Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue No. 20 - Evidence - May 17, 2017
OTTAWA, Wednesday, May 17, 2017
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:17 p.m., in camera, to consider a draft report on the development of a national corridor in Canada to facilitate commerce and internal trade; and in public, to study the subject matter of those elements contained in Divisions 3, 8, 18 and 20 of Part 4 of Bill C-44, An Act to implement certain provisions of the budget tabled in Parliament on March 22, 2017 and other measures.
Senator David Tkachuk (Chair) in the chair.
(The committee resumed in public.)
[English]
The Chair: Good afternoon and welcome colleagues, invited guests and members of the general public who are following today's proceedings of the Standing Senate Committee on Banking, Trade and Commerce either here in the room or listening via the Web. My name is Senator David Tkachuk, chair of the committee.
Today, we begin our subject matter examination of Bill C-44, the Budget Implementation Act, 2017, No. 1, or BIA, and in particular Divisions 3, 8, 18 and 20 of Part 4 of the bill. Honourable senators will know that our committee must report our findings to the Senate by Wednesday, June 7, 2017.
For the first portion of our meeting, we welcome before us officials from the various departments responsible for the different divisions of the bill, all coordinated by the Department of Finance Canada. Thank you for that.
We will conduct the examination in the following order: Division 3, Financial Sector Stability; Division 8, Investment Canada Act; Division 20, Invest in Canada Act; Division 18, Canada Infrastructure Bank Act.
It will make for an informative session and one that I hope, with some organization, will be as seamless as possible. I would remind you that we have a lot of ground to cover. So make your questions crisp and as succinct as possible; witnesses, your responses the same.
We'll start with Division 3 and, once completed, quickly welcome the witnesses for the next division at the table in the order that I mentioned and so on.
Again, for Division 3, Financial Sector Stability, I'm pleased to welcome from the Department of Finance Canada, Ms. Lisa Pezzack, Director, Financial Systems Division, Financial Sector Policy Branch; Mr. Justin Brown, Chief, Financial Systems Division, Financial Sector Policy Branch; Mr. Manuel Dussault, Senior Chief, Framework Policy, Financial Institutions Division, Financial Sector Policy Branch; and Ms. Liane Orsi, Senior Advisor, Financial Institutions Division, Financial Sector Policy Branch.
From the Canada Deposit Insurance Corporation, we have Mr. Greg Cowper, Managing Director, Policy, Insurance and Emerging Risks.
Please proceed with your opening remarks, after which we'll go to a question and answer session.
Lisa Pezzack, Director, Financial Systems Division, Financial Sector Policy Branch, Department of Finance Canada: Thank you very much.
This proposal seeks to strengthen Canada's bank resolution regime by formally designating the Canada Deposit Insurance Corporation as a resolution authority for its members and by requiring Canada's biggest banks to develop and submit resolution plans.
The proposal would also clarify that the Superintendent of Financial Institutions may set criteria for how domestic systematically important banks must meet their requirement to maintain a minimum capacity to absorb losses.
The Canada Deposit Insurance Corporation has been responsible for providing deposit insurance for Canadian banks since it was established by the Canada Deposit Insurance Corporation Act in 1967. Following the financial crisis and in line with the development of international standards, CDIC's powers and tools have been expanded to facilitate the orderly resolution of a member institution in the event of a failure. The proposed changes would formally designate CDIC as a resolution authority for its member institutions.
In this capacity as resolution authority, CDIC has undertaken a number of initiatives to ensure its readiness to deal with any banking failures. One of them pertains to the development of resolution plans. A resolution plan describes how a systematically important bank could be resolved in an orderly manner while ensuring the continuity of critical financial services and protecting financial stability.
In 2015, Canada's systematically important banks were asked to work with CDIC to prepare plans demonstrating how they could be resolved in a manner that ensures the continuity of critical financial services and protecting financial stability in the unlikely event of a failure.
The proposed changes we're discussing here today would put the requirement for Canada's large banks to develop resolution plans into the legislation and provide CDIC with the authority to set out the framework for these plans in a bylaw.
Together, the proposed changes would provide additional transparency regarding CDIC's activities as a resolution authority for its members, and it should facilitate CDIC's role in supporting the stability of the financial system.
The proposal would also clarify that the Superintendent of Financial Institutions may set criteria for how domestic systematically important banks must meet the requirement to maintain a minimum capacity to absorb losses. The requirement for systematically important banks to maintain a minimum capacity to absorb losses is set by the superintendent and met through additional regulatory capital and debt that is subject to conversion into common shares in a failure through the exercise of CDIC's bail-in power.
Greg Cowper, Managing Director, Policy, Insurance and Emerging Risks, Canada Deposit Insurance Corporation: Good evening everybody.
As you know, CDIC is a federal Crown corporation that contributes to the stability of Canada's financial system. We protect deposits in more than 80 Canadian member institutions in the event of their failure. Our members include banks, credit unions, federal credit unions, loan and trust companies, retail associations licensed under the Cooperative Credit Associations Act.
Since 1967, when CDIC was created, we've dealt with 43 member failures, affecting some 2 million Canadians, and in nearly 50 years of operations, not a single dollar of deposits under CDIC protection has been lost.
CDIC has a number of tools to deal with a failing member. A number of these tools, such as liquidation and reimbursement of deposits, have been around since CDIC's inception. Others were added more recently, including the bridge bank power in 2008 and enhancements to CDIC's ability to take control of a large failed bank, which came into force just last year.
The amendments that are before you today seek to formally designate CDIC as a resolution authority for all its members and give us the power to require Canada's systematically important banks to develop, submit and maintain resolution plans. CDIC welcomes these initiatives as they are in keeping with international standards and would enhance Canada's resolution framework.
We've been operating as Canada's resolution authority for several years already. Legally designating the corporation with this responsibility is a best practice that will solidify the legal basis for our expanded powers and will reinforce our ability to act as the resolution authority for Canadian banks.
Moreover, since 2015, Canada's six largest banks have been working with us to develop their own resolution plans and we are pleased that they have taken this exercise seriously. We are reviewing first drafts now. However, without the amendments included here, the banks are essentially complying with the requirement on a voluntary basis. As we begin to establish criteria, which lay out our expectations for resolution plans and consider necessary revisions, it's important that we have the ability to establish bylaws needed to help us guide that process.
In summary, the changes reinforce activities that CDIC has already been undertaking for a number of years and don't represent a fundamental departure from what we're doing currently.
We do believe that the measures help promote financial stability and the protection of Canadian depositors.
Thank you very much.
Senator Ringuette: I understand and I welcome the Canada Deposit Insurance Corporation in regard to its membership requiring all of that, but I've been a member of the Banking Committee for 12 years now and numerous times we've dealt with the Superintendent of Financial Institutions. And right here it's explaining to me that as of now, the Superintendent of Financial Institutions, with all of the oversight power that organization has, has not set criteria for how the capital and prescribed shares and liability of domestic systemically important banks — that's the six banks — are to be valued toward meeting the bank's requirement to maintain a minimum capacity to absorb loss.Isn't that already in the legislation and within the power of the superintendent?
Ms. Pezzack: I'll start, and then I'll turn to Liane because she's more of an expert.
Last year, we put in place a new regime called bail-in. If a systematically important bank gets into trouble, they have to have new kinds of capital and debt that then would be converted into common shares. This is what we call the bail- in regime. This is what we would use to rescue a systematically important bank should it fail. We don't think that will happen, but should it happen, this is the plan; this is how it would work.
In putting in place the legislation last year and then working through the regulations to implement all of this, it became clear that there was perhaps some confusion or some lack of precision about the superintendent's powers and ability to say that.
Liane Orsi, Senior Advisor, Financial Institutions Division, Financial Sector Policy Branch, Department of Finance Canada: Yes, the amendments pursued last year clarified that the superintendent had the authority to set the level of this particular requirement. It builds on existing authorities that the superintendent has under the legislation in respect of capital and liquidity.
The amendments that were made to the Bank Act last year confirmed that the superintendent has the discretion to set the level of this requirement, but it was not explicitly clear that the superintendent also had the discretion to set criteria as to how the banks may satisfy that requirement. The purpose of this amendment is to clarify that.
The requirement is essential to the functioning of the bail-in regime, because it ensures that the banks have sufficient loss-absorption capacity available to recapitalize the banks in the event of their failure and keep the doors open.
Senator Ringuette: This organization comes into the field because the Canada deposit insurance program includes those six major banks. Canadians who have deposits in those six banks that you call systematic —
Ms. Orsi: Systematically important banks.
Senator Ringuette: Yes. The protection that the federal government offers to depositors includes them, and it's under your jurisdiction as a program.
Ms. Orsi: But that is unaffected, because those insured deposits are not within the scope of the bail-in regime. The prescribed shares and liabilities that are subject to conversion under the bail-in power include capital instruments and senior unsecured long-term debt that is not insurable by the CDIC.
Senator Wetston: I have a general comment. I'm very supportive of this provision, by the way. I think it's important. But it's a response to the financial crisis and the work of the Financial Stability Board.
Are you catching up to all of the work that's been done by the Financial Stability Board over the last seven or eight years with respect to bail-in provisions —TLAC, which is what you're addressing here, the resolution regime? And if so, how does this differ? None of our banks have been considered to be SIFIs, as you all know. Obviously they are systematically important in Canada, but they're not SIFIs from the point of view of what the Financial Stability Board has determined to be systematically important financial institutions.
Could you tell me how this relates to the work that's been done? Canada is a G20 member, and OSFI has participated extensively in the committees of the FSB over the last number of years? Can you help me with that?
Ms. Pezzack: Let me start with the CDIC changes, and then I'll turn to Liane.
The Chair: I've had this discussion with other members of the Banking Committee. Sometimes an acronym comes up, and we're too embarrassed to ask. What the heck is SIFI?
Ms. Pezzack: Systematically important financial institution. In Canada, we have what we call D-SIBs, domestic systematically important banks — the big six. And we have globally systematically important banks, or G-SIBs.
Senator Wetston: I apologize, chair.
The Chair: It's like a foreign language.
Ms. Pezzack: It is completely a foreign language.
An Hon. Member: But if the word "systematic'' weren't there, what would you do?
Ms. Pezzack: We wouldn't have to worry about them.
Essentially, the Financial Stability Board and the G20 have been working to make sure that banks that were previously thought to be too big to fail and would need to be bailed out — that we don't need to do that anymore. We've been giving, over the past few years, the powers and tools to CDIC so that in the case somebody did fail, they would be able to fix them. But we haven't formally put them in law. So we're covering that part.
On the bail-in, as I said, we put the regime in place last year. This is fine-tuning the regime, if you will. At the international level, we're not really that far behind. I think we're pretty even.
TLAC is relatively new. It's quite complicated. Lots of people are still trying to figure out how to make it work.
Ms. Orsi: I will add to what Lisa just explained.
In 2011, the Financial Stability Board issued standards called the Key Attributes for Effective Resolution Regimes for Financial Institutions, and that applies to systematically important financial institutions of all varieties, such as insurance companies and banks. It dealt with institutions that are systematically important in a global context as well as in a domestic context.
How they determine something is systematically important is whether the consequences of the failure of that institution would have a profound adverse impact on the domestic economy or the global economy at large.
Those standards were put in place in 2011, and jurisdictions have been putting those standards into practice. Some of those standards only apply to the global systematically important institutions, and some of them apply to all of them, including the domestic ones. In Canada, we only have domestic ones at this time.
The TLAC requirement that Senator Wetston referred to does not apply to domestic systematically important banks, but we are putting it in place because we see it as essential to the functioning of the bail-in regime. Without it, effectively there's nothing to bail in if the bank fails.
It is essential to it and we're very supportive of it. I see Senator Ringuette looking at me, and I think I'm anticipating your question. Without that requirement, the banks would not have sufficient capital or bail-in debt available to bail in, and that would expose taxpayers to losses if one of them got into trouble in lieu of those bail-in debt creditors and shareholders.
The Chair: Senator Wetston, keep it to a question plus a supplementary, because we have a big group here.
Senator Wetston: No acronyms, I promise.
Once again, I think the approach evolves from the financial crisis, and I think the response is a sensible one.
Where does the Bank of Canada fit into this now? The Bank of Canada is still the lender of last resort. What is the relationship between the resolution regime and the Bank of Canada being the lender of last resort, if any? I understand OSFI's role, and to put it into the vernacular, OSFI can pull the trigger and will need to develop the criteria and percentages of whatever standards would be put in place. Can you tell me about that?
Ms. Pezzack: The Bank of Canada — and this is not my area of expertise to be sure — is responsible for emergency lending assistance when and if it's needed. There's a whole process, and we work collaboratively through the Financial Institutions Supervisory Committee, which is chaired by OSFI, and on the policy side, the senior advisory committee chaired by the Deputy Minister of Finance.
All of the relevant financial players and financial sector regulators are in the room and in those discussions. Should it be necessary, those decisions would be made.
I don't know if you have further clarity on the bank.
Mr. Cowper: I would add that the Governor of the Bank of Canada is a member of the CDIC board. So as we're making a recommendation to the minister as to the appropriate resolution tool, he or she would be involved in the decision at that time and the recommendation.
The failed bank would likely require liquidity assistance, and the bank does have the facilities, based on appropriate collateral, to provide that assistance in times of need.
Senator Black: In terms of the model that you have used to develop your resolution plans, can you tell us where you looked for precedence?
Mr. Cowper: There are international standards and international guidance around resolution plans themselves, so we have been using that as a base and participating in the international programs as they've been going forward. This program has been in development for a number of years as well, so we have gone through several iterations of resolution plans, the most recent of which places the responsibility for the preparation on the D-SIBs themselves, because they are the ones who are most aware of their operations. They can map our principles to their particular set of circumstances and come up with a plan that is extremely detailed and ultimately credible at the end of the day.
