Failures past haunt the Infrastructure Bank

The following is a transcript of a presentation to a hearing on the proposed Canadian Infrastructure Bank by Jack M. Mintz, appearing before the Senate banking, trade and commerce committee on May 17.

An infrastructure bank combining government and private sector funding has been proposed in several countries, including Australia and United States. The idea has not particularly caught on since its advantages have not been made clear.

Its governance could be particularly problematic with the mixing of public and private interests. Back in the 1970s, many governments throughout the world created public- private mixed enterprises to improve the performance of public agencies or corporations. It was based on the idea that an entity would perform better with the expertise and discipline provided by the market. That experiment, including the Canada Development Corporation with a mix of public and private interests, ultimately failed.

Recently, we have seen a resurgence of public-private mixed enterprises including Hydro One and many foreign state- controlled companies. The jury is still out as to whether such entities will be successful. My view is likely not.

The reason for this failure is that it is difficult to merge public and private interests. Private investors are solely interested in commercial success. Governments have other objectives that could compromise profitability. Four decades ago, my PhD thesis in this area predicted that Canadian mixed- enterprise experiments would fail, with companies eventually privatized or fully nationalized. That is what happened to Canada Development Corporation and others. Will we be repeating history once again with the Canada Infrastructure Bank?

Three advantages could be gained from an infrastructure bank:

❚ While an infrastructure bank itself is not needed for this purpose, a revenue stream will be needed to attract investor interest, potentially leading to greater use of user pricing that is economically desirable for determining demand. However, most infrastructure projects are quasi-monopolies that could result in excessive user prices unless the public interest is protected.

❚ Investors will be able to propose projects, thereby leading to a different approach to project selection than is typically left to governments. Their expertise could help professional staff select better projects. With public assurances, investors may have greater confidence that projects will be completed within a reasonable time, given that Canada has one of the slowest permitting processes according to the World Bank.

❚ The retained earnings created by the bank could be used to support other projects. This could be one advantage that makes the Canada Infrastructure Bank unique compared to public infrastructure spending and a public-private-partnership Crown agency. Otherwise, it is difficult to say why an infrastructure bank is needed as opposed to a P3 Crown agency.

The legislation creates a bank that is not a Crown agent with exceptions. Ministerial responsibility will still be applied with respect to advice on the selection of projects, financial commitments and dissemination of data to governments.

However, there are some significant issues that could lead to serious liabilities and underperformance by the bank.

❚ If the government assumes risks with loan guarantees, this will lead to a misallocation of risks whereby taxpayers will be responsible for the downside but only share the upside. This type of risk allocation leads to poor performance as the private investor takes on risks that are inappropriate. A good example was the case of a private proposed Swan Hills hazardous waste treatment centre that cost the Alberta government over $1 billion in losses.

❚ Private investors, especially pension funds seeking a better return on their assets, could earn inferior rates of return on investments arising from government policies and interference compromising the investment. For example, a gas pipeline, controlled by the Norwegian government, with a 44 per cent stake from private investors, lost $2.1 billion or 25 per cent of its value when the Norwegian government cut tariffs after 2012 in the interest of promoting oil and gas exploration in the North Sea. CPP Investment Board, along with Abu Dhabi’s sovereign wealth fund and German insurance Allianz, are suing the Norwegian government, so far without success. CPP pensioners will ultimately lose money on this failed publicprivate investment.

❚ It is hoped that significant funding will come from pension funds. However, as seen with recent directives by governments to public pension funds like the Caisse de Depot to invest in Montreal’s transit with questionable profitability, a serious precedent is arising with respect to the independence of public pension funds. Will governments begin interfering with arm’s- l ength public- pension- plan decision- making through the infrastructure bank?

While infrastructure funding is important to Canada, we should remember that a significant share is already undertaken by the private sector, whether pipelines, railways, broadband or power transmission and distribution. The concern over the lack of infrastructure spending is with respect to our onerous regulatory system and a lack of investment in public- owned infrastructure. Whether the Canada Infrastructure Bank will be a catalyst for better infrastructure spending is far from clear. We might be better off with privatization that was the end result of a failed public-private mixed approach of the 1970s.