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-be-created 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.
The opposition parties have taken the Liberals to task for days in the House of Commons over the plans to create the bank, enshrined in a budget bill the government wants passed before the summer recess. During the daily question period Wednesday, the Liberals were forced to defend how the bank would reduce risks for the private sector.
Infrastructure Minister Amarjeet Sohi said the bank wouldn’t invest in projects that are too risky, or that aren’t in the public interest. The experts that will run the agency “will make sure that taxpayer dollars are always protected.”
Conservative Leader Andrew Scheer questioned why private investors wouldn’t pick up the full tab for projects if the government was only going to pick those that never lose money.
“Liberals will hand-pick projects and they’ll hand-pick the investors and they admit that the bank is all about de-risking private projects for private investors,” he said. “That means that investors get all the profit and taxpayers get all the risk. Can the prime minister explain to hardworking Canadians why he’s asking them to co-sign loans for the richest one per cent?”
Sohi said several public pension funds already invest in infrastructure projects, but overseas.
“What is wrong, Mr. Speaker, if the same organizations … work with our government to build the infrastructure that our Canadian communities need?” Sohi said.
The Liberals see the bank as a way to build projects that are too expensive for government to handle and too risky for the private sector to tackle alone.
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 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 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.
An expert on federal finances from the 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 headed by former parliamentary budget officer Kevin Page.
Brook Simpson, a spokesman for 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.
NDP Leader Tom Mulcair called the bank proposal “a massive slush fund for rich companies and Liberals to make a fortune on the backs of what should be public infrastructure.”