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Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue No. 20 - Evidence - May 18, 2017


OTTAWA, Thursday, May 18, 2017

The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:34 a.m. to examine 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.

[English]

The Chair: Good morning 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 David Tkachuk, and I am the chair of this committee.

Today we continue our subject matter examination of Bill C-44, the Budget Implementation Act, 2017, No. 1, and in particular Divisions 3, 8, 18 and 20 of Part 4 of the bill.

Honourable senators will know that our economy must report our findings to the Senate by Wednesday, June 7, 2017.

We have three panels today. To begin, I am pleased to welcome Darren Hannah, Vice President, Finance, Risk and Prudential Policy, Canadian Bankers Association to discuss Division 3, Financial Sector Stability.

Darren Hannah, Vice President, Finance, Risk and Prudential Policy, Canadian Bankers Association: I would like to thank the committee for inviting the Canadian Bankers Association to discuss Division 3, Part 4 of Bill C-44.

As committee members may remember, I appeared before you as part of your review of Bill C-15 in May 2016. That legislation enacted the legislative framework for the bail-in regime in Canada, which we continue to support.

My name is Darren Hannah. I am the Vice President of Finance, Risk and Prudential Policy at the Canadian Bankers Association. The CBA represents 62 domestic banks, foreign bank subsidiaries, and foreign bank branches operating in Canada, and their 280,000 employees.

Strong, sound banks help families buy homes and save for retirement, help small businesses grow and thrive and drive the economy. Over half of all business lending in Canada is provided by banks. In fact, as of September 2016, total authorized lending surpassed $1 trillion, up an estimated 4 per cent over the previous year and 30 per cent since September 2011.

Canada's banks are prudent lenders and continually work to make credit available to credit-worthy Canadians and businesses in Canada. This prudent approach is a key reason why Canadian banks avoided the financial difficulties that plagued banks in other countries. Maintaining these sound fundamental principles of prudential lending is important to Canada's banking system and is in the best interest of all Canadians.

The amendments being proposed in Bill C-44 are technical changes to further strengthen Canada's bank resolution regime. These amendments do the following: formally designate the Canada Deposit Insurance Corporation as the resolution authority for its members; require Canada's largest banks to develop and submit resolution plans; and provide the Superintendent of Financial Institutions with the flexibility to set and administer the requirement for systemically important banks to maintain a minimum capacity to absorb losses in resolution.

During the financial crisis, there was significant turmoil in the global financial system. A number of banks in other countries became insolvent and either failed or received taxpayer-funded bailouts. In Canada, this was not the case. No bank was in danger of failing and no government bailouts were required. Canada's banks were well-capitalized, well- managed and well-regulated going into the financial crisis and remain so today.

As you know, the global financial crisis led to a series of significant regulatory changes to international banking standards. These efforts and regulatory reforms were designed with the objective of reducing risk in the global banking system and helping prevent another financial crisis. While these standards are set internationally, it is up to domestic regulators to translate these international standards into domestic rules and to enforce them.

The financial crisis demonstrated that it is important for banks, particularly large global banks, to have a plan in place to unwind its operations with minimal disruption to the overall financial system. These plans are known as resolution plans.

It is important to note that CDIC has been acting informally as the resolution authority for its members and requiring Canada's largest banks to develop and submit resolution plans for several years. As such, we do not have any concerns with codifying these authorities in CDIC's legislation.

A key element of the global financial reform agenda is a bank recapitalization framework, otherwise known as a bail-in regime. The idea was originally proposed by the Financial Stability Board, which was established in 2009 to monitor and make recommendations about the global financial system.

In 2011, the Financial Stability Board published a report entitled Key Attributes of Effective Resolution Regimes for Financial Institutions, which provided a high-level framework for a bank resolution regime to protect taxpayers. This was officially endorsed by the G20 in November 2011 as part of its broader financial sector reform agenda.

The federal government then began exploring potential options to institute a bail-in regime for domestic systemically important banks in Canada.

Bill C-15, passed by Parliament last year, established the legislative framework for the bail-in regime in Canada. Currently, we are working closely with the government on the development of regulations and guidelines which would set out further features of the bank resolution regime. We look forward to commenting on the draft regulations and guidelines once they're released.

In short, a bail-in regime provides a framework to allow the conversion of certain long-term debt obligations into capital in the unlikely event that a bank depletes its capital and is in danger of failing. It provides a strategy to ensure that losses are borne by shareholders and creditors and protects taxpayers in the event of a bank failure. The bail-in regime does not capture deposits as part of its resolution framework. Instead, the bail-in regime is an added level of protection for depositors as it provides a roadmap to recapitalize the bank so that it can remain in operation.

Furthermore, eligible Canadian bank deposits are already insured up to $100,000 by the Canada Deposit Insurance Corporation in the unlikely event that a bank fails so that customers can rest assured that their deposits are safe.

The bail-in framework ensures that Canada remains consistent with international standards endorsed by the G20 and provides the government with another option in its resolution tool kit, despite the strength and stability of Canadian banks. We are supportive of the framework and look forward to continuing to work with the government as it finalizes its regulations to complete the bank resolution regime.

Thank you again for the opportunity to present our views. I look forward to your questions.

The Chair: Thank you.

Senator Ringuette: Mr. Hannah, nice to see you again. I certainly agree with the proposed legislation, but I am somewhat concerned. I will explain.

During the "taxpayer-funded bailouts,'' as you called them, in the U.S., Canadian banks with subsidiaries in the U.S. did receive this bailout money from U.S. taxpayers for those subsidiaries. Right now, we are in a situation where we have seen a reduction in banking regulations implemented by the new administration in the U.S.

Do you find that it is producing a different level of playing field for your subsidiaries and, therefore, your maisons maîtres in Canada? How do you see the current legislation in front of us impacting all of your operations?

I know that you have already put in place, under voluntary measures, most of these provisions, but is that the case for your U.S. subsidiaries? I'd like to understand where it lies with regard to the North American context.

Mr. Hannah: Thank you for your question. There are multiple parts.

I will start by saying that I'm not going to try to speculate on where the U.S. is going from a regulatory point of view. That has become a spectator sport in and of itself.

I will say that the U.S. has its own particular robust regulatory framework, and where Canadian banks are operating there, they certainly abide by it.

That said, our principal interest and support for this legislation is ultimately to ensure financial stability in Canada for Canadians, and that is what we believe it does.

Ultimately, as international institutions, Canadian banks operate on the basis of the regulatory framework that they face in each jurisdiction. They recognize that and go in with that understanding, and they work to that basis. But they are ultimately Canadian financial institutions and proudly so.