Senator Black: In developing these plans, would you be in conversation with representatives of the systemically important banks?
Mr. Cowper: Yes, absolutely.
Senator Black: So they are at the table?
Mr. Cowper: Yes.
Senator Black: Is there any opposition to this provision that we're discussing here today?
Mr. Cowper: We have had very good cooperation with the D-SIBs to date. I think the notion of a large bank failing is relatively new, quite frankly, and it's something that folks not just in Canada but around the world have been having to deal with since the last financial crisis. A culture shift has certainly taken place. It is fair to say that everyone recognizes the importance of resolution planning and recognizes that it provides an extremely valuable base of knowledge so that if we ever get to the event that none of us want to consider, at least we have something to build off of. They've taken the process so far very seriously as well, right through the organization.
Senator Black: Thank you all.
Senator Massicotte: To CDIC, I have no problem with the proposed amendments, but I always thought it was CDIC's responsibility, which you propose to be doing, your note saying it's been the practice that it's CDIC's responsibility. I'm just curious. Something must have happened for you to say, "We have to change the legislation to confirm the practice that currently exists.'' What is it? What happened?
Ms. Pezzack: I would say it's just a for-greater-certainty event. As Greg mentioned, the big six banks have been making their resolution plans on a voluntary basis. Normally CDIC's work is governed by bylaws, and they can't make a bylaw without a legislative change that would allow them to then make a bylaw that would say, "The big six banks must prepare and present a resolution plan.''
Senator Massicotte: Is there a bank that refused to prepare in spite of your lack of authority?
Ms. Pezzack: No.
Senator Massicotte: So there is no issue, contradiction or conflict there with anyone?
Ms. Pezzack: It's a for-greater-certainty thing. Resolution planning is something that's going to be iterative; we're going to do this now; we're going to have plans. But organizations change and people change. It's just good to have it all on paper. It's all clear that way. It's more transparent.
Senator Massicotte: So what you were doing before was maybe not legal, then.
Ms. Pezzack: It's not that it wasn't legal because it was done on a voluntary basis.
Senator Enverga: We're talking about systemically important financial institutions, and you mentioned the six banks. Where does Desjardins Group belong? It is a big financial corporation. Aren't they supposed to help the public in general?
Ms. Orsi: Desjardins is not regulated federally; it's regulated on a provincial basis by the Autorité des marchés financiers, the AMF. So they have designated as a systemically important bank in Quebec, and they have applied very similar provisions to it as applied to the six federally regulated domestic systemically important banks. But because it is not under federal jurisdiction, it is not subject to this regime, although the AMF has, again, put in a number of provisions equivalent to the requirements applicable to the six D-SIBs.
Senator Enverga: Don't they have branches all over Canada or just in Quebec?
Ms. Orsi: No, they don't.
Senator Marshall: I just want to be sure I understand the amendments. The term "domestic systemically important bank,'' is that just the big six banks?
Ms. Pezzack: Yes. The Office of the Superintendent of Financial Institutions has the authority to designate a bank when it reaches a certain size and complexity.
Senator Marshall: My understanding is that the impetus is to upgrade to international standards.
Ms. Pezzack: Yes.
Senator Marshall: Are there more international standards to be upgraded to?
Ms. Pezzack: Well, the standards evolve continuously. I think we're pretty much there, but as the standards continue to evolve, we need —
Senator Marshall: So once this goes through, you're current, and then you're expecting more to come forward?
Ms. Pezzack: Once the bail-in regime is finalized and put in place.
Ms. Orsi: As I mentioned earlier, a number of the standards only apply to the global systemically important banks, so we are applying them on perhaps a more stringent basis to our institutions because they are only viewed as domestic systemically important banks; i.e., their failure would only have impacts on the Canadian economy and financial system rather than more broadly. So we are applying more stringent requirements than otherwise would be the case.
Senator Marshall: Thank you.
Senator Moncion: Just to add to what you were saying, some of these banks have offices elsewhere, outside of Canada. So you're saying that these would only apply in Canada?
Ms. Pezzack: For example, when they're preparing a resolution plan, they're doing so for their entire organization. They would also in some cases be subject to supervision in other jurisdictions as well, so those that are in the U.S. are subject to U.S. supervision. They have already done some of this because they had to do it as a U.S. institution.
Ms. Orsi: I can clarify. What I meant is that their failure would predominantly have an impact on the Canadian economy rather than the global economy. It's not to say there wouldn't be impacts outside of Canada, but most of the impacts would be concentrated within Canada.
Senator Moncion: I have two questions. You said something about exposing taxpayers to losses here in Canada. CDIC is supposed to have the funds to not touch Canadian taxpayer money. How does that come into play?
Ms. Orsi: The bail-in regime is defined in a very specific way so that it only applies to subordinated debt holders, preferred shareholders and also certain senior creditors. It does not apply to deposits, and the depositors that are protected by the CDIC, the Canada Deposit Insurance Corporation, are not subject to the bail-in regime. That means that if a bank were to fail and the CDIC was authorized by cabinet to convert the bail-in debt and shares to recapitalize the failed bank, the depositors would not be impacted; they are protected because they are not subject to the bail-in regime. The bank that had failed would be recapitalized with the intent of maintaining it open as a going concern.
Senator Moncion: Taxpayers would not be impacted by this. It would be the —
Ms. Orsi: That's the goal, yes.
Senator Moncion: How does IFRS 9 come into play here?
Ms. Orsi: I don't think it would come into play at all, actually.
Senator Moncion: Because of that provision coming in at the beginning of 2018, banks will have to have larger reserves for bad loans. If you add on top of this other measures that will hinder their ability to lend — we've seen in the past few years that banks have reduced their lending risks. What has happened is you see fewer risky loans being granted and the economy slowing down because of this. This is a personal opinion.
I'm just asking if you've evaluated the fact that this is coming in at the same time as you're bringing in new measures, especially on capital and on reserves.
Ms. Pezzack: I think that forms part of the supervisory framework for the Superintendent of Financial Institutions. They're well aware that these things all need to fit together. We talk about how they all fit together when we look at the policies.
It doesn't change the fact that the bail-in regime is there to protect taxpayers, ultimately, because the alternative to having the bail-in regime, if a major bank topples over and has an impact on the whole Canadian economy, is a bailout, which is a big use of taxpayers' money. The bail-in regime that we're finalizing here is the alternative to having taxpayers fixing a bank that is falling over.
Ms. Orsi: You're right: There are a number of ongoing reforms. At the same time that we're looking to implement these reforms, we are cognizant of those impacts on the banks. The requirement that we're putting in place, the total- loss-absorbing-capacity, or TLAC, requirement, will not be subject to the banks immediately upon the regime coming into force. They will have a period of time to implement that requirement, and that is to take into account the impacts of some of these other reforms.
As well, we want to take into account simply the rollover of their existing senior funding, so we don't want to necessarily make their lives more difficult than need be. Our banks have a high reliance on wholesale funding already, and that would be the future bail-in debt. We're quite comfortable that they'll be able to meet this requirement within a short period of time, even though these other reforms are ongoing.
The Chair: We have insurance. I think the insurance is $100,000 per account. How long has that been around, the $100,000 number?
Mr. Cowper: Since 2005.
The Chair: What was it before that?
Mr. Cowper: Sixty thousand.
The Chair: Is there any consideration of increasing that amount?
Mr. Cowper: It is a perennial question. There is a deposit insurance review ongoing right now. Consultations that took place last fall looked at some of the results and issues around that. The conclusion at the time was that the $100,000 limit satisfies the needs of most Canadians. I think that based on our data analysis, over 95 per cent of Canadians' accounts are covered by the $100,000 limit, and so the conclusion was that it's sufficient for the needs.
The Chair: Did a regulatory body see the six banks as all too big to fail?
Ms. Pezzack: Yes, that would have been the decision of the Superintendent of Financial Institutions when he designated them as domestic systemically important banks.
The Chair: That's essentially what that means?
Ms. Pezzack: Yes.
The Chair: So they're safe; they can act with reckless abandon.
Ms. Pezzack: No, that's why we put in the bail-in.
The Chair: Well, they're all too big to fail.
Ms. Pezzack: This is why the bail-in regime is coming in, so that if the bank does fail, it's the creditors and shareholders of the bank who will be responsible for making sure that it is fixed as opposed to the taxpayer.
Mr. Cowper: I think the purpose behind a lot of these reforms, whether it's resolution planning or bail-in or what have you, is to provide the option of resolution rather than bailout.
Senator Wetston: Following up on Senator Moncion's question, which I think is important, what you're doing with the bail-in provision is moving any losses, or potential losses, if it went that far, from the taxpayers or from the public. You're reducing moral hazard and putting it on the shoulders of the shareholders. That's why the conversion from the debentures to equity is necessary. You're confirming that's what is occurring.
Ms. Orsi: That's correct. It's not just on the shoulders of the shareholders but also certain creditors.
Senator Wetston: Yes, because of the conversion. Thank you. I just wanted to confirm that.
Secondly, on the comments around the financial crisis in the Canadian banks, they obviously did well and did not suffer the huge losses that required bailouts of other banks and insurance companies, because they — you can confirm this or not — had higher capital requirements than other significant financial institutions at the time of the financial crisis. They also had less leverage and better quality liquidity. That may be one of the reasons — I'm just asking you to confirm this — that our banks did well in the post-financial crisis or in that period. Of course, the challenge that we had in Canada was ABCP, but that was another matter and, obviously, was addressed by the Canadian private sector primarily. Can you confirm that?
Ms. Orsi: The reasons you cite have all been written about by many authors citing some of the reasons that the Canadian financial system fared better than other jurisdictions during the crisis. So I would agree with you.
The Chair: I'd like to thank the witnesses for coming and making their presentations. Thank you, colleagues.
We're now going to deal with Division 8 of Bill C-44, the Investment Canada Act. I'm pleased to welcome, from Innovation, Science and Economic Development Canada, Ms. Patricia Brady, Director General, Investment Review Branch; and Jonathan DeWolfe, Director, Policy and Outreach, Investment Review Branch.
Please proceed with your opening remarks, after which we'll go to a question and answer session.
Patricia Brady, Director General, Investment Review Branch, Innovation, Science and Economic Development Canada: Division 8 of Part 4 proposes two changes to the Investment Canada Act. The first change, in clause 192, is to raise the dollar value threshold that triggers a requirement for a net benefit review of a foreign acquisition of control of a Canadian business to $1 billion. Currently, an acquisition of control by a non-Canadian of a Canadian business valued at or above $800 million must be reviewed under the Investment Canada Act for its net benefit to Canada and approved by the Minister of Innovation, Science and Economic Development before it can go ahead.
There is a schedule in the act already for this threshold to rise to $1 billion on April 24, 2019. The amendment in clause 192 would accelerate the increase so that the threshold would move to $1 billion upon the coming into force of the budget implementation act, roughly two years ahead of the already planned schedule.
The higher billion-dollar threshold will only apply to investments by private sector investors. There is a lower threshold for investments by state-owned enterprises. That threshold is $379 million currently, and this amendment will not change that.
In addition, this amendment will not change the government's authority to review investments for national security reasons. There's no financial or economic threshold for national security reviews. Any investment can be reviewed for national security, and this amendment will not change that.
The second proposed change to the Investment Canada Act is in clause 193, and that's to require annual reporting on the administration of the national security review provisions of the Investment Canada Act. Currently, the Minister of Innovation is required to issue an annual report on the administration of net benefit reviews. But the national security review part of the act is explicitly exempt from that reporting requirement. This amendment would remove that exemption to require annual reporting on how national security review provisions have been used that year.
That's an overview of the two amendments, and we're happy to take your questions.
Senator Wetston: Can you just tell me what the relationship is between — I suspect there is one — the amendments in the Investment Canada Act and the pre-notification provisions of the Competition Act?
Ms. Brady: There isn't a direct relation between the two. Pre-notification requirements under the provisions of the Competition Act are subject to their own threshold. It's not my area of expertise, but I think there's a merging-party- value threshold and also a deal-value threshold. These go up every year somewhat with inflation, but the important part is that the merger review, under the Competition Act, is an entirely independent process under that act. It is the Commissioner of Competition, ultimately, who makes decisions and can bring those to the Competition Tribunal, whereas under the net benefit review in the Investment Canada Act, it's the Minister of Innovation that has the exclusive authority, subject to a different legislative test.
Senator Massicotte: I think we're all sympathetic to this increase — we've read a lot about it — but is there something peculiar as to why this amount? Is it just political? You are getting investors who are refusing to come because it's not high enough. What is the specific logic?
Ms. Brady: The schedule for the increase in the thresholds was put in train in 2010, and that was in response to recommendations from the Competition Policy Review Panel that was led by Red Wilson, an expert panel that reviewed all of Canada's competition policies and frameworks, including the Investment Canada Act, with a view to making recommendations for how Canada could become more globally competitive.
At the time, it recommended raising the net benefit review threshold to $1 billion to help Canada compete for foreign direct investment, because it assessed that we needed it to grow. And because it was seen that the net benefit review, just having this explicit economic review requirement, might put Canada at a disadvantage because most countries with whom we compete for foreign direct investment do not have an economic review for foreign investments. They generally have exclusively national security reviews.
The recommendation was made in 2010 to go to $1 billion. It has slowly gotten there and the purpose of accelerating the increase is in support of the government's other initiatives aimed at attracting more global investment to Canada.
Senator Massicotte: What do the U.S., U.K. and France do?
Ms. Brady: The U.S. only reviews investments for national security concerns; the U.K. has a competition review and a national security review, although less explicit.
Senator Massicotte: What threshold do they use?
Ms. Brady: They have no threshold because there is no economic review.
Senator Massicotte: Thank you.
