BUILDING BRIDGES
Documents raise questions over new financing agency’s plan to help private investors
Documents suggest Liberal infrastructure bank could protect investors over taxpayers,
OTTAWA— Federal investments doled out through the government’s new infrastructure financing agency may be used to ensure a financial return to private investors if a project fails to generate enough revenues, documents show.
The revenues attached to projects financed through the soon-to-becreated infrastructure bank are key to the government’s plan to leverage private capital to pay for public roads, bridges and transit systems.
What investors have recently been told — and what the finance minister was told late last year — is that if revenues fall short of estimates, federal investments through the bank would act as a revenue floor to help make a project commercially viable.
That would be the case when the bank takes a subordinated equity position, where the government buys ownership shares in a project, and would only be reimbursed after those higher up the equity ladder receive their repayments.
Experts say the wording in the documents suggests taxpayers will be asked to take on a bigger slice of the financial risk in a project to help private investors, a charge the government rejects.
Brook Simpson, a spokesperson for Infrastructure Minister Amarjeet Sohi, said the infrastructure bank would only be liable for its own stake in a project and the possibility of lower-than-expected revenues would be part of the risk private investors assume in financing a project.
The government plans to infuse the new institution with $35 billion — $15 billion in cash, $20 billion equity and loans — hoping to pry three or four times that amount from the private sector for large-scale projects. But the projects have to generate revenue, meaning they would result in new toll roads or bridges where user fees finance the construction costs.
Cheng Hoon Lim, the International Monetary Fund’s mission chief for Canada, said Wednesday that the government needs to give a risk-adjusted rate of returns to investors that reflects how much financial liability they are taking on.
“That’s the role that user fees play in this regard and I think that if the government can . . . at least explain the benefit of the Canada infrastructure bank as an important component of Canada’s long-term growth, that could be a winning strategy.”
An October briefing note to Finance Minister Bill Morneau ahead of the fall economic update where the government unveiled the financial plan for the bank, said federal funding could be structured in such a way that the bank’s “return on investment will only materialize if defined institutional investor revenue thresholds are met.”
“The infrastructure bank could enter in the capital structure to bridge the gap between reasonable returns on investment for investors and the revenue generation capacity of specific infrastructure projects,” reads the briefing note, obtained by The Canadian Press under the Access to Information Act.
Investors have heard a similar message in recent months: A presentation federal officials have provided to stakeholders said that if revenues fall “far below expectations,” the government’s subordinated equity position would act as a floor.
An expert on federal finances from Institute of Fiscal Studies and Democracy at the University of Ottawa said the government hasn’t been as clear publicly as it has been privately on the level of risk that would be transferred from the private investors to the public.
“Because the private investors get paid out first, that means the revenue risk for them is much lower than if the bank had an equal share of the risk,” said Randall Bartlett, chief economist at the institute.