Senator Ringuette: Well, the U.S. reduction in banking regulations is not speculation; it was officially announced by the White House.

I appreciate that you view this bill very favourably.

Senator Wetston: Thank you for coming today.

I want to explore this a little differently because these resolution regimes have been discussed for several years, as you have indicated, primarily supported by the work of the Financial Stability Board, Basel, a lot of European and U.S. involvement, being the significant jurisdictions that have been exposed more to the failure of the global banks than Canada was during the financial crisis. I think you indicated that.

Let me just ask you a question or two about these resolution regimes. For example, there is a lot of business in the U.S, and Canadian banks have a lot of business in the U.S. We don't know yet the extent of the regulatory reform that will occur with Dodd-Frank. We are seeing some signs, but we don't know the extent of that yet. So I would more or less agree with your notion of waiting to see what might occur there, putting words in your mouth a bit.

Cross-border cooperation is the key, because if institutions fail in another jurisdiction, then the jurisdiction in which the bank is headquartered will have concerns about what it can do and how it will be affected. There is a great deal of cross-border cooperation, and the FSB, of course, attempted to initiate some of that.

Given the Canada-U.S. situation, what is your sense of the CBA with respect to cross-border cooperation in the event that there is a failure in the U.S. that comes back into Canada and affects Canadian banks?

Mr. Hannah: I think what you are getting at is a concept called solo capital that regulators internationally have been working on for some time that goes to exactly your point. How do you manage the cross-border contagion risk? The way they've opted to do that is to have institutions look at what the solo capital is within each of their regulated affiliates and subsidiaries and what that would be during a time of stress to try to get at that issue, namely, to what degree I can or cannot access capital abroad. If I can't, do I have sufficient reserves domestically to make sure that I am able, on a stand-alone basis, to continue operations? That is certainly an issue that regulators have been grappling with and working at for some time because they have raised exactly the same point that you have raised.

Senator Wetston: I want to point out that what will occur here is a great deal of reliance from one government to another government; a regulator to another regulator. Whether it be in securities, banking or more in deposit-taking insurance, as CDIC exists, that issue of reliance is going to be pretty critical. One jurisdiction will have to rely on another jurisdiction as they perform their compliance and audit functions and deal with that resolution, which could also deal with issues of insolvency and bankruptcy. Has the CBA looked at it from that perspective and worked with the banks on those types of issues? Because it deals with reliance by governments, not just the banks and their subsidiaries.

Mr. Hannah: We work with our members on a broad variety of regulatory issues that are put before them, either by OSFI or any other regulator with whom they are involved within the Canadian context.

Certainly, what I can say is that, post-financial crisis, this entire issue of the importance and necessity of regulators communicating with each other across borders and internally, within jurisdictions as well, has become key because that recognition came through all of that. Do we work with our members on that? We certainly do in so far as regulatory questions and proposals come up in the Canadian context.

Senator Moncion: Thank you for being here.

The changes that are in legislation are minimal, and they will have minimal impact on the operations of the banks. I understand that well. How is IFRS going to impact you?

Mr. Hannah: It is hard to speak on the exact impact. Different elements are coming on board — IFRS 9. It will change financial reporting and have some impacts, potentially, on how financial reports are stated.

Ultimately what matters is the financial strength of the institution. That doesn't change. Accounting rules simply change how I demonstrate that and how my financial results are reported. What really matters is ultimately the strong management and strong decision making within the institutions. That doesn't change, irrespective of what method I choose or ultimately have to make my financial reports based on.

Senator Moncion: With the loan allowance, you will be putting more money into it, so you will add another layer of protection to the financial stability at some point.

Mr. Hannah: As I said, certainly it will have an impact around financial reporting and around how I account, but ultimately it will not change from the point of view of financial institutions. That core prudent judgment is ultimately what drives success and failure. It's not driven by accounting. Accounting has an impact, but at its core, what makes Canadian banks strong is their prudent decision making, and that doesn't change.

Senator Moncion: So what is in the legislation right now is not an issue for banks. Talking about it forever will not change the changes brought forward, and they are not having a large impact on the banks.

Mr. Hannah: What is in here reflects the measures being proposed in the legislation, and from our perspective, it simply provides certainties and codification of what banks have already been engaging in with their regulator to provide that additional loss absorbency, to work with CDIC, to develop resolution plans that are effective and robust. We support all of that and that doesn't change.

Senator Massicotte: I will follow up on Senator Wetston's question.

When we were in New York a week ago, this issue was raised that when you get to a certain asset size — as you know, they basically manage the foreign banks, but it is a different department from the fed and they manage it differently depending upon the size. They put a quite a bit of emphasis on having a parent company of the subsidiary, in other words, trying to segregate as much as possible any contamination of a problem in one country. Obviously they don't have jurisdictional rights over our Canadian banks and businesses.

Could you explain how that works? I remember, in 2008, there was serious alarm about some banks being insolvent in some countries and solvent in others.

Can you explain how that works? How do Canadians get protected so that any contamination problem in the United States does not come here to be borne by the Canadian depositors and, more importantly, the debentures or debt that potentially would be converted in a parent company?

Mr. Hannah: As I mentioned, a few things will happen here.

First, the resolution planning process itself is supposed to plan through what the implications would be and how the bank would maintain its financial stability and solvency. They have to think through what the implications are in different jurisdictions and what they would do if operations in different jurisdictions start to find themselves in financial distress. That is part of the thought process they need to go through.

Solo capital rules are designed to deal with the issue of ensuring that banks' different operations in the Canadian context are sufficiently sound and robust in and of themselves so that they can withstand them on a solo basis.

In addition, in other jurisdictions, depending upon the size and scope of the institution, they may well have to file resolution plans in those countries as well, if they are sufficiently large from a relative perspective to be considered systemically important in those countries.

Ultimately, it comes back, as Senator Wetston said, to the point about communication, that regulators have to talk to each other in the event you have a shared concern.

Senator Massicotte: If I am correct, the resolution plan for the consolidated operations worldwide and, in our case, you do it for Canadian assets and liabilities specifically. Am I correct in saying that?

Mr. Hannah: In effect, yes. You are certainly going to be doing a resolution plan for your institution worldwide, and you have to look at it from the perspective of what happens to the Canadian operation and how to keep the Canadian operation sound.

Senator Massicotte: I remember in 2008 some banks let their foreign branches die or become insolvent for the sake of protecting the local bank. Therefore, you have to do both to ensure each one independently could survive the stress of a financial crisis.

Senator Enverga: Thank you for your presentation. You said that during the financial crisis, basically our Canadian banks were not affected by the turmoil.