Senator Ringuette: How does this increase tie in with the prospect of building an infrastructure bank?
Ms. Brady: I don't think it's directly related because this Investment Canada Act review only applies to acquisitions of control of Canadian businesses, and so not to investments in Canadian banks, for example.
Senator Ringuette: It would apply if the infrastructure project included a Canadian business, wouldn't it?
Ms. Brady: If there was an acquisition of control by a non-Canadian of an infrastructure project, and if the value of the Canadian project was over $1 billion, then it would be subject to a net benefit review.
Senator Ringuette: So, yes, there is a link.
Senator Day: I should be able to answer this question myself by looking at the current statute. We're accelerating up to $1 billion. Are escalators built in beyond that? This $1 billion comes into effect immediately upon the Royal Assent of this legislation; so that's accelerated it two years, as I understand it. The steps would have led us there two years from now.
Ms. Brady: Right.
Senator Day: What is happening now? Are we going beyond this on an annual basis?
Ms. Brady: Once the threshold gets to $1 billion, then it will rise annually with nominal GDP growth. There is a formula in the act, but those are not significant increases.
I'm trying to give you an example. Last year the state-owned enterprise threshold was $375 million, and it rose with the nominal increase in GDP to $379 million this year. There will be a slight increase envisioned over the years, but the $1 billion is the last step in the major increase.
Senator Day: A major step forward.
Ms. Brady: That's right.
Senator Wetston: I think you indicated, Ms. Brady, that there's no change in state-owned ownership levels with respect to acquisitions by foreign state-owned entities; is that correct?
Ms. Brady: That's right.
Senator Wetston: I suspect I would know the rationale for that, but can you let us know the rationale for not increasing that?
Ms. Brady: I suppose the rationale for having a lower threshold in the first place is that we consider it important to ensure that state-owned enterprises will be commercially motivated in Canada and operate under Canadian standards of corporate governance. That's the reason for the lower threshold in the first instance and I gather the reason for maintaining that lower threshold.
[Translation]
Senator Carignan: Is there an alert mechanism? Even if the transaction is less than $1 billion, having a lower threshold will help us to ask questions about security. If there are transactions with a higher financial threshold, is there an alert mechanism that will inform members of Parliament, senators or the general public to ensure we can address issues that could affect safety? When the financial threshold is lower, there is an opportunity to question and determine whether there is also a security issue, but if the threshold is higher, there may be several elements or transactions that can fly under the radar, as they say. Safety wouldn't necessarily have to be questioned because these elements will have flown under the radar. I don't think sellers could raise a security issue, saying, for example, that they are aware of a secret that could be sold abroad. How does this monitoring or alert mechanism work in the case of a threshold that is lower than the amount covered by the law?
Ms. Brady: Thank you for that excellent question.
[English]
There is a notification filing requirement under the act now for any investment that's below the net benefit review threshold. Investors are required to file an administrative filing, a notification of the transaction. The government receives those, and we scan and review them for national security concerns.
Our intelligence agencies are doing ongoing intelligence and security work and can identify a potential investment that may be of concern, and we have jurisdiction to act as soon as we become aware.
We might also become aware, through open source scans, of databases on M&A activity, which we also scan regularly.
But you're quite right. There is a provision for mandatory notification of investments below the threshold, and that won't change with this amendment.
Senator Woo: Could I get clarification on the coverage of this new threshold? You said it covers a review of investments over $1 billion for significant acquisitions of control. You don't mean majority control. You mean acquisitions of any size relative to the total ownership of the target company; is that correct? Or are you referring to majority control?
Ms. Brady: It's majority control, generally.
Senator Woo: So an investment of over $1 billion that does not constitute majority control would not be subject to review?
Ms. Brady: Not for the net benefit review, no. It's when a foreigner is acquiring control of a Canadian business.
The Chair: That's a little confusing to me.
Senator Massicotte: You use the generic word "control.'' In the Income Tax Act, and many other acts, "control'' means control. It doesn't necessarily mean having 51 per cent of the common shares. You can buy a convertible debenture and have control. Therefore, if I'm a foreigner, and I buy Bell and spend $10 billion, and if I have a debenture that's convertible but I don't have operating control, that's okay, there's no review?
Ms. Brady: If you're not acquiring operating control of the Canadian business, there is no requirement. An investment of $1 billion or more in a business that doesn't result in a change in control of the business is not subject to the net benefit review.
Senator Massicotte: We're talking about the use of the word "control'' here. The way you said it, to me, insinuates operating control. I don't need to own 51 per cent. If all the other shareholders are retail shareholders and they have got $100,000 each, and I have $10 million, I have got control. I may not have 51 per cent. What is it? Fifty-one per cent or control?
Ms. Brady: There are detailed and fairly complicated rules in the act of establishing control for publicly traded companies. A controlling interest would be control under the act. It would not just be 51 per cent of the shares.
The Chair: I think we cleared that up.
Senator Day: I'll get Mr. DeWolfe on the record, as well. Thanks for being here.
Could you tell me where your offices are located and how many people are involved in doing this kind of work? I understand that somewhere between 18 and 10 reviews might be triggered.
Tell me, who does this and where are you situated?
Mr. DeWolfe: We're situated at the C.D. Howe building at 235 Queen Street. We have, at any given time, between 12 and 20 full-time employees to examine, as you say, roughly 20 net benefit reviews per year.
Senator Day: You do only the net benefit?
Mr. DeWolfe: We also administer the national security review provisions of the act, in cooperation with the Department of Public Safety.
Senator Day: Are they physically in the same place as you?
Mr. DeWolfe: We're not co-located, no.
Senator Day: And you're Innovation?
Mr. DeWolfe: Innovation, Science and Economic Development.
The Chair: After that short commercial, thank you very much.
I want to thank Ms. Brady and Mr. DeWolfe for coming here.
Colleagues, we're now on Division 20, which is the Investment Canada Act. I'm pleased to welcome, from Global Affairs Canada, Mr. Louis Marcotte, Director General, Investment and Innovation, International Business Development, Investment and Innovation; and Mr. André LeBlanc, Executive Advisor, Transition Team, International Business Development, Investment and Innovation, Global Affairs Canada; and Geneviève Pellerin, Counsel, Legal Service.
Louis Marcotte, Director General, Investment and Innovation, International Business Development, Investment and Innovation, Global Affairs Canada: Thank you, Mr. Chair, and good evening everyone.
The Budget Implementation Act introduces the enabling legislation of the Investment Canada hub announced in the 2016 Fall Economic Statement. This new federal body is to work globally, in partnership with federal departments, as well as with provincial and municipal investment attraction offices, to ensure that Canada makes the most of every opportunity to attract global investments and the jobs that come with them.
Foreign direct investment makes a significant contribution to the Canadian economy, creating high-paying jobs, spurring innovation and driving trade. Foreign-controlled multinational enterprises in Canada employed 1.9 million Canadians in 2015, representing 12 per cent of Canadian jobs and 30 per cent of manufacturing jobs. They are responsible for 49 per cent of all our merchandise exports and 37 per cent of all business expenditures in research and development.
The Advisory Council on Economic Growth noted in its October 2016 report that Canada stands to gain enormously by attracting more foreign direct investment.
The enabling legislation that you're reviewing determines, first, the nature of the entity as a departmental corporation, and second, its mandate and functions to create the partnerships required to leverage all of what Canada has to offer: Brand Canada as a premier investment destination; provide a one-stop service to assist investors in navigating the investment landscape; and actively pursue anchor investment projects and deliver world class aftercare services.
Third, the enabling legislation determines the governance of the new body, where the minister provides direction, the board of directors manages the corporation and the CEO operates it on a day-to-day basis.
Finally, the act determines the general powers and specific authorities over administrative policies, as well as the human resources regime of the entity.
Overall, the enabling legislation allows for the creation of an organization able to interact effectively with business while being subject to the necessary oversight and accountability measures.
[Translation]
Senator Carignan: Minister Champagne told us yesterday that recruiting a CEO for this yet-to-be-established agency is already under way. Can you describe the process for selecting the CEO of an agency that doesn't exist yet?
Second, you are talking about the exemption from the Treasury Board's rules. Why exempt an agency from the Treasury Board's rules? When I asked the minister, I understood it was because he wanted to attract the best candidates. I found his answer worrisome.
Mr. Marcotte: As far as the CEO is concerned, the competition hasn't been officially launched yet. It will be launched as usual in the context of appointing and recruiting people appointed by the governor-in-council, but the competition hasn't yet been officially launched.
With respect to the Treasury Board rules, in the bill before you, the provisions included are those of the Canada Revenue Agency, which allow for more flexibility in the recruitment of foreign investors, on the human resources side, but also on the administrative side. So the bill doesn't set a precedent here. These are things that are already under way in other public institutions.
Senator Carignan: There is also the possibility of organizing events. There are a lot of sponsorship items for this new agency. Will the agency be subject to the Treasury Board's rules to make these sponsorships, or rather the usual rules of finance?
Second, how will this agency play its parallel role with the existing economic missions, which are doing an excellent job? How will it do its work without encroaching on the work the others are doing?
Mr. Marcotte: There is no specific sponsorship plan. The plan that has been put forward is to promote Canada abroad. This could mean participating in a trade show to give Canada some visibility. It isn't sponsorship, but rather a service contract with a trade show organizer to gain space and visibility.
In terms of economic missions abroad, our embassies and consulates general are actively attracting investment to Canada. However, the agency will be located exclusively in Canada. Since it will not have staff abroad, it will call on our trade commissioners to get in touch with foreign investors in the markets. They will work very closely to avoid duplication of effort.
Senator Carignan: So they will promote foreign investments within Canada?
Mr. Marcotte: They will be in contact with investors and will travel abroad to meet with them, along with the trade commissioners already on site. One of the important functions of this entity is to act as a one-stop shop. Investors thinking about investing in Canada will be interested in obtaining information on the scientific research and development tax credit. They will want information on obtaining visas for high-level staff and would like to have access to a regional development agency's incentive program. All this, of course, is very complicated when you are abroad. You have to talk to one department, then another, and so on. The agency will serve as a single point of access to all federal information for potential investors.
[English]
Senator Wetston: Thank you for coming.
I'm not questioning the need for this, although I'm not entirely familiar with all the rationale for it; the provisions don't tell me a lot about the policy rationale for it. I thought this was the work of Foreign Affairs, our offices that we have globally and the officers that we have in those areas. I suspect that if they were able to be given more resources and opportunities, they'd be able to do much of this work as they are in the field or in those locations. Perhaps you can inform us as to the rationale for the need.
Second, institutional design interests me. I know that the legislation creates an agent of the Crown, which helps with Crown immunity and other such things; it doesn't prevent you from some liabilities, obviously. I'd like to have a better understanding of the governance arrangements that you have in place, the degree of independence and autonomy, other than directions of the government, the cabinet or the minister with respect to some of these activities.
Mr. Marcotte, can you inform me of some of that information?
Mr. Marcotte: It would be my pleasure.
With regard to the needs, we have trade commissioners abroad who are doing foreign direct investment attraction. However, there's no single window back at home where they can send those leads for them to be looked after properly and be presented with a comprehensive value proposition.
With many other countries, we've seen over the last 10 years the number of investment promotion agencies offering these types of services increase by 50 per cent. Right now, Canada does not have that to offer to investors. So investors are confused by the multiplicity of players, the multiplicity of people they have to reach out to in order to make a decision to invest in Canada. The purpose here is to simplify the process and make it easier to invest in Canada.
In terms of governance, this is going to be what is called a departmental corporation, not a Crown corporation. A departmental corporation, by definition, is closer to the core public service. The intent here was that because this entity will be called to coordinate and work with other ministries, it would be better to be closer to the public service than arm's length like a Crown corporation would be.
It will report to a minister. It will have a CEO with the rank and power of a deputy minister, so that person can interact easily with his or her colleagues within the federal departments. But it will also have a board of directors that will oversee the management of the organization and make sure that it applies policies that ensure the funds are used properly.
[Translation]
Senator Massicotte: When I came here, I was wondering why it was still so complicated and bureaucratic to work in Ottawa. Now I understand it a little better. However, I don't understand why we need a bill to create an agency that would act as a one-stop shop. Why is it so complicated, and why do we need a chair and a board of directors? I have the experience of managing several companies, and creating something didn't require bills. Why the bureaucracy, why the red tape of a structure with a chair, and so on? And how many people are we talking about? To provide a single point of service and knowledge, it would take four or five people, but no, the board alone will have more. I don't understand the need. I believe in the project's purpose, but I don't understand why we have to go through the bureaucracy of having legislation and all this red tape.
Mr. Marcotte: The idea was to create an independent entity, meaning independent from departments that will provide the link with the other departments. Now, you need enabling legislation to create a Crown corporation.
Senator Massicotte: Again, I don't understand. Doesn't the Prime Minister have the authority to create a one-stop agency, to ask his people to organize with departments or economic development agencies, to hire the four or five people needed and to ensure that it will be done? It seems so obvious to me, and I'm surprised it hasn't been done before.
Mr. Marcotte: It could have been done within a department, but there was a desire to create something that was going to be independent and visible outside of a department so that investors would recognize that it is not a single point of service lost within the Department of Global Affairs, but a single point of service that is only for investors.
Senator Massicotte: How many employees are we talking about?
Mr. Marcotte: The government announced an investment of $218 million over five years. It won't be a huge entity. This sort of thing hasn't been announced yet.
Senator Massicotte: It's $40 million or $50 million a year. That's still a hundred people. If the average salary is $100,000, it's still a lot.
Mr. Marcotte: This won't only be used to create wages; we talked about overseas promotion, public relations campaigns, and so on. So it's part of the budget.
Senator Massicotte: In addition to the work already done by our embassies and consulates general.
