Infrastructure bank head defends low-interest loan
OTTAWA • The head of the $35-billion Canada Infrastructure Bank (CIB) defended a recent loan that was awarded to a Montreal light rail project, pushing back against questions over whether the bank can operate free of political influence.
In an interview with the National Post, the bank’s CEO Pierre Lavallée said the $1.28-billion loan, beginning at just one per cent interest and rising to three per cent over 15 years, will ultimately lessen the risk assumed by taxpayers. The CIB offered the loan to Montreal’s Réseau express métropolitain (REM) light rail project on August 22, marking its first investment since Finance Minister Bill Morneau announced plans to form the bank in November 2016.
But the loan’s ultralow interest rate came as a surprise to some in the finance community, prompting questions over whether the CIB will operate as a fully autonomous and self-sustaining body. Ottawa has long said the taxpayer-funded bank would make decisions based on market principles, funnelling money into public transit, green technology and trade-related infrastructure.
Lavallée acknowledged that the interest rate was low, but stressed that a central function of the CIB is to invest in projects the private sector otherwise wouldn’t. He said that, in addition, the lower rate ensures the bank will recoup its investment.
“Because of the way (the loan) is structured, the project can pay us the interest — albeit at one to three per cent, I get it — but it can afford to pay us the interest,” he said. “And perhaps from a more important perspective of the sustainability of the bank, it will also be able to pay us back the loan in 15 years.”
“We’ll get our money back in 15 years and we’ll be able to redeploy that capital.”
Opposition members of Parliament have criticized the CIB since before its formation, after successive delays pushed back the bank’s official start date. Conservative Infrastructure critic Matt Jeneroux said the bank’s low interest loan sets a bad precedent.
“It puts a lot more risk back on the taxpayer, and seems to cut a break to the private investor,” he said.
The $1.28-billion loan also raised questions over potential political influence in the bank’s decision-making process. The August announcement effectively replaced an earlier investment promise from Prime Minister Justin Trudeau in June 2017, when he announced $1.28 billion in government funding for the Montreal light rail expansion.
The prime minister suggested at the time the Canada Infrastructure Bank might potentially be interested in an REM investment. His office said in a press release “it will be possible for an investment to come from the Bank rather than Quebec’s transit allocation” if it moves ahead with such an investment.
Lavallée said CIB investments are checked through a rigorous process involving people far removed from political oversight.
“Our investment process is ultimately structured around having an independent board of directors that approves our investments,” he said. “These are wellestablished, recognized business people; these are serious people who are looking at investments as investments, they have fiduciary duty to the banks.”
Jeremy Kronick, researcher at C.D. Howe Institute, said determining the correct interest rate for investments by Crown corporations is a complicated process. While low interest rates reduce profitability, higher rates can actually crowd out potential private investment or place an unnecessary burden on the loan recipient, he said.
“I think there’s risks technically on both sides,” he said. “The concern is that you’re going to end up with excessive risk being taken by either the Crown or the counter parties.”
But he said that, like all Crown corporations, the CIB is unlikely to operate based entirely on market-related information the way a private fund would.
“The other risk is that if you have a Crown corporation with political backing to it, there’s always a political angle, even if the people working within the Crown corporation don’t feel like there is,” Kronick said.
The CIB will spend $35 billion over the next decade as part of the Liberal’s broader $186.7 billion infrastructure spending plan, first laid out in its 2016 budget.
Lavallée was brought on as CEO of the bank in May 2018, just months before the REM investment. He has held previous roles with the CPPIB and others, including private firms Bain & Co. and Reitmans.
Lavallée said the scope and direction of the bank will become clearer in coming years as it makes additional investments. He stressed the bank’s success does not hinge on any one investment, and will depend on a wider portfolio of equity positions and debt that carry varying degrees of risk.
“We’re in investment business so there will be some investments that don’t turn out as well as others, so that’s all part of the portfolio construction that we’ll go through in the next few years.”