With these new changes, you have been doing your due diligence in the banking sector, which is good. However, this time they are proposing that the Minister of Finance must approve the bylaws in order for anything to become law on your end. Do you have any concern with that?

Mr. Hannah: There is really nothing in the legislation that concerns us in that respect.

The processes that the government feels that it needs to go through in order to satisfy itself that the regulators have the authorities that they need are, from our point of view, almost exogenous. That is what the government feels it needs and what the regulator feels it needs.

From our point of view, banks work closely with their regulator to be able to satisfy the regulator that they are prudentially sound. They work closely with OSFI to provide them with certainty about the capitalization of institutions. None of that changes. There is nothing in here that gives us any great concern that way.

Senator Enverga: But wouldn't they have a direct hand in your bylaws? Would you agree with that?

Mr. Hannah: There is nothing from my perspective on these particular sections that really changes the relationship with OSFI itself. OSFI has a great deal of authority and latitude over the operations of financial institutions right now. Certainly we want to work with them to make sure they are satisfied that banks are well run, well capitalized and have strong corporate governance.

Senator Massicotte: Given we have the privilege of having the Canadian Bankers Association with us, could I ask a question regarding other parts of the bill we are reviewing?

The Chair: I do not see why not, as long as they agree.

Senator Massicotte: Part of our study is the proposed infrastructure bank. I understand, given the nature of business, that you don't see that to be a competitor. These are not things you would do because you are predominantly in the debt business. Am I correct in saying that?

Mr. Hannah: The CBA doesn't have a position on the infrastructure bank. You are right; it is not a bank in the sense that a charter bank would be. It is not out there taking deposits. In that sense, the label "bank'' is something of a euphemism. Institutions may choose to do business with it, but that is a commercial decision. From the CBA's perspective, it is not something we take a position on because it is not a banking policy issue, per se.

Senator Massicotte: Given your extensive experience relative to some difficult years, and so on, do you have any advice on the structure? Is the governance okay? Are we going in the right direction? Will we regret it 20 years from now?

Mr. Hannah: I wouldn't be the right person to speak about that, senator. I am certain there are others more qualified to speak about that kind of organizational design question.

Senator Wetston: Do you recall the asset-backed commercial paper crisis in Canada?

Mr. Hannah: Yes.

Senator Wetston: Had it not been resolved, the magnitude of that crisis was in the range of $30 billion. Are you aware of that number?

Mr. Hannah: Not offhand, but I will take your word for it.

Senator Wetston: Recent authors have suggested it is around $30 billion.

I am asking a bit of a preamble, chair.

It was actually the only "financial crisis'' that was resolved by the private sector without government intervention. Are you generally aware of that?

Mr. Hannah: Yes.

Senator Wetston: There were regulatory actions, however, both by the OSC as well as IIROC in that matter, and there were some banks involved. Are you aware of that as well?

Mr. Hannah: Yes.

Senator Wetston: I am asking this question because I don't recall CDIC having to be involved whatsoever. Are you aware of that? I am not sure.

Mr. Hannah: I wasn't specifically involved, but I don't recall any mention of CDIC in the context of that.

Senator Wetston: With regard to the resolution regimes that are being proposed and the tool kit that will be developed, are you aware of what would be contained in the tool kit?

I recognize that they have experience with this already, and they are putting into actual legislation what they have been more or less developing over the last number of years.

Tell me a little bit more about the tool kit. I would like to you make an assumption here. The asset-backed commercial paper crisis did not get resolved and there was an actual crisis that needed to be dealt with. Do you believe that the tool kit would be sufficient to address those issues?

Mr. Hannah: It's hard for me to answer that specific question about belief. The CDIC would be in a much better situation to articulate its tool kit. Generally speaking, it can do several things. It can come in and take control of an institution. It can do a forced liquidation. It can do a bridge bank, which is effectively separating out the good assets from the bad assets of the institution, relaunching a smaller but financially sound institution and selling off the bad assets of the institution. It can do a forced sale. On top of all of that, of course, it can also change management. So it has a number of options available to it.

Senator Wetston: Who does that? CDIC or OSFI?

Mr. Hannah: CDIC is the resolution authority.

Senator Tannas: There are a couple things I wanted to make sure I fully understood.

With the bail-in provisions that we are talking about here, foreign banks are not subject to the bail-in resolution requirements in Canada; is that correct?

Mr. Hannah: Correct. The bail-in requirement is only applied to the domestic systemically important banks, which are the six largest banks as designated by OSFI.

Senator Tannas: Are you aware of any — just for better protection — securities that exist issued by foreign banks that have a bail-in provision that would prop up a Canadian subsidiary of their institution?

Mr. Hannah: Say that again? I didn't quite follow it.

Senator Tannas: For instance, does Citibank have any securities in the market that would bail-in Citibank Canada, as an example.

Mr. Hannah: That's a good question. I don't know the answer.

Senator Tannas: Could you maybe just follow up and let us know?

We have had a discussion about the foreign banks, and so on, and my sense is it's irrelevant because I don't think the foreign banks have any bail-in capital that they have issued that would be specific to Canada, right? So what do we care? Other than the fact that we're making our big six banks take on a layer of capital that all of the others who compete with them are not taking on.

The other question I have — and you may be the wrong person to ask — is if the regulators looking at this say, "Oh, wait a minute, now we have a different standard for an American or Hong Kong subsidiary in terms of capital requirements,'' there must be some adjustment being done behind the scenes by the regulators, I would assume, to make sure that everybody is carrying the same capital load. I wanted to get that on the record because I think that's the question that we should be asking.

It doesn't have to be you, Mr. Hannah. Maybe we will follow that up somewhere along the way, to follow on Senator Wetston and Senator Massicotte.

The other question I had was with regard to IFRS, the International Financial Reporting Standards, and Senator Moncion's question about what this does. I understood you to say that the IFRS and the way in which our institutions are reporting their financial results has no impact on the way in which the regulators look at the soundness of their capital situation. A good example would be preferred shares, which used to sit in the equity of banks and now sit, thanks to IFRS, somewhere else. The regulators didn't light their hair on fire and say, "Oh, my God, you've lost all this equity.'' The security didn't change. What they did was change their measurements to match up with IFRS. Would that be a fair statement, do you think?

Mr. Hannah: What I said, just to clarify, is that ultimately what drives the strength and stability of the financial sector is not the way that financials are reported but the underlying quality of the underwriting, the quality of the loan- making decisions and the quality of the portfolio.

Senator Tannas: And the quality of the capital, which doesn't change.

Mr. Hannah: And the quality of the capital that doesn't change.