Mr. Marcotte: Yes.
[English]
The Chair: It's like a Treasury Board Crown, right? Will the salaries be governed by the same rules as the civil service, or will they be outside of that?
Mr. Marcotte: It will be outside, but it will be reviewed by the President of the Treasury Board.
The Chair: So the president can get more money than maybe if he was sitting in a department? Is that the objective?
Mr. Marcotte: The CEO of the organization?
The Chair: Yes.
Mr. Marcotte: That would be someone appointed by order-in-council and those salaries are determined there.
The Chair: Because it's a Treasury Board Crown rather than the civil service doing the same job, which as some of the senators have pointed out, is perfectly capable of marketing Canada and marketing to investors through the departments and through all of the embassies we have across the country, across the world. I'm not quite sure why we need separate Crown corporation.
Mr. Marcotte: I want to correct that. It's not a Crown corporation. It is a departmental corporation. Sorry, it's an important difference.
The Chair: Yes, exactly.
Mr. Marcotte: In order to be credible when you present to a foreign firm about Canada's clusters and ability to attract, accept and integrate investments, you require a lot of specialized expertise. We're not saying that that expertise does not necessarily exist in the government, but it certainly is more available in the private sector.
Senator Wetston: You indicated previously that institutional design is important. It's important for accountability, and with responsibilities as between the CEO that you're creating as opposed to a deputy minister. I don't have any issue with the notion of trying to find a one-stop shop, more or less. Many jurisdictions have done that and that may make sense.
I'm following up on a question that Senator Massicotte asked, to understand the cost and need associated with this. It does seem to me that you're creating, as you say, this agency within the department — a departmental agency but not a Crown corporation — with a board of directors, which sets up challenges and responsibilities as between the minister, the board and the CEO. And I'm sure that if this comes into place you'll say I told you so, but maybe not.
I want to understand the rationale for this, as opposed to creating a more simplified agency that would be within Treasury Board guidelines, within deputy minister responsibility that would carry out these functions on behalf of the Crown and achieve the goal that you're attempting to achieve.
I'm still puzzled by why you want to create this kind of institutional design, which may be perfectly fine. On the other hand, it may lead to other issues.
Mr. Marcotte: It's to strike a balance between flexibility and stewardship of money, but also being able to acquire the knowledge and the skills that are available and will benefit the operations of the organization.
You could think of a board of directors that will have the responsibility of ensuring that monies are well spent, policies are in place, et cetera, but which will also bring contacts and knowledge of foreign investment attraction, and can actually direct some of the strategies of the agency itself.
Senator Day: Shakespeare used to write a play within a play. This is not unlike that in that this is a stand-alone bill inside another bill.
Who made the decision not to take this to Parliament as a separate, stand-alone piece of legislation that we could study?
Mr. Marcotte: That was not a decision I made. The fact is that the intention of the government to create this agency was included in the Fall Economic Statement and then reiterated in Budget 2017 in order to meet the commitment to create this by the end of 2017. Then this is being introduced as part of the BIA.
Senator Day: So the idea is that if you've got a budget that talks about 1,000 different things, you just throw everything that was mentioned into that basket and expect us to deal with all of those things?
Mr. Marcotte: That was not my decision, sir.
Senator Day: No, you don't have to answer that one.
I was looking for an example of a departmental corporation that you modelled this on. I think I just found it in my notes. The National Battlefields Commission is one of those models.
Mr. Marcotte: Actually, the Canada Revenue Agency would probably provide better similarities. But you could also think of the National Research Council and the Canadian Food Inspection Agency. There are many departmental corporations in the federal government.
Senator Day: Do they all have these similar attributes and powers?
Mr. Marcotte: The CRA does. All others don't necessarily, depending on what they needed to operate and deliver on their mandate.
Senator Day: It's the oversight aspect I'm concerned about. This departmental corporation is going to be receiving $218 million. Despite the Financial Administration Act, the Invest in Canada hub is not subject to any regulation or requirement established by Treasury Board.
All these other examples are like that?
Mr. Marcotte: The CRA is like that. But they have their own, and they have a board who manages them and provides oversight.
Senator Day: This group will do the same?
Mr. Marcotte: The board of directors will have responsibility for the management and the oversight of the corporation.
Senator Day: There seems not to be a requirement to report to a designated minister. We don't know yet. It says that the minister "may'' require the Invest in Canada hub to provide it with an annual report, not "shall.''
Mr. Marcotte: Actually, as a departmental corporation, it will be subject to the regulations of Parliament and will have to produce an annual report that will be presented to Parliament.
Senator Day: What is subsection (4)?
Mr. Marcotte: I'm not sure. I think there was a reference that basically made sure that the minister could ask any information from the corporation to ensure that the minister also has oversight, because he's responsible for that corporation, and that he can ask questions and get answers on any of the activities or the financial management of the corporation.
Senator Day: Are you satisfied — I haven't found it, but if you tell me it's there, I will not go looking — that Parliament will become aware of the activities on a fairly regular basis, perhaps an annual basis?
Mr. Marcotte: The departmental corporation, like any other departmental corporation, will have to produce an annual report that will be presented to Parliament, just like CFIA, CRA, ministries — the same thing. They will have an annual report that will be presented to Parliament.
Senator Day: Notwithstanding the fact that they are exempt from all the rules and regulations under the Financial Administration Act?
Mr. Marcotte: That's right. But that is related to financial management, and they're not excluded from those rules related to financial management.
Senator Enverga: Are you going to give financial incentives when you try to get investments?
Mr. Marcotte: No, the entity is a facilitation and promotion agency only. It will leverage incentive programs that currently exist in different departments in the federal government, but it will not provide incentives.
Senator Enverga: When you ask for prospective foreign investors, would suggest that they invest in the infrastructure bank? Is that part of the deal?
Mr. Marcotte: Not really. The Invest in Canada hub will focus on attracting what we call greenfield investment — a company that comes from abroad and builds a plant, opens an office or creates jobs directly. The focus of the agency will not be to attract capital; it will be to attract foreign direct investment projects.
Senator Enverga: It will have nothing to do with the infrastructure bank?
Mr. Marcotte: It could work with the infrastructure bank in promoting Canada as a place to invest in certain regions of the world, but the mandates are very different.
Senator Wallin: I have a couple of questions. You've twigged me to something else. It's not the job to attract capital, but projects. Then you're to facilitate the capital after you've attracted the projects?
Mr. Marcotte: Maybe I can make myself clearer.
The idea is not to bring investors who only bring money and put it into a Canadian company. That's not the objective. We're not after attracting capital. We're after attracting a company who would want to establish a presence in Canada and create jobs, manufacture products, do design, research, development, establish a laboratory, for instance, or expand a business line that they have and give that Canadian subsidiary the global mandate for it. That's the type of investment project we're looking for.
Senator Wallin: Having worked in a consulate, along with your colleague, I understand why you're saying private sector expertise and not just trade reps, and whatnot, operating, but will these folks not be civil servants as opposed to private sector people and therefore have the same issues in terms of credibility?
Mr. Marcotte: The credibility will come from their knowledge of the Canadian economy and Canadian sectors more than whether they are a public servant.
The idea is to recruit people who know the Canadian economy and sectors well and can actually make a good sales pitch abroad about those sectors.
Senator Wallin: Who triggers the activity? You're sitting in your office here in Ottawa — this group of people. You're calling embassies, consulates and other things. What would make somebody get on a plane and fly to Indonesia?
Mr. Marcotte: We are envisioning that the employees would work in tandem with provinces and territories, as well as municipalities, to identify targets that could be approached with a value proposition in order for them to consider investing in specific ecosystems across the country.
Once you've identified those targets, you build a value proposition and then you decide to go and present it, along with trade commissioners and maybe provincial or municipal governments.
Senator Massicotte: I'm resigning myself to not understanding this issue. That's the bottom line. I just don't understand why we're creating such a complicated issue for creating a mechanism to do prospecting on a serious basis. You argue a lot about the quality of the people and about the competency. It doesn't matter whether it's within private enterprise or the government; you still need highly competent people. You don't need a corporation with a board to attract those people.
It's a lot of money. I give up. I have no more questions. I've listened to all the answers. I don't understand.
The Chair: You don't have to answer that question. Senator Massicotte has given up, so I'm going to go to Senator Carignan.
[Translation]
Senator Carignan: I have a question about the legislation. I'm sorry, I'm a lawyer.
Mr. Marcotte: Please.
Senator Carignan: Sometimes it colours my questions.
Subclause 4(2) states:
(2) The Invest in Canada Hub is for all purposes an agent of Her Majesty in right of Canada.
Paragraphs 7(1)(a) and 7(1)(b), particularly 7(1)(b), Powers of Invest in Canada Hub, indicates the following:
(b) enter into contracts, agreements, memoranda of understanding or other arrangements with Her Majesty in right of Canada as if it were not an agent of Her Majesty;
Is it an agent or isn't it?
Geneviève Pellerin, Counsel, Legal Service, Global Affairs Canada: It is an agent and, in fact, it's to allow the agency to enter into binding agreements with other government entities as if it were not an agent. Normally, there would be no binding contracts between the Crown and the Crown. So, with this provision, which is also found in other legislation, the entity can enter into contracts that may be binding, binding agreements with other government entities.
Senator Carignan: Perfect. My second question is about the agency's mandate. Paragraph 6(a) reads as follows:
(a) Develop and implement a national strategy to attract foreign direct investment to Canada;
The Invest in Canada Hub will make the strategic plan, and decide and how and where to attract foreign investment. What happens if the priorities are not the same as the government's, if the government decides it wants to attract European investments while the Invest in Canada Hub has a strategy to attract Chinese investments? How is coherence with government policies being encouraged?
Mr. Marcotte: That's one of the reasons it's a public institution and not a Crown corporation, meaning that the minister retains administrative powers, and can guide the organization and ensure that it follows government priorities, for instance. Since the president and CEO will be at the deputy minister level, the incumbent will, of course, be part of the deputy minister community and be able to align the activities of the agency with those of the rest of the government.
Senator Carignan: In that case, what is the point of having an agency, when there are already trade missions that can follow the minister's directions?
Mr. Marcotte: The goal — and this may be a response to Senator Massicotte's concerns — is to ensure that we coordinate Canadian players, at least at the federal level, and bring provincial and municipal players with us in a concerted approach to attracting investment. Right now, our overseas officers do it on an individual basis. If you are in India, you are trying to attract Indian investors to Canada, but there is no one in Canada who can determine exactly which investors you want to attract to the Montreal area, for example, and how to work with Montreal International to find the investors we want to attract to work together, including with trade commissioners.
Senator Carignan: You know we can't do that.
Mr. Marcotte: Why?
Senator Carignan: Because Montreal International is a corporation that draws its budget from the Province of Quebec and, under a Quebec law, Montreal International will not be able to enter into a direct agreement with that agency without going through Quebec.
Mr. Marcotte: My understanding of it is that Montreal International also receives federal funding. At the Department of Global Affairs, we are already working very closely with institutions like Montreal International, Toronto Global, HQ Vancouver and others, and we share information, agree on targets and move forward together. Obviously, the objective here is that this agency incorporates the federal offer into the proposals that are presented to investors, in cooperation with the provinces and municipal entities.
[English]
Senator Ringuette: First of all, I'm kind of stunned that we have 1,500 trade commissioners throughout the world and they're not considered credible expertise to get foreign firms to invest in Canada, and that we need to create this entity. It's pretty disturbing.
Then we're creating this entity with a board of trade that will manage and create the policies, and then you've just mentioned the Montreal International, Toronto Global and the Vancouver Economic Commission. Where does that leave Atlantic Canada, sir, with regard to the current dire investment needs we have? There is no assurance whatsoever that anyone from this board of directors will come from Atlantic Canada, and they will elaborate the policy and the direction of this agency.
[Translation]
As we often say, will we still be the poor kids of the country? How can you assure me, as an Atlantic citizen, that the Atlantic region will receive the same consideration as all the other regions in Canada?
[English]
Mr. Marcotte: I am myself a trade commissioner, Senator Ringuette, so far be it from me to say I don't believe in their expertise. I am one of them.
What I was referring to specifically is knowledge of the Canadian economy and sectors. There's no one better than someone who has lived in a specific cluster to actually sell that cluster abroad. The trade commissioners abroad are very well trained to actually approach investors, but there comes a point where you have to actually go into the details of a value proposition that is best answered by someone who has actually lived it, back in Canada, to sell the product and the service.
[Translation]
With regard to Atlantic Canada, I can assure you that we, at Global Affairs, are already working very closely with a group like Halifax Partnership.
[English]
That is a municipal economic development organization. We take them on the road shows abroad. We promote Halifax as a place to invest, and the greater area of Nova Scotia, for instance.
We also have very good relationships with each of the provinces, because they each have an interest in attracting investment. We recognize the importance of even a smaller investment in a smaller ecosystem across the country, not only in the Atlantic provinces, but also in Central Canada, the Prairies and on the B.C. coast.
Senator Ringuette: If I look, I think you have a board of directors as anything between 8 and 10.
Mr. Marcotte: That's correct.
Senator Ringuette: Are you saying to me that to have Atlantic Canada fully participate in the management, the policy elaboration and the attention to cluster the investments that Atlantic Canada needs, that you will make sure that we'll have two directors — one male, one female, one francophone and one anglophone — on this board?
Mr. Marcotte: I personally cannot make that commitment. There's a process for appointing directors to a board from those agencies.That applies to all agencies of Canada.
I can tell you, though, that for sure the CEO who will be heading this organization will want to work with provinces and municipalities, all of them. There's a recognition in the world of FDI attraction, foreign direct investment attraction, that investment happens locally. People don't invest in Canada; they invest in Brampton, in Fredericton. That's where the investment takes place. Who is best equipped to sell Fredericton than people from Fredericton?
