund public works worth billions of Canadian dollars with the help of private investors.
The government wants to use the bank to leverage its role as a public guarantor so as to entice private investors to support projects with far greater amounts of funding than it would be able to do on its own.
The bank, which would start with at least CA$35 billion in federal funding, could help unleash what the government has described as “transformational” investment in infrastructure. The bank, tentatively named the Canada Infrastructure Bank, is a key component of “Investing in Canada”, an initiative on the part of the government to encourage more private investment in the country and give a boost to its economy.
«The time to invest in Canada’s infrastructure is now,» reads a fact sheet on the initiative posted on the government’s website.
«This commitment is unprecedented in Canadian history,» reads the Fall Economic Statement, a fiscal update that Finance Minister Bill Morneau presented to Parliament in November. It was on this occasion that the creation of the bank was announced, with the government emphasizing the importance of meeting the needs of a country with a population of more than 30 million.
«Investments in infrastructure create good, well-paying jobs that help strengthen and grow the middle class today, and deliver sustained economic growth for years to come,» it says.
Given its vast territory, Canada relies heavily on infrastructure to develop its economy and maintain the high standard of living enjoyed by its citizens.
And it needs much more of it, according to the Advisory Council on Economic Growth, which advises the finance ministry on policy. By its estimates, Canada needs between $150 billion and $1 trillion worth of infrastructure investment.
In the Fall Economic Statement, the government says the global environment of low interest rates is a unique opportunity to finance projects. Not only does it make it cheaper for it to borrow, but it also makes it easier for the government to encourage private investors to consider infrastructure projects as a worthwhile asset class in light of the negative rates of return some of them are receiving from bonds bought in Europe, for example.
«Institutional investors… are looking to invest their capital in assets that provide stable, long-term and predictable returns, and there is no investment opportunity that fits this description better than infrastructure,» it says.
In describing the potential of this source of funding, the Fall Economic Statement estimates that public and private pension funds hold US$170 billion worth of infrastructure investment globally. «There is a potential to multiply this level of investment 10 to 14 times, with Canada well positioned to attract its fair share of this investment,» it says.
Canada's largest pension fund manager, the CPP Investment Board, welcomed the news of the creation of an infrastructure bank. Senior Managing Director Michel Leduc was quoted by the Canadian Press as saying the bank could stimulate investment just as its counterparts had done in other countries. «Because we measure risk-adjusted returns, and we know Canada well, the home market advantage is one we would apply fiercely in what we expect will be a very competitive process with strong interest from global investors.»
One project that could receive funding from the bank would be a new public transit system in Montreal being planned by Quebec's public pension fund, the Caisse de Dépôt et Placement du Québec, according to a Reuters report.
In describing the role of the bank, the Fall Economic Statement says it would identify potential projects and investment opportunities that would provide the biggest social, economic and environmental return.
It would invest the CA$35 billion through loans, loan guarantees and equity investments. Whatever the project the bank would choose, it would have to generate revenue.
The bank could help the government reduce the amount of funding it would commit to a project to 20% of the total cost, leaving the rest to be taken up by private investors, according to two members of the finance ministry’s advisory board.
«(The) bank… should be able to attract $4 of institutional equity capital for every government dollar invested. That’s $200 billion of new equity to build what we need, in addition to traditional debt financing,» reads a column they published in October in The Globe and Mail newspaper. «By investing through a development bank, Canada can multiply the impact of every federal dollar.»
As it becomes a centre of expertise on infrastructure, the bank would ensure that the execution of a project would be done properly, opening the possibility of reducing costs by up to 25%. «By establishing a new organization capable of working with the private sector where it makes sense, public dollars will go farther and be used smarter, leading to better projects,» reads the fact sheet.