Do regulators have regard to how financials are reported? Certainly they do. They have to look at that. Ultimately though — this would be a better question put to the regulator — how do they allow for changes in financial reporting in their decision-making process? That's something you should be talking to the regulator about. They can give you a better answer than I can.

Senator Tannas: Thank you.

Senator Massicotte: I want to follow up on the response to the question. Am I not correct that capital needs are largely defined by international norms and the committee that is set up internationally to require, depending on systemic risk and so on, those norms, and that we're trying to satisfy those norms and often exceed them to make sure we're viewed as being very safe?

Mr. Hannah: The short answer is yes, but I think the key word in there is "norm.''

The way the international regulatory system works is you have the Basel Committee and the FSB that set international norms or standards, but decisions about the actual regulation and how that's implemented happen on a national basis.

Senator Massicotte: But to respond to the fact that we would be in an uncompetitive position if our norms and practices are so much more severe than the American banks, for example, that's probably not applicable given that we're all trying to follow the same international norms. Is that accurate?

Mr. Hannah: We are always concerned to make sure that Canadian banks are competitive. We are always concerned to make sure that we don't put ourselves in a non-competitive position.

If everybody followed the same standards internationally, that wouldn't be an issue. Does everybody implement in the breach the same way? That's a different question. From my point of view, it is a separate question from whether or not we should be giving the regulator here sufficient authority and power to be able to do what it feels it needs to do.

Senator Ringuette: I want to clarify something. You represent 62 domestic banks. Six of those banks are classified as systemically —

Mr. Hannah: Just one clarification: We represent 62 banks, domestic and foreign.

Senator Ringuette: Exactly. But the proposed legislation says that the six will be under the supervising plans for bail- in by OSFI.

Yesterday, the Canada Deposit Insurance Corporation said that it supervises 91 members. So you have 56 domestic and foreign banks. Then you have the rest of the financial institutions that take deposits and are under the Canada deposit insurance bank. I wanted to know if you have something to add to this, because I was under the impression that this new proposal for the Canada deposit insurance bank did not require foreign entities operating in Canada to do a bail-in plan.

Maybe I heard it wrong, but I want to clarify that at the end of the day there is a bail-in plan for all the financial institutions. Six will be operated and under the direction of OSFI. The rest will be under the direction of the deposit insurance bank.

Mr. Hannah: To clarify, any chartered bank in Canada is regulated by OSFI. Those that take deposits in addition are also overseen by CDIC as the deposit insurer.

Senator Ringuette: Exactly.

Mr. Hannah: If any of those institutions are designated as systemically important, in addition to that, they would have to be participants in the bail-in regime and they have to file a resolution plan with CDIC.

But any deposit-taking institution in Canada, and any deposit-taking institution that is federally chartered, is regulated by OSFI. Anyone that takes deposits and is federally chartered is insured through CDIC.

Senator Ringuette: Thank you very much.

The Chair: Thank you very much, Mr. Hannah.

I'm pleased now to welcome following witnesses who will speak to us about Division 18, the proposed Canada infrastructure bank act: Andrew Claerhout, Senior Managing Director, Infrastructure and Natural Resources, Ontario Teachers' Pension Plan Board; Mark Romoff, President and CEO, The Canadian Council for Public-Private Partnerships; and Colleen Campbell, Vice-Chair, BMO Capital Markets.

Mr. Romoff, please start.

Mark Romoff, President and CEO, The Canadian Council for Public-Private Partnerships: Good morning, senators, and thank you, chair and committee members, for inviting me to appear this morning. As the chair mentioned, I am President and CEO of the Canadian Council for Public-Private Partnerships. I'm pleased to speak to you about the council.

You may know that the council is a not-for-profit, non-partisan, member-based organization with broad representation from across all levels of government in Canada and the private sector. Its mission is to promote smart, innovative and modern approaches to infrastructure development and service delivery through public-private partnerships, or P3s as they are commonly known. The council is a proponent of evidence-based public policy in support of P3s, the education of stakeholders and the community on the economic and social benefits of public-private partnerships, and the facilitation of the adoption of international best practices.

I should emphasize that the council is not a lobby group. Rather, it works as a partner with governments to enable them to achieve the best outcomes and the best value for taxpayers from their respective infrastructure investments.

The council is pleased to speak today in support of Bill C-44, in particular the act to establish the Canada infrastructure bank.

As you probably know, Canada is facing a massive infrastructure deficit that some peg as high as $1 trillion. This deficit hinders productivity, economic growth and the social well-being of Canadians. For these reasons, more investment in infrastructure is absolutely critical, because we all know that it drives job creation, productivity, economic growth and prosperity, and global competitiveness.

The council is pleased that successive governments have recognized this reality and have put historic resources into overcoming the infrastructure gap in this country. Notable in this regard is the unprecedented and ambitious federal investment of $186 billion over the next 12 years.

But government cannot and should not do this alone. Governments have limited budgets and must allocate accordingly amongst competing priorities. Government spending on its own will not fix the infrastructure problem. That is why we view the establishment of the Canada infrastructure bank as an important and timely initiative.

At the same time, Canada is fortunate because we have an experienced, world-class infrastructure sector that is investing heavily in this country's public assets. There are now 258 public-private partnership projects across the country, and those that are in operation or under construction are valued today at more than $122 billion. This is not an insignificant portfolio in a Canadian context. These projects are building everything from new hospitals, to water and wastewater facilities, to public transit.

By bringing in the private sector to design, build, finance, maintain and in some cases operate an asset for a long term and with a fixed-price contract in place, the federal government is able to get high-quality infrastructure built on time and on budget, and with the exceptional value for taxpayers.

The Canadian Centre for Economic Analysis has independently estimated that P3s have saved Canadians as much as $27 billion over the last 25 years, since they began. These projects are being built 13 per cent faster than those brought to market in the traditional way, which has added a further $11 billion in value to the Canadian economy. Most important, P3s are creating 115,000 jobs and generating $5 billion of additional wages, on average, every year. This strong track record of success has resulted in the Canadian P3 approach being recognized around the world as best-in-class.

It is important to remember that in all of these projects, they are still publicly owned and publicly controlled. This is in no way a privatization of government assets.

We know that Canadians are wary of privatization on the one hand but also have little faith that government can build infrastructure on time or anywhere near on budget. That is why we have consistently seen support for P3s hover around two thirds to 70 per cent of Canadians across Canada, according to polling recently completed by Nanos Research.

We believe the Canada infrastructure bank is the next step in the evolution of public-private partnerships in Canada. Earlier this week, I had the pleasure of explaining this to a House of Commons Finance Committee.