So there will be a need for the CEO to work really closely with provincial counterparts and also with municipalities across the country.
The Chair: Thank you, Mr. Marcotte, Ms. Pellerin and Mr. LeBlanc.
We're going to go now to Division 18, the Canada infrastructure bank act. We're going to do something a little different. We asked Mr. Mintz to come. Mr. Mintz was going to be here anyway for a dinner, but his dinner starts at seven o'clock, so we're going to be flexible because he has been a friend of the committee and a great witness for us on previous occasions.
First I'm going to thank Mr. Campbell for his patience in allowing Mr. Mintz to go first, and then we're going to call officials.
Mr. Mintz, the floor is yours. I don't know how much time we'll have to ask you questions, but that will probably depend on what you have to say.
Jack Mintz, President's Fellow, The School of Public Policy, University of Calgary, as an individual: Thank you very much, Mr. Chair. Thank you for accommodating me in this respect. Actually, the dinner started at six o'clock; I told them I would be coming at seven. So I was accommodating the committee, actually. I just wanted to note that I did try to do my best for you.
The Chair: I understand that.
Mr. Mintz: I'm going to specifically discuss the Canada infrastructure bank, and I'm going to start with some comments. As you know, I'm not unafraid of being quite frank about certain things. I will have some comments about the Canada infrastructure bank, which I have a great deal of concern about.
An infrastructure bank combining government and private sector funding has been an idea that has been proposed in several countries, including Australia and the United States. The idea has not particularly caught on since its advantages have not been made clear.
Its governance could be particularly problematic with the mixing of public and private interests. Back in the 1970s, many governments throughout the world created public-private mixed enterprises to improve the performance of public agencies or corporations. It was based on the idea that an entity would perform better with the expertise and discipline provided by the market. That experiment, including the Canada Development Corporation — not the Canada Development Investment Corporation but the Canada Development Corporation — with the mix of public and private interests, ultimately failed.
Recently we have seen a resurgence of public-private mixed enterprises, including Hydro One and many foreign, state-owned companies. The jury is still out as to whether such entities will be successful. My view is likely not.
The reason for this failure is that it's difficult to merge public and private interests. Private investors are solely interested in commercial success; governments have other objectives that could compromise profitability.
Four decades ago — and now I'm really going back in my history — my PhD thesis in this area predicted that a Canadian mixed enterprise experiment would fail, with companies eventually privatized or fully nationalized. This is what happened to the Canada Development Corporation and others. Would we be repeating history once again with the Canada infrastructure bank?
Three advantages could be gained from an infrastructure bank. While an infrastructure bank itself is not needed for this purpose, a revenue stream will be needed to attract investor interest, potentially leading to greater use of user pricing that is economically desirable for determining demand. However, most infrastructure projects are quasi- monopolies that could result in excessive user prices unless public interest is protected.
I should mention that years ago I worked for the World Bank doing projects in Hungary, and they didn't worry very much about pricing, which I think was a huge mistake on their part when they went into more privatized type of infrastructure projects or public-private infrastructure projects.
Second, investors will be able to propose projects, thereby leading to a different approach to project selection that is typically left to governments. Their expertise could help professional staff select better projects, although one would like to use cost-benefit analysis from a government point of view.
With public assurances, investors may have greater confidence that projects will be completed within a reasonable time, given that Canada has one of the slowest permitting processes, according to the World Bank. In fact, if I recall, we rank 119 out of approximately 190 countries in how long it takes to get a permit in this country.
Third, the retained earnings recreated by the bank could be used to support other projects. This is what I think is one unique feature of the bank. This could be one advantage that makes the Canada infrastructure bank unique compared to public infrastructure spending and a public-private partnership Crown agency. Otherwise, it is difficult to say why an infrastructure bank is needed as opposed to a P3 Crown agency.
The legislation creates a bank that is not a Crown agent, with exception. Ministerial responsibility will still be applied with respect to advice on the selection of projects, financial commitments and dissemination of data to governments. However, there are some significant issues that could lead to serious liabilities and underperformance by the bank. If the government assumes risks with loan guarantees, this will lead to a misallocation of risks whereby taxpayers will be responsible for the downside but only share the upside. This type of risk allocation leads to poor performance as the private investor takes on risks that are inappropriate. A good example was the case of the Swan Hills hazardous waste treatment centre that cost the Alberta government over $1 billion in losses.
Second, private investors, especially pension funds seeking a better return on their assets, could earn inferior rates of return on investments arising from government policies and interference compromising the investment. For example, a gas pipeline controlled by the Norwegian government, with a 44 per cent stake from private investors, lost $2.1 billion, or 25 per cent of its value, when the Norwegian government cut tariffs after 2012 in the interests of promoting oil and gas exploration in the North Sea. The CPP Investment Board, along with Abu Dhabi's sovereign wealth fund and German insurance Allianz, is suing the Norwegian government, so far without success. CPP pension holders will ultimately lose money on this failed public-private investment.
Third, it is hoped that significant funding will come from pension funds. However, as seen with recent directives by governments to public pension funds, like the Caisse de dépôt foreign investment in Montreal's transit with questionable profitability, a serious precedent is arising with respect to the independence of public pension funds. Will governments begin interfering with the arm's-length public pension plan decision making through the infrastructure bank?
While infrastructure funding is important to Canada, we should remember that a significant share is already undertaken by the private sector, whether it's pipelines, railways, broadband and power transmission and distribution.
The concern over the lack of infrastructure spending is with respect to our onerous regulatory system and a lack of investment in public-owned infrastructure. Whether the Canada infrastructure bank will be a catalyst for better infrastructure spending is far from clear. We might be better off with privatization that was the end result of the failed public-private mixed approach of the 1970s.
Senator Massicotte: Thank you very much, Mr. Mintz. We very much appreciate your comments.
If I understand what you're trying to tell us, there is a relatively high risk that this will not work out to be successful for two reasons in particular. One is that the interest is not mutual. In other words, private enterprise, like you said, is interested in commercial success. The government sometimes changes their mind, but their interest is much wider, so they may disagree in spite of the structuring.
The other comment you make is the government's role will still be somewhat political. As proposed, they will appoint the board members and the CEO. Yesterday I think the Minister of Finance said they would also approve investments. Even the investment people say, "Why am I getting involved in this? This seems to be highly political, not based on pure business.'' So it may fail again.
Am I correct in saying that? Is that a good summary of where you're coming from?
Mr. Mintz: Yes. When I say "failure,'' I mean it won't be earning an appropriate risk-adjusted rate of return on capital.
Senator Massicotte: For the government?
Mr. Mintz: Right.
The work I did 40 years ago on mixed enterprises showed that, yes, mixed enterprises perform better than Crown corporations in earning at least some profitability, but it is way below what was being earned in the private sector after taking into account various factors.
I am concerned, for example, that in the end, even if the bank is operating on as much commercial basis as it is, the government has a lot of powers that go beyond what could be exercised through a board.
Senator Massicotte: The other comment I would have made, the observation you make, if you look at what's happening with P3 projects in Canada, I am a big supporter of user pay. I like it. It's a more efficient allocation of capital, better services. But if you look at the experience today, given that the consumer of those services is not prepared to pay the full price, they still necessitate significant government funding as subsidy for upfront cost or higher risk capital than the others, which means already you have a conflict of interest. Does that mean that the $35 million becomes worth nothing? Because they're taking a higher risk. You have the loan guarantees and I'm not sure they get compensated, so it's going to be tough to structure. That's the key.
At the same time people say look at the U.K. and Australia, the best governance examples. What are they doing that is successful in this respect?
Mr. Mintz: I think the P3s are a little different, and I would not put them in the same category as the infrastructure bank. P3s work well when all the risks are put on the private operator. In fact, the ones that have worked and the ones I know about in Australia, British Columbia, and other places, is that the private operator not only constructs the project, but it also operates the project and takes on all the risks associated with the project.
This is my point about loan guarantees. What failed in the Swan Hills hazardous waste treatment centre was that it was like a P3. What happened is that the government gave a minimum rate of return on the project and then shared the upside. You can easily show you're going to get bad behaviour as a result. What is not clear to me is that in the infrastructure bank case, are we going to have an appropriate allocation of risk?
I think in the P3 it can be controlled because it's a contractual thing, where the government is still choosing the projects, outlining what it wants in terms of design, and says to the operator, "You build it, run it, and if you do a lousy job, you're going to pay the price for it.'' There's a certain independence associated with that.
Yesterday, I saw a friend of mine who once ran a pension plan in Toronto, and he has grave doubts that the infrastructure bank will work that well because of this mixing of public and private interests at the board level, which is problematic, as we have seen many in situations in the past.
Senator Massicotte: When you refer to Australia and the U.K., I didn't check the references, but you say that is a bad reference, because that is P3 and not an infrastructure bank per se.
Mr. Mintz: I don't put it in the same category.
Senator Wetston: Thank you very much for coming.
When you talked about the revenue stream, the quasi-monopoly characteristics, private investment in the proposed projects, that sounds to me like regulated utilities, and very much the model of regulated utilities, which, for the most part, has been quite successful. For example, earning 9 or 10 per cent rates of return on equity is not so bad in these environments. Is that the model you think might work well and has worked well?
I would add that to Senator Massicotte's thoughts about P3s. My sense is you think P3s are fine. We have a lot of successful ones in Canada, provided the risk allocation is appropriately adjusted.
The third part relates to private investment. You talk about private investment and you obviously are supporting that.
If you have all those things working well in the infrastructure environment in Canada, is it your position that it's unnecessary to have the infrastructure bank?
Mr. Mintz: Yes, it's hard to understand why you would have an infrastructure bank.
I have to admit we had a very good paper written at a conference at the School of Public Policy several years ago, and unfortunately it got lambasted at the conference. There were some very good people around the table talking about it, and I don't want to give names, but some of them we know well. The main issue became, what is the point? What does it do that we can't accomplish otherwise?
If you take a regulated utility, if it was private — and in Canada we have a lot of power companies that are Crown corporations, except for Alberta which is completely privatized. But we do know with regulation there are some issues. There are some problems. Certainly it has protected the public interest where you have an entity that has market power because it's either in a monopoly or an oligopoly position. You do need regulations to protect your public interest in that case. The model has worked reasonably well.
P3s have worked reasonably well so long as one is very careful about the allocation of risk. If that's not done properly, a P3 could be a disaster.
But in the case of the infrastructure bank, it's unclear what we're accomplishing with it that we can't accomplish already either with a P3 agency or regulated, privatized systems.
Senator Wetston: As you know very well, and probably better than most, our pension funds have been very successful. I'm going to include Brookfield in that as not quite the same type of pension arrangement, but nevertheless very successful globally.
Potentially investing a little less in Canada, perhaps investing more globally, as you know, not doing it necessarily under an infrastructure bank model in those jurisdictions, would the infrastructure bank — and I'm not talking about the conflict interest here, which the media has been talking about — would it potentially encourage greater pension fund investment in Canada if we had that bank in place?
Mr. Mintz: I don't think so. What we need to do is develop public policies that are going to encourage more investment in Canada. We have a regulatory system that is, especially in infrastructure, very slow. I wrote a piece about this a while ago, which is one the few surveys that have been done, the World Bank survey on doing business around the world. It was interesting.
Canada does very well in certain areas. I can say from experience we run a very good tax system in terms of compliance costs and things like that. But we do poorly in certain areas when it comes to infrastructure, things like permitting and getting goods to the border. It's not just pipelines.
You hear stories about how long it takes for permitting to be done in this country. In fact, the bank used a survey. It was building a warehouse in a city, and Canada came out really low. Australia and the United States were much better. In fact, amongst OECD countries, we're in the middle of the pack when it comes to the overall ranking in this World Bank study.
My main point is people will come here if we have a better regulatory system. People will come here if we also make sure that — and I've been on panels with pension funds — they can get a revenue stream and if we're willing to use user pricing. As a country, we are reluctant to use user pricing, and that may be a political decision. But if you don't have it, the infrastructure bank is not going to work very well. Maybe there is some value and we will get more of it with the infrastructure bank, but that's getting over a political hump that I'm sure there will be a lot of opposition to.
Senator Woo: Given your support for P3s, are P3s in fact precluded from the work of the Canada infrastructure bank, as you read the legislation?
Mr. Mintz: As I read the legislation, it would not be excluded. To me it's the way that the bank will be operating with public and private interests, with the private interests actually proposing projects to the bank.
Senator Woo: Is that the only by way projects are identified? My understanding is that government can do it as well.
Mr. Mintz: For sure.
Senator Woo: And the logic, as I read it, is to crowd in investment, in other words, to generate private funding for projects that would not otherwise be funded.
Do you feel that there are publicly desirable infrastructure projects that fall into the category of not being funded otherwise, and therefore being able to be crowded in because of the government assuming some risk, either through a P3 structure or some other project financing structure?
Mr. Mintz: I won't give you my 400-page PhD thesis on this topic.
There are two arguments for bringing in private participation, which again I think is where the P3 model has worked. One is with respect to risk capital. I don't think it applies very well to Canada because we're in an advanced country and we have good risk markets. I don't think the government can improve upon the risk diversification and risk allocation in the economy.
Senator Woo: It's about revenue stream.
Mr. Mintz: This is an argument for less developed countries.
The second argument is one of bringing in expertise. Again, I think the P3 has worked well because you have certain expertise brought in that does the construction and the operation of the project. What the infrastructure bank may do is bring in the private expertise to at least help with the selection of projects. That could be a benefit, but the question is why you still need the bank to do that. I still have trouble with that. Maybe it's because you're creating a professional class within the bank to do that sort of thing.
But I still worry about the mixing of public and private funding, and how eventually that is going to be sorted out given the very different objectives that governments have vis-à-vis private interests.
