THE PROBLEM OF BANKING ON THIS INVESTMENT. COYNE

Infrastructure bank doomed by the details

In the beginning it all seemed so simple. Rather than borrow and spend on its own account for major infrastructure projects such as roads and power lines, the federal government would harness private capital; in return, private investors would be entitled to the “revenue stream” — user fees, tolls and so on — attached thereto.

Moving spending that could be financed in this way off the government’s books would free up scarce public dollars to pay for things that can only be funded through taxes. At the same time, basing project funding on the willingness of users to pay for it would ensure that decisions on infrastructure spending, so often distorted by political calculations, met the proper test of demand: did users receive greater value from it than it cost to provide?

For once, the old political euphemism — it’s not spending, it’s “investment” — would be accurate. The very name of the agency that would oversee it all seemed to suggest it: the Canada Infrastructure Bank.

Alas, this involves government, and Liberals, and Canada, and so the infrastructure bank, so fresh and full of promise at its announcement just a few months ago, has since become bogged down in charges of political interference, private profiteering and conflict of interest, as the details of what the Trudeau government had in mind began to trickle out.

For all the insistence that the bank would be at arm’slength from the federal government, its decisions based wholly on the returns accruing from different investments, potential private investors were alarmed to discover, when the enabling legislation was finally unveiled, that in fact the government would hold quite close powers over it.

Cabinet could fire its chairman and directors, unlike those of the Canada Pension Plan, a similarly arms-length agency. Cabinet would also have to approve the board’s choice of chief executive officer, and could fire him or her if it chose, while the minister of Finance could veto its loan decisions.

Even before this, the decision to place responsibility for the bank with the Infrastructure department, rather than with Finance — regarded outside government as being less overtly political, more policy-oriented — had raised eyebrows. But no sooner had questions begun to be asked about how independent the bank really was from politically motivated meddling when it began to take fire from the other direction.

It was reported that officials from BlackRock, the U.S.-based asset management firm, had been intimately involved in the planning of the bank, even going so far as to provide advance input into the Infrastructure minister’s speech to a group of BlackRock’s institutional clients in Toronto last November. Indeed, BlackRock executive Mark Wiseman is a member of the federal Advisory Council on Economic Growth that first recommended the bank, having been appointed when he was still president of the Canada Pension Plan Investment Board.

The presence of Wiseman on the advisory council, along with Michael Sabia, president of the CPPIB’s Quebec counterpart, the Caisse de dépôt et placement du Québec, was always a bit odd — public pension funds, with their fiduciary responsibility to act at all times in the best interests of their beneficiaries, should generally be kept as far away from politics as possible.

But it is positively peculiar to have the two so closely involved in the design and implementation of an agency with which they may well hope to do business. Indeed, the Caisse already has a pitch before the federal government for it to invest in a proposed light rail project in Montreal.

Well, which is it? Is the infrastructure bank too vulnerable to political influence, at the expense of its private investors? Or is it too much under the sway of private capital, at the expense of democratic accountability? The answer, quite possibly, is both. It is plausible that its decisions may be affected by political considerations, but that private investors would be compensated for putting up with this in the form of overly generous terms.

That possibility was, indeed, built into the infrastructure bank from the start: with the decision to finance it, not exclusively from private capital, but with a mixture of public and private funds: $35 billion of the former, with which the government hoped to attract perhaps four times as much of the latter. Wherever and whenever public and private funds are mixed in this way, there is always the potential that the result will be public risk for private profit.

And yet the basic idea behind the bank remains sound. The commonly heard objection that the bank’s cost of capital would be higher than if the government simply borrowed on its own account is based on the error of supposing that the lowest cost is always the best. Not so: the foundation of economic efficiency is not the lowest cost, but the true cost.

Each project has its own unique risk; that risk should be reflected in the cost of capital, rather than being homogenized into a uniform government rate. If it were wise to fund investment on the government tab, merely because it has the lowest cost of borrowing, then it would be wise to fund all investments in that way. But the government can’t fund every investment, and so far as it chooses to fund some and not others it is implicitly subsidizing the first at the expense of the second.

I’m all for public-private partnerships — just leave the public out of them.