Essentially, it boils down to this: In Canada, most P3s are done on what is called an availability-based model. That means if the private sector delivers an asset on time and keeps the asset in good working condition, they are paid by government in full. While this will continue to be a highly used model in Canada, particularly for social infrastructure, government has not fully leveraged their investments on projects with revenue-generating potential. If government is fully funding projects, they will be limited in the number of projects they can move forward.

On the other hand, revenue-risk P3 models are those where government asks the private sector to take on demand or volume risk associated with projects. Where projects have a revenue stream, the government can actually reduce the amount of money it spends on a project because the private sector will collect some or all of its payments through this revenue stream.

Quite simply, we have a funding problem in Canada, not a financing problem. There is no shortage of private capital waiting to be invested in Canadian infrastructure. We believe that, if structured appropriately, the Canada infrastructure bank can reduce overall public expenditures by transferring revenue risk while ensuring that projects are delivered on time and on budget and are well maintained over the life cycle of an asset.

When I say structured properly, I mean that each project that comes to the infrastructure bank must, first and foremost, have a strong business case, and the procurement process that follows must be competitive, efficient, transparent and fair.

It must also be recognized that not all governments have the capacity or expertise to successfully procure the large, complex, revenue-generating projects that will be the purview of the bank. In these instances, we would urge government to establish a project preparation fund, which would be available to less-experienced provinces, territories, municipalities and indigenous communities, to acquire the consulting services and advisers necessary to successfully take their projects to market.

P3s are not a panacea, but we strongly believe that for large, complex projects, there is a real opportunity to further leverage federal investments to draw in more private sector capital, transfer risk and, ultimately, build more critical infrastructure in this country. That cannot be stressed enough. The bank has the opportunity to build more infrastructure in Canada that might not otherwise come to market.

Now that the location of the bank has been decided, the important next steps are to recruit a high-quality and experienced chair, an equally high-quality board of directors and a CEO, who together will put the flesh on the bones of this new institution. Under strong, capable leadership, my council is confident that the Canada infrastructure bank will be well-positioned to continue the country down a path of success, and the council is pleased to support the act before this committee.

Andrew Claerhout, Senior Managing Director, Infrastructure and Natural Resources, Ontario Teachers' Pension Plan Board: Thanks for having me. My name is Andrew Claerhout, and I head the Infrastructure Investment Division of the Ontario Teachers' Pension Plan. Ontario Teachers' is one of the largest pension plans in Canada, with $175 billion in assets under management, $18 billion of those assets being in infrastructure.

Also notable is the fact that we were a very early participant in the infrastructure-investment area. We have been doing it for more than 15 years, and we have investments around the world.

Since the idea of the infrastructure bank was first introduced by the federal government in the 2016 Fall Economic Statement, Teachers' has said that they were highly supportive of it, with a general health warning as a caveat. The general health warning was that the devil is in the details. We need to get the implementation right. More specifically, we support the creation of an institution that includes a significant pool of capital — and I would suggest that $35 billion is significant — that will strive to accelerate the development of critical infrastructure by identifying the highest priority projects, that will enhance the projects to attract or, in other words, "crowd in'' private sources of capital and, finally — and this last point is quite critical — that will be overseen by an independent and highly qualified board and management team.

However, as I mentioned earlier, the trick is successfully achieving these goals through implementation. I suggest that this will require adaptability and agility.

Canada's infrastructure needs, as Mark referred to earlier, are vast and growing, and despite the fact that there are billions of dollars dedicated to investing in infrastructure, there are still too few investable projects. That's driven by the fact that the risks of new infrastructure are either too great or the returns too low or a little bit of both. There is an abundance of capital available that has been earmarked for infrastructure investments, including tens of billions of dollars based right here in the hands of Canadian institutions that are global leaders at investing in infrastructure. These names will be quite familiar to you. They include Ontario Teachers', Brookfield, CPP, PSP, La Caisse, and others.

In order for the bank to enhance project returns to attract or to activate that private capital, it must invest by way of what is referred to as bridging capital, which means it's capital that is going to earn a lower rate of return than investors like Teachers' or others would expect. The benefit of providing what is essentially a subsidy is that the government will be harnessing private capital to achieve its policy objectives.

I cannot stress the next point enough. It's absolutely critical that the board and the management team of the bank are both independent and highly qualified: independent, because the bank must be held accountable for its investment decisions and not be subject to political interference; highly qualified, because we're talking about vast sums of money here, $35 billion, and an area, infrastructure investing, that requires a high degree of expertise. So we want to make sure that the board and the management team have that expertise, have that experience, so that they can oversee the bank suitably.

At the risk of being blunt, we believe that the bank will only be able to attract the type of high-quality board member and the type of high-quality CEO if it is suitably independent from government. Accordingly, the right governance model, which balances the appropriate level of independence from political intervention, is the single most important issue in my mind.

The bank is both being created by the federal government and entirely funded by the federal government, so we understand that the government will need to have a say in how the capital is invested. We suggest, however, that the government sets out broad policy objectives. Two examples would be easing congestion in some of the larger cities in Canada, and creating international trade routes between Canada and foreign destinations, trade partners like Asia. But once those have been defined, the bank, its board, and its management team should then determine which projects are best suited to achieving these objectives.

At all times, the bank should also be the one who would oversee the project details, including the structures used, how it's financed, how it's procured, et cetera, creating a very clear and distinct separation between the duties of government with respect to the bank and the duties of the bank itself, the board and its management team.

We encourage, therefore, those working on implementing the bank to focus on achieving that delicate balance between politics and business imperatives. This will help to create a predictable investment framework.

There has been evidence of this in other institutions in Canada. This is going to sound self-serving, but we only need to look at the leading pension plans in Canada, like Ontario Teachers', like CPP, where there is a clear distinction between government's role, or the funder's role, and the management's role. Those institutions have been very successful, and, frankly, they are the envy of other countries around the world to create institutions like the pension plans. So I would encourage the government to look to how they've structured CPP, as an example, as a guide for how they should approach governance in the Canada infrastructure bank.

I want to thank you all for having me here. It's a real privilege to be here with you. Of course, once we're done our statements, I welcome any questions.

Colleen Campbell, Vice-Chair, BMO Capital Markets: I'm pleased to be here this morning to offer my perspective on infrastructure financing in Canada and offer comments, where helpful, to the committee on the proposed Canada infrastructure bank.

I have been working in investment-banking and debt-capital markets for over 35 years, in particular in the area of infrastructure bond financing in the Canadian market. At BMO Capital Markets, the investment and corporate banking arm of BMO Financial Group, I started our infrastructure practice in 1997. We have a strong expertise and success in this area. In particular, we have been a major participant in the market for public-private partnerships, both as an adviser to government and as an adviser and an underwriter/lender to bidding consortiums. This includes Ottawa's own LRT project where we advised the government.