[Translation]
Senator Carignan: I'm trying to find the purpose of the bank. Is it a for-profit or not-for-profit organization? It is normal for the administrators of a pension fund to earn a return for their clients based on set performance targets. A bank must have a return for its shareholders, otherwise it will see the stock price of its shares decrease. However, I'm trying to determine whether one of the objectives of the bank is to be profitable in order to return dividends to the government, or to take risks and perhaps lose money to support a business or investment. It's not clear to me.
[English]
Mr. Mintz: When I read the act this past week, the objectives were not entirely clear for the bank. What it talked about was that there would still be ministerial responsibility, which you might argue is appropriate in a government, with respect to the selection and the financing of projects. In other words, a bank isn't going to be on its own and it's not going to be making contracts with various participants without the government approving the contracts. That would be the role of ministerial responsibility.
I would argue that that is appropriate from a government perspective and in ensuring that there is ministerial responsibility.
[Translation]
Senator Carignan: The limit of the funds transferred is $35 billion overall. Clause 23 provides that the Minister of Finance may pay the bank up to $35 billion from the Consolidated Revenue Fund. Clause 24 provides that the Minister of Finance may lend money to the bank. Are loans to the bank included in or excluded from the $35 billion limit?
[English]
Mr. Mintz: I would argue, yes, in fact it might be included given the wording that is coming out of the Consolidated Revenue Fund. It may include whether it's equity or loans. I think the officials have to answer that. In my view, it should apply to the total.
[Translation]
Senator Carignan: The experts are already grappling with the matter. They will have time to think about it.
[English]
The Chair: Thank you so much, Mr. Mintz, as always.
Colleagues, we're going to have the officials here and then that will be it. The other witnesses have kindly put off their appearances until after the break. This will be our last kick at the cat tonight and then we'll continue on when we come back after the break week. We have a meeting tomorrow, but we are going to continue with the infrastructure bank when we come back.
I want to thank the Canadian Chamber of Commerce for being kind enough to come back at that time. It is much appreciated.
We're still on Division 18. From Infrastructure Canada we have with us Mr. Glenn Campbell, Assistant Deputy Minister, Canada Infrastructure Bank Transition Office; Mr. Shawn Grover, Senior Policy Analyst, Canada Infrastructure Bank Transition Office; and Mr. Steven Kuhn, Senior Director, Canada Infrastructure Bank Transition Office. And from the Department of Finance we have Niko Fleming, Chief, Infrastructure, Sectoral Policy Analysis, Economic Development and Corporate Finance Branch.
Glenn Campbell, Assistant Deputy Minister, Infrastructure Finance and Investment, Canada Infrastructure Bank Transition Office, Infrastructure Canada: I'm pleased to return to this committee after the bill has been tabled. We did have a preliminary conversation a couple of months ago.
Part 4, Division 18 would establish the Canada infrastructure bank, first announced the 2016 Fall Economic Statement, as well as reiterated in Budget 2017. For reference, the proposed amendments are clauses 403 to 406 and can be found on pages 236 to 248 of the bill.
Please allow me to begin briefly by providing some background and context around the proposed bank, and then I'll walk through the contents of the proposed legislation at a high level. Finally, I'd be happy to answer questions, including some of those that were raised by previous witnesses.
The infrastructure bank is intended to provide innovative financing for new infrastructure projects and help more projects get built, including those transformative projects that would not have otherwise been built in Canada by attracting private and institutional investment. The proposed bank is part of the government's overall $186 billion Investing in Canada infrastructure plan. Federal support for infrastructure would continue to largely be delivered through traditional infrastructure models, and the Canada infrastructure bank represents less than 10 per cent of the total plan.
The bank would be one new tool that the government partners, particularly municipal, provincial, territorial and indigenous partners, could choose as an option to build more infrastructure projects. The bank is a new partnership model to transform the way infrastructure is planned, funded and delivered in Canada. Leveraging the expertise and capital of the private sector, the bank would allow public dollars to go further and be used more strategically with a focus on large transformative projects such as regional transit plans, transportation networks and electric grid interconnections.
The proposed Canada infrastructure bank act can be grouped into six main categories. The areas are incorporation, mandate, functions and powers, governance, funding and accountability. Let me address these very simply in turn, Mr. Chair.
First, the act would incorporate the bank as a Crown corporation effective at Royal Assent.
Second, the legislation would set the mandate or purpose of the bank to make investments in revenue-generating infrastructure projects that are in the public interest and seek to attract private sector and institutional investment to those types of projects.
Third, the legislation describes the functions and powers of the bank to help achieve its purpose. The bank would be able to make investments through a wide variety of financial tools, including debt and equity investments and other tools. The bank would make its investments directly into the infrastructure project, and its investments would be alongside the private sector and institutional investors, as with any other government investor. This would be a co- investment and co-lending model.
Projects supported by the bank would be structured using conventional and robust legal arrangements among partners, designed to protect the interest of Canadians.
The bank would also make loan guarantees with the approval of the Minister of Finance. Separate approval is consistent with general requirements for Crown corporations.
The bank also would have functions other than making investments, including acting as a centre of expertise and advising other levels of government on revenue-generating projects, working with all orders of government to collect and share data to inform future investments.
Fourth, the proposed legislation sets out the high-level governance of the bank. The standard Crown corporation governance requirement in the Financial Administration Act would generally apply. Under the proposed legislation, board members and the CEO would be appointed by the government through the Governor-in-Council, and the board would play a role in the selection of the CEO.
On May 8, the government launched, on an anticipatory basis, an open and transparent merit-based selection process to identify the bank's senior leadership. Through these processes, the government would first select a chairperson of the board, followed by the remaining directors and the chief executive officer.
Any appointments would only be effective if legislation establishing the bank is passed by Parliament and receives Royal Assent.
The fifth aspect of the proposed legislation allows the Minister of Finance to pay up to $35 billion to the bank. It is expected that the bank's assets, liabilities, revenues and expenses would be fully consolidated with the Government of Canada's books. We expect capital only to be transferred to the bank as needed over time to execute deals.
While the cash amount would be $35 billion over time, the government has announced that the bank would be authorized to fiscally expense, on an accrual basis, up to $15 billion over 11 years.
The sixth aspect would allow the Governor-in-Council to designate the location of the bank and appoint a responsible minister. The government has announced its intention to designate Toronto as the location of the bank. It has established a global reputation for excellence as a centre for infrastructure financing.
The Crown corporation would be accountable to Parliament in a number of important ways, required to submit a summary of its annual corporate plan, as well as an annual report. It would be subject to the Privacy Act and Access to Information Act, although commercially sensitive third-party information would be kept confidential — about the commercial partners, not about the projects.
It will have the highest standard of having its books audited by both the Auditor General of Canada and a private sector auditor, and a review of the bank's legislation would be conducted and tabled in Parliament every five years.
Let me conclude. As announced in the budget, the government's goal is to have the bank operational in late 2017, a year after it was initially announced and made public. Since the first announcement last November, the government has been discussing the proposed bank extensively with stakeholders and in the public domain. This includes discussions with provinces, territories and municipalities, as the bank would be one more tool for those partners to use if they choose, in addition to traditional funding programs.
As part of the overall Investing in Canada Plan, provinces, territories and municipalities are currently engaged in long-term planning for how they will fund, finance and deliver infrastructure. While the bank represents less than 10 per cent of the overall plan, it would provide an additional option for government partners to make their public dollars go further under a new partnership model.
These government partners have already indicated early interest in using the bank as a catalyst to move their infrastructure priorities ahead and deliver more infrastructure for their communities.
It would take some time for the bank, if approved by Parliament, to mature and for discussions to turn into actual investments. A project pipeline is expected to develop over time, and the institution itself would scale up and mature as it evolves.
The bank could clearly provide early value in supporting government partners in their long-term planning through its data function, advisory and centre of expertise to further the ability of all governments to make evidence-based infrastructure investments.
I'd be happy, with my colleagues, to answer your questions.
The Chair: When you were doing your consulting, was KPMG hired by the federal government to give advice on an infrastructure bank?
Mr. Campbell: The Department of Infrastructure, in May of 2016, as one of the many inputs, contracted KPMG to provide some background and to consult on inputs into the government's consideration of an infrastructure bank.
The Chair: What were their recommendations?
Mr. Campbell: They did not make recommendations. They had considerations in that report, and they provided a lot of information on what other countries were doing, other programs, the broad considerations. KPMG, at the time, was not part of the government decision making, and, of course, a decision was not made at that time. So this was based on their research and analysis.
The Chair: Were they in favour? Did they think it was a good idea?
Mr. Campbell: I think they'd have to speak for themselves. Generally speaking, they saw the merits. The paper was setting out considerations on how the government should go about, depending on its own criteria, designing an effective infrastructure bank.
Senator Massicotte: Could we get a copy of the KPMG report?
Mr. Campbell: Yes. We recently provided it — yesterday — to the clerk of the Finance Committee, and we're happy to do the same here today.
Senator Massicotte: Okay, I appreciate it.
I have read this thing many times. I've read quite a few articles. As far as the act, per se, what is in there makes me think that when you create a corporation, there's a lot of standard stuff and corporate governance issues, but that's not the issue. As an observer, we must take that information and say, "We're creating hypotheses of how your business model is going to work and what the business plan is, which we don't have.'' So we're speculating.
Let me make a couple of presumptions. I presume we're talking about projects where there's a user pay component? Correct? It has to be revenue generating?
Mr. Campbell: Yes.
Senator Massicotte: Am I correct in saying that, if you look at the history of those projects in Canada, on nearly every user pay project, a significant portion is strictly a government subsidy and the balance is basically user pay? Is that a good assumption to make also in the future?
Mr. Campbell: Generally speaking, senator, yes, it would be.
Senator Massicotte: Am I correct in saying that the bank will not necessarily be pari passu with the investors? They may take a different role and presumably also a subsidiary role to make the project feasible? Is there a high probability of that?
Mr. Campbell: There would be a high probability, yes.
Senator Massicotte: If that's the case, from a Canadian taxpayer point of view, if you look at $35 billion and let's say it's all spent, you may find that a good portion of money is in a secondary higher risk ratio. Therefore, the $35 billion may be worth $5 billion or $10 billion. Does that mean that the deficit or the decrease in value will be reported as an operating deficit of the government?
Mr. Campbell: There are many points you've raised in the latter question, senator. Let me go back to frame the business model of the bank because that is the way in which to answer your question.
Firstly, the bank is not intended to be capitalized with a set amount of money like other Crown corporations where the government says, "Here is your amount of capital. You go away and do it, and then you return a dividend to the government on commercial terms.''
This has clearly been designed as a mechanism to deliver federal support for infrastructure, given that the majority of infrastructure in Canada, as you say, requires some level of federal or provincial-municipal support. So this is still a delivery mechanism of support. You would look at projects that, by and large, are put forward by a province or a municipality. That's the preponderance of projects.
A project could have otherwise been funded 100 per cent by government subsidy, by either a province or a municipality, and this is an incentive — in the decision-making process between municipalities, provinces and the federal government — to say that if a project is determined to be suitable for revenue generation and meets the other criteria, then that may be put forward as a project that would require less government support than it otherwise would.
The core of what the bank is about is building more infrastructure by making dollars go further, by relieving the pressure on our provincial and municipal partners, to transfer risk onto the private sector so that the public sector puts less money into that particular project than it otherwise would.
To conclude, the role of the bank is to serve a risk management function, and its investments could be subordinated or unsubordinated. The bank would help with risk transfer between the two parties.
Senator Massicotte: From your comments, if you look at a bridge that costs $5 billion, you seem to be saying that the initial decision by this bank is how much subsidy money must it provide to create an interest by private enterprise to invest in the balance. Of the $5 billion, the government would maybe put up a billion dollars and the other four will come from pension funds or investors. Am I correct?
Without necessarily the bank investing in the pure equity, they will focus on how much money they must put up to make it interesting for the third parties to invest in the balance. Is that correct?
Mr. Campbell: We would approach it slightly differently. You would have a province or a municipality coming forward saying, "I want to build a bridge.'' Going back to the earlier conversation that I heard, the province could put forward that project to the Government of Canada, as meeting one of the priorities, and it could be funded through one of the other parts of the Invest in Canada plan; provinces have their bilateral allocations, and it could be funded that way.
But if they were willing to consider a revenue model on that particular project, then it could become a candidate for them to consider the infrastructure bank.
They would then work with the infrastructure bank to say what they want to do, what the terms are, what the revenue model is and how much revenue they think is attached, and the private investment would correspond to the risk that they're going to take and the amount of the revenue model.
Then it may be that below the line there's an amount of government support that would be needed that otherwise would have been there in that project.
Senator Massicotte: Fast forward 20 years from now, and the $35 billion will have predominantly been spent to make the projects feasible from a private investor sense. Therefore, 20 years down the road, as far as the Canadian population says, that $35 billion is worth nothing. It's gone by way of incentive.
Mr. Campbell: I would recharacterize. First off, the $35 billion is balance sheet. The $15 billion is the amount of expendable capital. There's $20 billion of room for liability-asset matching. For example, the bank could take an equity position that has value or it could lend into the project on its own — it could become a debt financier — to which it has a corresponding asset and gets repaid. And that would basically count against the $20 billion.
The government has been quite transparent, and you'll see it in the fiscal framework, that it really expects to deliver support through the bank and to many of those projects that are in the public interest where it makes sense to do so because the public would have gotten that asset built. So the public would have that asset. They'd have the bridge, the road, the transmission grid, the intertie or potential green water treatment. The asset would be built.
Senator Massicotte: The principal function of the bank, as you said earlier, is to create the project and the interest and provide as much capital as necessary, but not more than what is necessary to create that third-party investment. They don't see themselves investing, pari passu, with the pension fund. They just see themselves putting as much money as possible in to create the interest and make it work.
