Project- & Infrastructure Finance

Infrastructure, the basic physical and organizational structures and facilities (e.g., buildings, roads, and power supplies) needed for the operation of a society or enterprise”. Infrastructure is about people. Investment in infrastructure improves the quality of living and improves productivity. Infrastructure investment is a key catalyst for economic growth. Globally various initiatives are underway to increase the investment in infrastructure addressing current and expected backlogs. The projection of total global infrastructure outlook until 2040³ reflects a gap of some US$18 Trillion:

 

In Canada, the gaps have not narrowed since previous years (and since the below-detailed analysis was compiled in 2017). Data below reflect on years past, up to 2017. In its most recent publication, The Canadian Parliamentary Budget Office released its "Infrastructure Update: Investments in Provinces and Municipalities" ( Infrastructure Spending update 2019 - see page 6." The spending gap amounts to ~$15bn. In short, the political will is lacking to substantially reduce the infrastructure spending- and financing gaps and are driven by implementation challenges, which in turn suggest a lack of adequate Infrastructure implementation, financing and funding skills notwithstanding having a strong PPP framework and having established, The Canada Infrastructure Bank in 2017.

Canada experienced periods of low levels of infrastructure investment over the past 60 years. The cumulative infrastructure investment backlog is estimated at C$ 357 billion¹. Part of the reasons why an infrastructure backlog came about is found in understanding how infrastructure investment priorities shifted traditionally from the Federal Government to the other levels of Government. Provincial and Municipal Governments have a lower income base, yet were expected to invest more in Infrastructure. Over time competing Government programs caused less funding to support new infrastructure investment, upgrades, and maintenance spending on aging infrastructure².

It is estimated that over the next two decades that Canada’s Infrastructure investment needs will amount to circa C$ 1.5 trillion³. The immediate estimated infrastructure investment needs, over the medium term, stemming from all levels of government amounts to circa C$118 billion(before considering a C$357 billion backlog)¹. Canada’s Infrastructure investment & funding is mainly driven by a Capital Grants system that funds investment through various Government sponsored programs aimed at various levels. Infrastructure investment is fractured and lacks national coordination at the Federal level.

Recent improvements include deploying a Public-Private-Partnership model at the Federal Government level. Public-Private-Partnerships in Canada is relatively young by comparison to other countries and regions, where it has been in existence since the early 1990’s. The P3 Canada Fund was created to improve the delivery of public infrastructure and provide better value, timeliness, and accountability by increasing the effective use of P3's. The P3 Canada fund, to date, has invested approx. C$1.3 billion in 25 large national projects in Canada. P3 Canada came into existence in February 2009. A further circa C$1.25 billion has been earmarked for P3’s over the next 10-years.

Since 2016 the Federal Government of Canada has budgeted to spend C$186 billion over the next 11-years in further infrastructure investment. Of this C$186 billion, C$35 billion has been earmarked to develop The Canada Infrastructure Bank (CIB) with the aim to leverage the C$35 billion in a ratio of 1:4 (or 5) times in procuring private sector funding and investment. This is a welcome development and something Canada has been lacking for a number of years. In other countries, CIB-type institutions have existed for more than two decades and run successfully producing attractive and strong returns for taxpayers and Governments. Especially in emerging markets, these CIB-type institutions developed to address basic infrastructure to protect people against famine, droughts, develop improved sanitation, roads, and water storage.

Here is a recent video clip (Oct 2017) of an address at an Infrastructure Summit in Toronto, Canada by the Hon. Finance Minister, Bill Morneau

There is a very strong business case for drawing-in the private sector in Canada to invest in Infrastructure, such as:

  • Infrastructure investment produces predictable cash flow returns;
  • Infrastructure funding is structured following project cash flows inclusive of projected risk mitigation. Traditional bank lending is not conducive to include changes to loan features that are out of the ordinary;
  • Infrastructure funding is structured to resemble fixed income-type instruments. For pension funds and long-term investors, given that mortality rates are decreasing and people working longer before retirement, more investment funds are available for longer-term investment. Infrastructure investments can match that longer investment horizon;
  • Infrastructure funding and investment affords the opportunity to better match longer term pension liabilities, especially in times of reducing Government Bond duration;
  • To date, Canadian Pension funds invest internationally in infrastructure with lower investment portfolio allocations to Canadian Infrastructure investment, mainly due to the traditional system of funding infrastructure by way of the existing Capital Grant System and of course higher yields being achieved internationally;
  • Drawing the private sector into more than one way of participating in infrastructure, creates the opportunity for Government to re-deploy funds into other programs as we move away from an overly high dependence on a traditional Capital Grant funding system for infrastructure. This will vastly benefit public health care funding given the aging Canadian population;
  • Canada has experienced weak productivity over the past two decades, accelerated Infrastructure Investment addresses weak productivity and improves economic output making Canada more competitive in export markets; and
  • Infrastructure investment, and specifically, transport corridor-focused investment, improve efficiencies in the transport of goods, services, and people. It, therefore, bolsters the capacity for economic growth and job creation.

1. Compiled from Data Series' maintained by Statistics Canada

2. Compiled from information published by The Canadian Centre for Alternative Policies, "Canada’s Infrastructure Gap Where It Came From, and Why It Will Cost So Much to Close", Hugh Mackenzie, 2013

3. Global Infrastructure Hub, A G20 initiative, Data series covering years from 2007 to 2040

 

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