I am also proud to serve as the vice-chair on the Board of Directors of Infrastructure Ontario, an arm's-length provincial Crown agency of the Government of Ontario. One of our roles within Infrastructure Ontario is to manage, build, finance and enhance the value of Ontario's public assets. Infrastructure Ontario makes use of alternative financing and procurement to help finance the building of infrastructure across the province.

I would add, consistent with the comments made on our public pension plans, Infrastructure Ontario is the envy of the world in terms of how it conducts this activity.

Throughout my career in this space, I have observed the significant benefits that accrue from the participation of the private sector in the infrastructure space. My time at Infrastructure Ontario, in particular, has shown the ongoing benefit of bringing together expertise from both the public and private sectors to ensure that the right projects are initiated and completed on time and on budget.

The Canadian infrastructure bank represents an additional opportunity to bring together stakeholders to expand and improve infrastructure finance in our country to the benefit of our economy and all Canadians. My goal this morning is to answer any questions you have on the role that private capital plays in the infrastructure space and the possibilities that might flow from the creation of this new institution.

Mr. Chair, thank you again for the opportunity to speak to you today. I look forward to answering questions.

The Chair: I have a couple of questions to start.

Mr. Romoff, you said at the beginning that your organization believes in evidence-based public policy. KPMG was part of the consultive process that the Government of Canada undertook, but it wasn't that positive about the infrastructure bank. Could you help me out with that? What other evidence-based policies were there that led to the infrastructure bank that you are aware of?

Mr. Romoff: To be honest, chair, I can't comment on that because I haven't actually read the KPMG report, so I am not familiar with the content. I know they made some comments that I saw in the press, but I don't have the detail there.

When I talk about "evidence-based,'' I am referring to the research that I quoted earlier, which demonstrates the economic impact of investing in infrastructure and, in particular, the advantage of using a public-private partnership model over traditional procurement.

As you know, there are good examples here in this city, in Toronto and right across the country. Projects procured in the traditional way tend to come in late and well over budget. Furthermore, unlike public-private partnerships, most of those other projects don't include any regular long-term plan around maintaining the asset. In fact, that is a vulnerability because most governments tend to focus less on maintenance, and particularly when there are budgetary problems, they tend to move funds away from maintenance to other activities.

Our evidence is based on the review of the performance of these projects in Canada and what we have seen occurring as a consequence of the 25 years that we have moved ahead with a P3 approach.

The Chair: I am a pretty big fan of public-private partnerships.

Mr. Romoff: Thank you.

The Chair: When you talked about the bank, you talked about projects that have a good business case. I am good with that. But then we had Mr. Claerhout say that, frankly, these particular projects require — and I couldn't get the department officials to call it a subsidy, but you directly called it a subsidy. If it requires a subsidy, it obviously doesn't have a good business case.

What are these two points of view staring at me? What are you two people talking about, really?

Mr. Romoff: I have a couple of comments, I am sure that Andrew will jump in. We are not exactly on the same page on this particular issue.

Irrespective of whether these projects are delivered by the bank, the P3 approach or the traditional way, unless you have a compelling business case as to why this project should come to market, you shouldn't do it because inevitably it will be a failure. We have been fortunate in Canada, certainly on the P3 front, as to not have those. Other countries have them. We have recognized that.

What is interesting about the Canada infrastructure bank is the hope that it will enable projects that wouldn't normally come to market to come to market. That is really a function generally of risk. It may be riskier. It may be that the government's programming — what the bank will have the ability to do — may in fact be to de-risk that project to a point where it becomes attractive to private capital.

What is not clear yet is the various functions the bank will have. That is why it is important that we quickly move ahead with identifying a chair, a board and a CEO because those individuals will take the concept and turn it into reality.

The Chair: Mr. Claerhout, everyone would like to have a business that is de-risked. Do you mean that governments will actually write a cheque to start it, to lower the amount of investment necessary, or will they guarantee the investment?

Mr. Claerhout: It could take many different forms.

The Chair: It's possible they'll guarantee the investment.

Mr. Claerhout: It could be. It could be a minimum traffic guarantee if it is a transportation asset, for example. It could be participating in equity with a first loss provision. It could be giving a loan guarantee such that you can procure a loan at a low interest rate. It could be many things.

One thing they have been clear about in all the conversations I have had is they want to maintain flexibility in terms of the form of capital or the form of bridging that they provide to address the bespoke nature of the types of deals they will look at.

The one thing they have been clear about, and the words I used, was "bridging capital.'' They have been clear about that. The reason it is called bridging capital is because it allows a project to be financeable with private sources of capital where it would otherwise not be financed if the bridging capital did not exist. That's why I say it is a form of subsidy.

The Chair: Of course it is.

Mr. Claerhout: It's a form of subsidy because it's bringing in an investment or some form of tool that the bank can provide which activates private capital. It activates it either because it enhances private capital's return or it lowers the risks that private capital is subject to.

You might ask, then, why we would do it. The reason it could make tremendous sense for government to do it is that government is not in the business of investing — at least I don't think they are. I think they are in the business of providing critical infrastructure to their citizens and making sure that the society they create supports growth and is sustainable.

You could argue that they have two profit and loss statements. One profit and loss will measure the return on the capital that the bank invests; the second profit and loss statement is what social good they were able to unlock through the use of that capital. The government, I would suggest, needs to look at both of those statements and come to a determination as to which of those projects they are happy to provide bridging capital because the social benefit will be far greater than the economic cost.

The Chair: Okay.

Senator Black: Thank you all for being here with very important evidence on a very important topic.

My first question relates to the ability to advance the infrastructure needs of Canada. I start with two premises. Correct me if I am wrong on any of these, from your point of view.

First, Canadian prosperity in my view depends on meeting and fulfilling the infrastructure deficits that currently occur, whether it is ports, airports, trains, transmission lines. We have a deficit which will, if it has not already, affect our prosperity. That is the premise that I work from on all of the work that I do.

My second premise — and this is what I want your comment on — is that many of these projects will not and cannot be done by government alone because they haven't got the capacity or the balance sheet. Maybe they haven't got the expertise.

Mr. Romoff, I heard you say that very clearly, but I would like to hear from our friends in the finance industry whether you share my view that some projects that might be required by Canada cannot be done by the Canadian government alone. Do you agree or not?

Mr. Claerhout: Is that directed to me?

Senator Black: I would like to hear from Ms. Campbell and yourself.