Mr. Campbell: Senator, my framing would be the least amount of money possible because you wouldn't want it to be a dollar more in that equation. That is why you have an arm's-length determination. Governments have to decide to put up an asset and go forward and say whether they want the federal government to co-invest through one of its bilateral programs or whether it is a candidate to be part of this model.
If it's a candidate to be part of this model, it gets put on a list. The bank gets that list and all the governments involved know it's on that list. If the bank goes out and attracts investors and talks with that jurisdiction, the jurisdiction, which is the steward of that asset, ultimately makes the decision. They have to bring the asset forward. They have to decide on the revenue model. They have to sell it to their people at the local level. So everyone would know the projects the bank is working on.
The majority of projects will come through the government channel. There was a reference earlier to unsolicited proposals, which we expect to be the minority, and even in those, the bank will be the interface for the Government of Canada, but we would still expect that party to come forward with a public sponsor in that project.
The Chair: I got lost.
Senator Massicotte asked a question and you brought up the example of a municipality having a bridge or a project. Let's say it's a bridge. They go to the infrastructure bank. What happens exactly? Do you seek out a business to build a bridge? Do you seek out a company to build a bridge? Is that what we're talking about here?
Mr. Campbell: Senator, the infrastructure bank is about upstream financing of a particular asset. The decisions about the procurement and construction are really downstream.
The Chair: Who is going to own the bridge?
Mr. Campbell: Who will own the bridge? It depends on the partnership agreement. Initially, whoever is the public sponsor of that asset, if it's a municipality, will still own that bridge. The question is: Under a partnership model, are they willing to co-invest and co-own along with other parties, including the infrastructure bank?
The Chair: You and the municipality are going in business together building a bridge.
Mr. Campbell: To finance the bridge, once a partnership agreement is agreed, if we decided it will take a billion dollars to build that bridge and we decided among the province, the municipality and the bank to put money in along with the private sector, then they will have a completely separate decision on a business basis. How are they going to construct and procure? Do they use a P3 model or another model?
Then, for example, if the project was in Ontario, they could go to Infrastructure Ontario and use their P3 model to go construct. If you're in B.C., you could use Partnerships B.C. If they wanted to use a PPP model, this is really about the financing of an asset, not about the procurement, construction or operations. It's secondary.
The Chair: So it's not at all about involving the private sector in public investment on a bridge, a piece of highway or an airport. It's not about that at all. It's just about the Government of Canada, through the infrastructure bank, making a partnership with a municipality to charge for a bridge.
Mr. Campbell: I'm not sure that's an appropriate characterization, senator.
The Chair: Who is the private sector person involved in this project?
Mr. Campbell: What we're talking about, with the bank, is the financier.
The Chair: I got that.
Senator Massicotte: A facilitator.
Mr. Campbell: The bank will be the structuring agent of a partnership agreement, and it will be seeking out financial partners. It may go out, deal with the market and bid for debt and equity financing. The players would have to compete for it. Our pension funds, domestic or global, or other asset managers would compete for a part of that project to bring the price down.
Once that is agreed, they will decide on the partnership agreement. We now have enough financing to build that bridge.
Then the group that now is in control of that asset gets to decide all of the options to go out and do the procurement of that bridge to yet again bring in other private sector players for the design, construction and operating of that asset.
The Chair: Who takes the risk?
Mr. Campbell: In the financing model, the risk is —
Senator Massicotte: It depends on the agreement.
The Chair: I'm trying to find out whether the infrastructure bank is taking part of the risk.
Mr. Campbell: It's designed to take the risk and to manage the risk.
An infrastructure project, by definition, is about risk management and the financing structure between the parties.
The objective is to transfer the revenue model risk to a private sector party to the significant degree that they earn a rate of return, and if the asset does not perform, their return goes down or they may lose their equity, but the asset gets built.
The Chair: The risk is split amongst the pension fund, the municipality and the infrastructure bank?
Mr. Campbell: It is a shared-risk model, depending on the partner agreement.
Remember, senators, we're comparing an asset that would have been 100 per cent risk absorbed by a municipality or other governments if it went ahead on its own and built that bridge. They could have had some savings if they used a P3 to construct and bring in some efficiencies, which are well known.
But in terms of who finances that asset, the more that the private sector comes in, the more you relieve the pressure on the two governments having to support that particular asset. That makes money available to do other projects, to build more infrastructure, including social infrastructure in those communities.
Niko Fleming, Chief, Infrastructure, Sectoral Policy Analyst, Economic Development and Corporate Finance Branch, Department of Finance Canada: Could I make one follow-on to Senator Massicotte's question?
You'd asked whether the $35 billion provided on a cash basis for the infrastructure bank could be reduced to zero or $5 billion. The government did report in the budget on the total accrual exposure, the total expense exposure, for the infrastructure bank, and that's capped at a maximum of $15 billion as an accrual expense.
Senator Massicotte: What does that mean?
Mr. Fleming: As Glenn had said, the bank can make cash investments of equity or loans of a total of $35 billion, but for many of those investments, it would retain assets on its balance sheet. The total expense to the government as a result of, among other things, concessional or subsidy arrangements into projects, is capped at $15 billion.
Mr. Campbell: If project "A'' requires support from the infrastructure bank of $200 million, It's quite possible it could use a mix of debt and equity. It starts going through the greenfield stage of construction. The value of the equity could fall. There's risk associated with it, and that would be marked as a subsidy, concessional lending, that would be reflected through consolidation into the government's books, fully transparent. Over time, once that bridge gets built, once it moves, that equity position could be marked up, so there is a pain-share / gain-share aspect in that we're co- sharing the risk. That means you can structure it so that we both get the upside and I'll get the downside.
From the expensing point of view, the federal government and the municipal governments hope to get more things built, where at the end of the day they would have put less public money into building that infrastructure so they could build more. That infrastructure would be funded to an extent on a user pay system. The majority of assets would likely not be candidates for a revenue-generating model.
We already hear from our municipal, territorial and provincial partners that they're already using and contemplating revenue models. They think they have candidates. They would like some help, and this is another tool to help our partners to achieve the objectives they are already contemplating in their long-term plans.
Senator Woo: Thank you, witnesses, for your testimony. I'm trying to put together the previous testimony. It's a good thing you were here because you got to hear from Dr. Mintz.
The crux of the debate is whether or not this bank will provide for incremental private sector investment in infrastructure projects that wouldn't otherwise be available.
Now, Dr. Mintz has a view that the real constraint to incremental infrastructure investment really is regulation. If we got rid of all the regulations that are in the way of permitting, and so on, those projects would be built.
I want your view on that in the light of the particular design of the Canada infrastructure bank, because it would seem to me that you're actually picking projects that would not at all be viable, even if the regulatory process were reduced to a minimum. I'm thinking about transit projects, for example. There are no transit projects, or very few, that provide fare-box revenue that make it viable, particularly subway projects.
To the extent that any of these projects would require some kind of government subsidy, would this structure provide for the crowding in of private investment that would not otherwise be available?
Mr. Campbell: Yes, and let me explain. You raised a few points.
The committee knows I've been here many times before. I used to be head of banking for Finance Canada. I've done a lot of consultations before I took the helm of this project with the financial industry, and I can tell you that many of our commercial banks said they would not do these deals. They just could not finance them. They're doing what they can. Where they are debt financing, we're not going to crowd them out.
I have talked — myself, outside of the government — to almost every pension fund, asset management and infrastructure finance company in Canada. They're all interested by this prospect because there are many projects they just can't invest in because they need that risk bridge. There are a lot of municipal and provincial partners who say they'd like to experiment and attach revenue where it makes sense to do so, but they don't have a vehicle to manage that risk and to manage that partnership with the private sector.
We are informed by the considered views of Dr. Mintz. We've heard this through our consultation: Get the governance right. The government thinks they've struck the right balance of independence and accountability, given some of those previous examples that were raised when they had mixed use private-public enterprises in the private market.
This is really about building public infrastructure. The client is other orders of government or entities that are close to the government.
So to suggest that you should be completely independent is difficult when this is really about building infrastructure in the public interest.
To the extent to which it's independent, you have an independent board, working with an independent CEO, highly professionalized, very small niche institution. Staff are there to be an advisory service, a centre of expertise, and are there in the public interest to help our partners in the federation work with the private sector who say they have excess equity capital that they're willing to invest back at home. Many of them are going abroad.
No one is saying this is going to be the preferred method going forward, but for every project that makes sense, that has a revenue model. That means that other projects in Canada that really deserve more government subsidy can get done; namely, those that would never have a revenue model, those in social infrastructure, those in the North. So for every project you can put through the bank, it would have less government support than it otherwise would, or it may not have gotten built and it frees up precious capital to be put towards other infrastructure needs.
[Translation]
Senator Carignan: Can you talk to us a little about the subsidiaries that the Canada infrastructure bank might create, since it could hold share capital? How will the subsidiaries be overseen? Will the auditor general have access to the subsidiaries' books? Take a 75 per cent or 55 per cent subsidiary, for example, that might have $10 billion in its accounts and might begin to spend the public money that the bank has received. How do we follow that money trail?
I see no provisions in your bill dealing with the oversight of subsidiaries, except for those that are wholly-owned. I know the tricks: you are going to get 50-per-cent or 60-per-cent subsidiaries, instead of wholly-owned ones, in order to avoid the oversight. How can we give Canadians a guarantee that the subsidiaries will not be trying to get around the oversight?
[English]
Mr. Campbell: Under the legislation, the reference to subsidiaries largely captures investments in the project. Technically, the project could become a subsidiary of the bank in legal terms. My legal colleagues can comment on that.
The intent under the business model, as we've just debated, is that the infrastructure bank should be a minority partner. We don't contemplate that the infrastructure bank would need to take a majority stake in any of those subsidiaries.
[Translation]
Senator Carignan: Where does it say that you can't go after the majority?
[English]
Mr. Campbell: It's more in the bank concept. It may happen that the bank invests as a minority partner, and, of course, if the equity investor gets written down, the bank or the Government of Canada or the municipality could find itself in a majority position. This just stipulates the rules under which something would be determined a subsidiary under the bank. It just legally means the bank would have that asset as a subsidiary, as a corporation, and it should be — and we expect it to be — fully transparent through the corporate plan, through the Auditor General and its own transparency of what its projects are and how it's been funded.
The only provisions in the legislation about protecting privacy are merely the commercial interests of a party that comes in and perhaps bids on a project, and it's their information, the third party. But we anticipate full transparency on the projects and what it owns. If it has a subsidiary, that means the bank's position in a particular project will be known.
As my colleague said, every project over time, or the aggregate of projects, would need to have an accounting determination every year as to value of the asset under the infrastructure bank. If it's in a negative position, it would be recorded in the consolidated books of the Government of Canada.
[Translation]
Senator Carignan: I agree with the matter of evaluation. As for the oversight, nowhere is it written that you will not oversee the majority and what has to be audited is the minority. That is not in the bill. According to the bill as drafted, you agree with me that you could have an 80-per-cent subsidiary and deposit $10 billion there, with the auditor general having no oversight over the subsidiary.
[English]
Mr. Campbell: I'm not sure about the auditor question.
The legislation is permissive in the sense that it allows the bank to use these innovative tools to invest in a structure. It's hard to envision how those structures will evolve over time, and a subsidiary will be a project that it will have a stake in. Often, if it had a majority interest, it would be really controlled by the bank. If it were a minority interest, it is likely in the steward of one of our municipal-provincial partners. I'm not sure that there will not be an ability for the Auditor General to review that.
[Translation]
Senator Carignan: This is what I want to get clear. We have to be prudent and to point out the difference between what you are saying today and what is written in the bill. I understand your intention, but that is not what the text of the bill says.
[English]
Mr. Campbell: The legislation is quite clear regarding how subsidiaries will be treated and disposed of.
[Translation]
Senator Carignan: With 100 per cent control, I agree. But when it is 50 per cent or 75 per cent, that is not the case.
[English]
Mr. Campbell: I think the range of probabilities is there, senator, for the bank to have flexibility on how it treats its various projects. For example, over time, if the bank has five or ten projects, each one may have different securities attached which the bank may dispose of in the market. It may sell its position. It may redeem it in order to fund another project. That will have an impact on the amount of position that the Canada infrastructure bank holds in that project.
This is a natural market-oriented event. Just like the private partners can likely buy and sell their own debt and equity in a project, we're meant to replicate what happens in the marketplace today.
[Translation]
Senator Carignan: How do you define the term "infrastructure''? I see definitions of a number of key words like "chairperson'' and "infrastructure projects,'' but I don't see a definition of the word "infrastructure.'' When I look in the dictionary, I see that it could be a building, possibly even an aircraft. So is the bank going to be financing aircraft? I do not see a definition of the word "infrastructure.''
[English]
Mr. Campbell: Senator, as a Crown corporation, it can receive high-level priority direction from the Government of Canada and the minister responsible. Those directions and its scope will be reflected in the summary of its corporate plan tabled before Parliament.
There's already an ongoing discussion among our federation partners about what constitutes infrastructure. For example, many of our provincial partners want various forms of green infrastructure — water, waste water. For example, they're considering broadening the definition of "rural broadband'' as Canada changes.
The intent is still to remain inside the types of infrastructure that are set out in the Investing in Canada plan, and that will be where the Canada infrastructure bank is situated.
To the extent to which the bank is working on a pipeline of bankable projects that will be put forward by governments, that priority policy determination would have been made earlier on. We think that will be a transparent process.
Mr. Fleming: The only thing I might add is that the government did set out initial priorities in the budget in terms of specifying that, of the bank's funding, there would be at least $5 billion dedicated to public transit infrastructure, $5 billion for green infrastructure and $5 billion for trade- and transportation-related infrastructure.