Ms. Campbell: I look at what these structures do, whether it is public-private partnerships or some of the things that Andrew went through, and at risk management as well. When you look at the government taking on all these projects themselves, they absorb 100 per cent of the risk. If you look at some of the structures which are mitigating an aspect of the risk to either give the private sector adequate return to take those risks on, because government has that broader framework that you just described, there is a larger multiplier effect for what they are doing. If they look narrowly at the returns on the project, they will say that it is a bad trade because they are giving up that return and allowing the private sector to earn it, but the measurement systems are quite different.

I agree with you unquestionably. I think there is a win-win situation by bringing the two groups together. They could not do it on their own. Ontario could not have built 45 hospitals — I have lost track of the number — over the last few years without this mechanism of risk-sharing. We do a value for money calculation every time we go through these exercises to ensure what we are getting back exceeds the higher financing costs, which is one of the aspects.

So it is risk mitigation, capacity to do these things, and the fact is that the private sector is much more capable in many of these areas than government is because that is their core business.

Mr. Claerhout: Regarding the prosperity assertion, I agree 100 per cent. There is a strong linkage between prosperity, incomes, economic growth and infrastructure. It is critical that the government get this right because the success of the CIB can help drive prosperity and economic growth.

In fact, some studies have been done that talk about the link to prosperity and the multiplier effect. Infrastructure spending leads to immediate economic stimulus. It is one of the better things to spend on if you want to stimulate the economy. The best, by way of background, is food stamps. Infrastructure spending is up there quite high, though not as high as food stamps, for a stimulating effect. It has both an immediate and long-term impact.

Second, I agree that the government cannot do it alone. That is why the bank makes sense. It will activate or unlock capital that desires a home in infrastructure, desires to be in Canada, which today does not have enough investable projects to satisfy its desire.

I want to clarify the differences in the types of projects. Everyone understands what a traditionally procured infrastructure project looks like. It is one that the government chooses, designs, builds, operates and pays for. Most of the free roads out there meet that description. When Mark talks about traditional triple Ps, it brings in many elements of the private sector. The private sector bids on design and on a fixed price, turnkey completion cost and will maintain the asset to a minimum level, but the government in most cases still pays for that. They pay for it through an availability payment.

The third area of infrastructure is one that is privately owned and privately financed. The government does not need to pay for it; it pays for itself. Typically these are infrastructure assets that have revenue-generating components to them. An airport would be an example; waterworks, electricity networks. The people that are the users of the infrastructure are paying for the infrastructure.

I think what we can do and what the Canada infrastructure bank is designed to do is not compete against traditionally procured projects or the well-functioning triple P market that we have in Canada. It is meant to unlock that third bucket, namely, infrastructure that can be initially financed with the help of the Canada infrastructure bank but where the long-term funding of that asset could be in private hands — things like airports, toll roads and things where the people that are using that infrastructure are paying for the long-term sustainability of the infrastructure. If we get all three of those right, there will always be projects that the government needs to pay for entirely. There will always be a role for triple Ps. If we can create that third basket where we have self-sustaining infrastructure based on revenue, I think the three together can ensure that we get at that prosperity and growth that we so badly need.

Senator Ringuette: Thank you to all of you.

Mr. Romoff, what is the council's membership?

Mr. Romoff: It is made up of governments from across the country, so the federal government or federal government departments are members of the council; the provinces, agencies of the provinces, so Infrastructure Ontario, for instance, where Colleen is a member of that board and a member of the council; and cities, so the city of Regina, Ottawa and Toronto are all members of the council. That is the public sector side. Then we have the global players in infrastructure, Canadian and non-Canadian companies, made up of developers, construction companies, architectural firms; lawyers — God help us, we can't do without lawyers; many of you may be lawyers. We can't do without accountants. It is a platform that brings together the private and public sectors in a way that gets them to work together collaboratively to get infrastructure built.

Senator Ringuette: Mr. Claerhout, the Ontario Teachers' Pension Plan Board invests roughly 10 per cent of its assets in infrastructure. You seem to have indicated that a good portion of that $18 billion is invested in foreign infrastructure.

Mr. Claerhout: The vast majority of it.

Senator Ringuette: Yesterday, Jack Mintz said that foreign experience with regard to merging private and public funds seems to indicate that it is not the ideal way to move forward with regard to infrastructure. I think he talked about Australia, but I am not sure if it was in this context.

What is your experience in infrastructure projects other than in Canada? Are you doing business with similar entities as this infrastructure bank?

Mr. Claerhout: Thank you for the question.

As mentioned, the vast majority of our infrastructure is outside of Canada. Only about $3.5 billion of the $18 billion is here in Canada. We touch geographies in Europe, Australia and Latin America, so we have a lot of experience in different countries, both developed and developing.

The one theme that cuts across the experience we have had in European airports, Chilean waterworks, Mexican toll roads or in water desalination in Australia, which are all examples of assets we own today, is that we are able to reduce the costs and improve the service versus a government-owned-and-operated model.

European airports are a good example. Most of them were owned by the government historically. Over the process of the last 30-plus years, they have brought in private capital. Some of them still have government involvement. Two of the capital city airports we own in Brussels and in Copenhagen, we are partners with the government, but they were able to bring us in so that we work hand-in-glove with the management teams to run those airports in a way that has lower costs, higher customer satisfaction and greater competition, to mention a few.

Probably the best case in point of any asset where we had a remarkable impact on the service levels and on the cost and quality of service was in Chile. We own four different monopolistic municipal waterwork assets in Chile, where we not only provide the clean drinking water but treat the waste water. We have held that for about 15 years now. In the years that we have been involved, we have seen the quality of drinking water increase substantially. There is much less sickness from the water and much higher standards for water. We have seen the percentage of waste water that is treated before it is put back in the streams, rivers and the ocean near 100 per cent, whereas when we took over that number was 30 per cent. We have actually fixed ailing waterworks where a lot of water was being lost from systems that were leaking, in regions that were suffering from drought. We also brought in technology and capital to make sure that the water that belonged to Chileans, that should go into people's mouths and on the crops, was there for that purpose.

For the most part, we have had a big, positive impact in terms of buying assets and improving them. Of course, there will always be a case that someone can look at and say there is a case where someone lost money; or the investment thesis didn't play out exactly as expected, but that is definitely in the minority of our portfolio. The reason we want to see the Canada infrastructure bank be successful is we would like to make more infrastructure investments. It has been one of the most successful areas in our investment program. Speaking as a proud Canadian, if we can build more infrastructure and inject more private capital with a profit motive, with international best practice to be able to improve those assets, I think that will benefit all Canadians, myself included.

The Chair: Let's try to shorten the questions and give crisper answers or we will not get through this.

[Translation]

Senator Carignan: I have a list of questions long enough to last a day. The subject is fascinating, but it raises a plethora of issues.