[Translation]
Senator Carignan: So I am to understand that, even before the Canada infrastructure bank is established, it is already receiving directives from the government about where to invest. But the notion of infrastructure has not yet been defined, so it could mean whatever the government wants it to mean.
[English]
Mr. Campbell: That's too broad a characterization, senator, given the framing around the Investing in Canada plan and the various categories to which the government has set as its priority and it's engaged with our bilateral partners now in discussing what could be funded under the various envelopes of funding. So that's already providing a framework under which our partners are determining what infrastructure to put forward.
Of course, like any Crown corporation, it needs to be transparent as to its mandate provided by the government, and that is tabled in Parliament. How that gets through the corporate plan and the agreement with that particular Crown agency is how it will go about its mandate.
In this case, we're setting up the tool where the bank is not doing the policy analysis. Other levels of government are saying which pieces of infrastructure they would like to build. The bank is there on a pre-approved list of infrastructure that is in the public interest, which is determined both federally and by one of our partners. Then it goes away to see if it can make that project work with financing partners to the benefit of everyone. If it doesn't work, likely that project goes back into the queue for full 100 per cent government funding.
Senator Ringuette: Mr. Campbell, we've crossed paths many times. You're an expert salesperson. I hope my question will please you somewhat.
What is the total expected federal contribution to the overall infrastructure project for the next 10 years? Did I dream $40 billion? Did I dream $100 billion? What is the amount?
Mr. Campbell: The Government of Canada has set out under the Investing in Canada plan over the next 11 years to support infrastructure in Canada being built to the tune of $186 billion, of which $15 billion is the source funding for the Canada infrastructure bank. The additional $20 billion that we talked about earlier is going to be cash; it's going to be asset-liability matched.
From the Government of Canada point of view — very transparent — it expects to contribute in the federation $187 billion.
Senator Ringuette: Totally federal money — $187 billion over the next 10 years?
Mr. Campbell: Twelve years, pardon me. It's laid out in Budget 2017.
As a caveat, to the extent to which the bank money can attract and lever a private sector multiple, the $35 billion could go up to $140 billion, if it were 4 to 1. I'm showing an illustration that the amount of federal support that it could bring in through the $15 billion minority piece, less than 10 per cent of the overall envelope could have a multiplier of bringing more financing and funds into public infrastructure.
Senator Ringuette: Over the last 10 years — every year almost — we've seen a new unit created in a department of whatever. The Senate has put forth a report specifically on the infrastructure situation, where we have currently 10 different units dealing with all kinds of infrastructure requests: federal solely, provincial, municipal, and provincial and federal.
I've been on Parliament Hill for 30 years, but I cannot believe that all this time and with all these requests there is not an expertise in regard to evaluating the priority projects that need to be built and how they should be built.
We have a panoply of private sector businesses that design and build with public service tenders — designed and built. And now we have another entity that is supposed to provide expertise in assessing the priorities and so forth.
Four years ago, we also had the introduction of PPP. Essentially, this is what you're targeting: public-private partnerships. So you already have a list of these projects.
I'm trying to figure out, except for creating this new entity and a board of directors and a lot of nice political language to sell to the Canadian people, what is truly different in regard to infrastructure projects built under the PPP scenario and infrastructure projects with private funds that will be built under this bank? We're still talking about leveraging private funds.
Mr. Campbell: That's a very clear question, senator.
Going back to the earlier conversation, there is a marked distinction between public-private partnership models for the procurement of public assets that's funded totally by governments, and that's merely a model to go out and get the contracting to design, build, operate, finance, maintain; but it's largely a debt finance, which means the financing of that asset is all on the government balance sheet. It's all levered and it needs to be repaid.
There are efficiencies gained by the P3 model. A number of our provincial agencies have already been established and are working quite well. They're going to be working in partnership with the infrastructure bank. Once the financing of an asset maybe that would never otherwise have been created exists, they can still go to one of those agencies and manage all the procurement of all of those players very efficiently, no duplication.
In terms of what is new, these projects are revenue generating and relieve the pressure on public balance sheets, and right now there is a missing piece in the marketplace. All of our conversations with private sector investors, municipalities, provinces, there is no tool or expertise to do the credit equity underwriting to structure the deals to put the financing around one of those projects.
Canada has done really well in the PPP model. Many of our provinces are doing it very well, and there will be more PPP projects coming forward because a lot of the government funding, $180-some billion is largely going to go into funding more P3s in Canada. But this is a transformative option for those projects that are bankable, have a revenue model but need some very sophisticated project structuring of all those parties.
It will be a very small niche institution. We're talking about 50 to 100 people at maturity. It's intended to have a big impact, small cost base to provide a value-added service, and then work with all those partner agencies in the provinces. It's their choice. It's an optional tool. They can choose to put a project forward; they can choose the procurement model they would like to use, including PPP or other options. In our view, it's pretty clear.
Senator Ringuette: We still don't have a national plan and priority.
Mr. Campbell: The infrastructure bank will not be doing the prioritizing, the governments will.
Senator Wetston: I'm going to ask one question because a lot of territory has been covered and it's getting late.
It sounds to me, given your last response, that all these projects need to be financed. That seems to be the challenge. You started giving a bit of an impression that there are other issues which may be political, may be economic, but they just need to be financed and the financing is not there. That's just a comment. You may agree or disagree with that, but I don't mind your comment on it.
However, other than the public good, which this is meant to serve, is there any return on or of capital invested by the bank in this project? I mean for the government, obviously, or for the bank.
Mr. Campbell: I think the intent of this model as a mechanism is to deliver support in a very strategic way to put less federal money than it otherwise would in any particular project. The objective would be to have the commercial interests of the bank such that it need not support any more risk in that project than it need to. At the end of the day, if it had its capital returned, that would be a good investment. But if its investment absorbed that risk and our province or territory got an asset built and the public is using the asset and it really works well, that would have been money well spent because it would have been less than we otherwise would have put in.
On the latter part, senator, there is an abundance of financing in Canada for infrastructure, but it's largely debt financing, which just levers up government.
There is a funding issue to the extent to which if you use a user pay model, the core funding of that asset plus the private sector discipline, the project selection, the efficiencies around demand management, encouraging people perhaps to use public transit instead of something else, there are a lot of efficiencies there.
Senator Wetston: I understand the rationale, but I'm having a little trouble understanding the fact that many of these projects will be utilized for many years, user pay systems, revenue generating. I don't quite understand. The financing seems to be a bit of a problem; these are projects that otherwise would not be built. Why would the government not seek a return over that period of time on a user pay system? I think the public might find that quite acceptable. You're using taxpayer money. It wouldn't be built otherwise.
I'm not suggesting you revise everything, but it's just a thought. My perspective is that if you're going to act a like a bank, act like a bank.
Mr. Campbell: Senator, I think one of the deliberate purposes is to crowd-in, not crowd-out investors. If the government wanted to create a commercial bank, we have banks that are quite successful. I made the remark earlier that many of our commercial institutions are moving into various areas — green finance and the like — but they clearly said this is not a space for them.
I think moving to a model where they seek a return would suggest that there is no gap in the market. We're trying to find those projects where there is a gap in the market, where that tool is particularly beneficial in the public interest. You're crowding in, not crowding out. Where any other private investor says they would have participated in that project, either in debt or equity, then the bank would not invest in that project. If the project is too risky, even if it's in the public good, the bank will not take on that project. If it looks like there's too much of support needed — for example, it's been very hard for any revenue model to cover all the capital and operating of various assets. It would be too much of a burden to say the user fee is going to be so high that it needs to recover.
There is a lot of rationale for public support of assets. There's also support in various projects to use user pay in an appropriate amount for that asset so that Canadians can get more infrastructure to serve their needs. That's the model.
Senator Wallin: You are doing yeoman service here. I appreciate that. It's late for all of us.
I want to come at this in a very simplistic way with regard to what's in it for the taxpayer. We do know that a lot of these projects would not get done. Infrastructure, building sewer and waterlines, is not a sexy project. People aren't lining up to say they want to do it, so I understand the incentive that this institution might create. I think it does exist already through P3, but you're just saying this is another way in.
However, from the taxpayers' point of view, they will benefit if their sewer is built or their bridge or whatever it may be. But the taxpayer is also paying twice in a sense through investment loan guarantees, whatever it may be, fallbacks if there's a problem, and then through the user fee, however that comes out. As a consumer they pay; as a taxpayer they pay.
My second point and concern is that the CEO and the board members are appointed by cabinet, not even by government, so that always raises suspicions of politics as opposed to necessary projects and therefore the independence of the governance structure.
Third, because of privacy interests, it's going to be very hard to have access to information to determine whether or not these are actually successful projects. I know you're not in the money-making business, but at least is the money being wisely spent? It will be hard to assess that because of all the reasons we know. It will be hard to go in and get that information when government has access-to-information restrictions.
I know those are kind of three different things, but I'm coming at it from that point of view.
Mr. Campbell: Let me try to be brief, senator. Thank you for that question.
First, many of our provincial, territorial and municipal partners are already using user pay models, user fee models — public transit, electricity grids, tariffs, water user fees. So we would differ on the view that Canadians are paying twice, because they are getting more. In the aggregate, they're getting more; they're getting more built and to their benefit.
To your third point, governments will be determining through their own process — a municipal council, a provincial government, territorial, others federally — that this is something they want to have done. Saying that they have a congestion problem or they want to move goods and services from here to there, or people, they can go forward and say, "What is it that we need for a piece of infrastructure and then work with other partners to finance and fund it?''
Some of the academics we consulted like the idea of the more integrated planning, the longer time horizon, having the bank advise their provinces about alternatives to various project selection. I think that's key.
In terms of the governance structure, the government has struck the appropriate balance between independence and accountability. The fact that we're having this discussion, the bank is not engaged in commercial enterprise, per se. It's public assets that are being financed, and counterparties are the ones bringing them forward. The government has determined that there will be no government members; there's no deputy minister or anyone from the government on its board. Independent board: The board will be the one over time nominating and appointing the CEO; it just needs Governor-in-Council approval.
The way that is structured now, the board could be from 8 to 11 directors and one chair. The government is following an open and transparent selection process that's reasonably representative, equity terms. The minister has sent a note to provinces asking them all to suggest qualified names for this open process so that it's really representative, and you have a really qualified board to help make and guide how that operates.
Governments will determine whether they bring an asset forward. Of course, the Government of Canada on the front end, as a shareholder in the bank, has a right to make sure its funding is being directed to the projects that meet its criteria. The question on independence is key because at some point all the parties, including an investor in the municipality, will have to go back and say, "Here are the broad strokes of an agreement, and are we okay to move forward with the infrastructure bank?''
Like a credit fund, an equity fund will have to go back to their board to see if they are okay to do it. They will all do it at the same time, and at some point the infrastructure bank goes independently and works on a project structure to which they all agree. It's meant to mimic the private sector behaviour in forming a project among multiple parties.
Senator Moncion: Where are the infrastructure projects going right now? Who finances them? Which departments are getting them?
Mr. Campbell: The majority of infrastructure in Canada is built by our provinces and municipalities. The large part of federal support is channelled through bilateral agreements that are managed by Infrastructure Canada.
There is other funding that other departments are involved in steering. Those are other forms of federal support going into infrastructure, but the large part of infrastructure, given that 95 per cent is largely owned by our municipal, provincial and territorial colleagues, they're the ones that are really in charge of infrastructure.
Do you want to supplement, Niko?
Mr. Fleming: Sure.
Other infrastructure spending specifically for federally owned and operated infrastructure assets tends to be managed by the responsible departments. For instance, National Defence has a significant holding of infrastructure assets and does new builds and maintenance on those assets all the time.
For Defence and other assets, Public Services and Procurement Canada helps with the procurement.
As Glenn said, the majority of funding for provincially and municipally owned infrastructure, which is the majority of infrastructure in Canada, goes through Infrastructure Canada funding.
Senator Moncion: When the bank is created, will they be going through the bank or will they still go through the different departments?
Mr. Campbell: Thank you for the question. There will be a process to foster coordination among the various departments that are interacting with our provincial-territorial colleagues and those stakeholders that are involved in federal assets. I think the government's intent is to have the Minister of Infrastructure and Communities, to the extent I can say, be the minister responsible for the bank and therefore the minister responsible for working on the pipeline that the bank would then have. So we will have a filtering mechanism to engage with parties in the priority determination of which projects may be suitable for the infrastructure bank.
We've already catalyzed behaviour. I'm interacting daily with our provincial, territorial, municipal and federal partners, given they are already anxious about, "How do I think about it? I'm doing my long-term planning. When is the bank going to be up and running so we can interact with them to help us think through this selection process?'' My office is helping now because we're sort of borrowing into the future to say, "This is how we think the bank will work.'' We've succeeded already in catalyzing the behaviour among our partners to think that there may be another option to deliver infrastructure.
Senator Moncion: Is it the intent of the government to bring it all under one roof, like the bank?
Mr. Campbell: I think speaking for the government, the view is the bank will maintain its niche status not to be the majority. It's not setting the standard for the way infrastructure will be delivered. It will still continue to be through these other traditional ways at the end of the day, still with local decision making on their priorities together with some federal priority-setting.
Only projects from that process that could qualify for bank support will be through the bank. There will be one minister. Of course, the Minister of Finance also has a role to play in various aspects of approving the corporate plan. We think this is going to be well coordinated with all those other avenues of federal support.
The Chair: Mr. Campbell, we're going to need you to come back. Our clerk will get a hold of your office to organize another time so that we can finish off in time and get the report done and off to the chamber. There is still a whole bunch of unanswered questions. It's eight o'clock; I'm losing my colleagues here, so I don't want to end up with just you and me here.
With that, thank you so much.
(The committee adjourned.)