You said the bank's activities should involve more risk taking, even if it means generating less revenue. Do we really need an infrastructure bank to achieve this goal? If so, why? Isn't it simply a subsidy? I agree with the private sector. However, you mentioned examples of efficiencies in other countries. The success of these efficiencies is likely linked to something else, such as obtaining contracts and negotiating collective agreements. You also mentioned many other obstacles we could face here that would prevent us from achieving this level of efficiency. I don't think the Infrastructure Bank would help us perform at the same level as a filtration plant in Chili, for example. It would be different.

How does the Infrastructure Bank play, as desired, the role of a bank and not the role of a government that provides subsidies? Wouldn't it be easier for the government to give you X amount of money on the basis that the risk will be lower and that there's already capital, and to proceed this way?

[English]

Mr. Claerhout: I am happy to take a cut. I will try to keep it brief this time.

There are a couple of points, senator. If the bank wasn't necessary, if the ingredients were in place today for this infrastructure to be built, it would be built. There are tens of billions of dollars in the hands of Canadian institutions that are desperate to put money to work in infrastructure in Canada. There needs to be some force that helps activate that capital and make those projects more "investable.''

Australia has taken a different approach to this, where the government builds assets and, after it has built and de- risked the asset, it sells that asset to the private sector. That actually is much more capital intensive because you have to put up all the capital to build the asset. It also means the government is managing the build-out of that asset, and governments historically have not been good at coming on time and in budget. I think what is being proposed in Canada is a superior solution to what the Australians have done over the last decade or more.

Lastly, in terms of not creating a bank but just giving a sum of money, I think that can be abused quite significantly because you need to have some mechanism that prioritizes projects and identifies those projects that are worthy of the bank's participation because they involve a modest amount of capital and they involve great public good so that the ratio between the public good that the asset will create versus the cost it will create on having it built is high.

Those would be my comments. I don't know, Colleen or Mark, if you have any other comments.

Ms. Campbell: It is a bit of one plus one equals four if you get this right, in terms of the risk that the government underwrites, or the mitigation or the capital, relative to the benefit. As we said earlier, it is not just the narrow benefit of the project but the fact that the project would not go ahead. To get the multiplier effect for the project, there is a narrow role that government can get it on the ground. Obviously the investors have to earn a market rate of return on their capital, but they are looking narrowly at the project. It is both of those things together and the fact that the execution risk goes down with the private sector players.

[Translation]

Senator Carignan: All the examples of infrastructure you referred to will generate revenue. Obviously, it's a matter of generating revenue to attract the private sector. Isn't that an indirect way for the government to take money to invest in infrastructure that, in any event, falls under its responsibility, and to apply the user-pay principle without being accountable for the rate increase? Isn't that a way for the government to keep the rates at arm's length and to hide behind a bank to raise rates? The government may not take the chance of doing so politically if it were directly linked to the rate increase.

[English]

Mr. Romoff: That's a good question. I will take your first comment around all these projects being driven by revenue.

The reality is that with respect to Canada's history with P3s, public-private partnerships, of those 258 projects I mentioned, 255 are not revenue-based projects. In those cases, the private sector makes its money by investing equity in the project and then maintaining the asset over the 30, 35 or 40 years.

It is a bit like a mortgage that you and I would have. If we were to go ahead and buy a house, we would enter into a mortgage agreement over the next 25 or 30 years. But if your roof leaked, the advantage of a P3 is that the person who built that house has to come in and repair the roof, and at no cost to you or I as a homeowner. That is the attraction of this model. It puts the risk on to the private sector to ensure that the costs that are so typical of some of these major projects, the cost overruns, are absorbed by the private sector. The government essentially has a warranty. Not only that, the asset will be maintained over that period of time. It has these features about it.

The difference with respect to the Canada infrastructure bank is that the underlying premise at the moment is that they will focus on revenue-generating projects. These have been historically very difficult to bring to market by governments because of the high risk or the unpredictability. Andrew referred to being able to estimate ridership levels. For instance, if you are building a highway, all these factors come into play. They do become very risky, but there is nothing wrong with government enabling those projects to come to market. In fact, you need a stimulus like that.

It is much like the logic behind the creation of the P3 fund by the previous government. In that particular case, they were providing a contribution to municipalities or provinces or First Nations communities that would bring a P3 project with a strong business case to the market, and they provided up to 25 per cent of the capital cost. That was hugely impactful in stimulating a cultural change in Canada, away from procuring projects in the traditional way and moving down the road of public-private partnerships, which has, in fact, been a large part of the success story I was talking about. These elements of the equation need to be explained and understood in order to make the kinds of decisions that you're referring to.

You made reference to unions. I have two comments on that. First of all, unions, irrespective of whether they are public sector or private sector, their own pension funds are investing heavily in public-private partnerships. On the one hand, public sector unions may complain about that, but OMERS is a big investor in P3s. At the same time, Labourers' International, LiUNA, is a huge investor in Canadian public-private partnership projects. If you speak with Joe Mancinelli, he'll tell you that he can't get a return as large as he gets from investing in P3s by investing in other projects.

These elements make it a very attractive opportunity. The key in the end, quite frankly, and where it has been successful, is to ensure that as union members transition from having worked for government and now working for the private sector on a project, in most instances all of the provisions that were negotiated in the collective bargaining agreement are respected when these very same people move to the private sector. There are ways to structure it to ensure it is successful and meets all of our objectives.

Senator Moncion: I was at the luncheon you had this week and I met with the members of your board. I was impressed with the quality of the people who are there. You mentioned earlier that the people who will be chosen to sit on the board are going to be key to the success of the infrastructure bank.

Is the Government of Canada looking at the infrastructure bank with a business approach to infrastructure as opposed to just being a government investor in some of these projects?

[Translation]

Mr. Romoff: We hope so.

[English]

To be fair, I think the government has the motives that Andrew has mentioned: one, getting more infrastructure built because there is a critical deficit in the country; but, secondly, there is the social aspect, the public policy aspect of this.

Colleen made reference to the number of hospitals in Ontario that were built using the AFP or P3 model. Most of those hospitals would never have been built had it not been for the government using this kind of partnership arrangement with the private sector, and it's proven to be a very effective way to do it. The advantage, as well, is that through the competitive process, you generally get three consortia competing against each other, which drives down the cost of that project in the end and in fact stimulates more innovative thinking around design and utilization of materials in order to ensure that they can be competitive in their bidding process and still earn a return, because business is in the business of earning a return. So I would say that government has both of those objectives in mind when they move ahead.

Mr. Claerhout: Could I add to that? I certainly hope they will have a business approach. Part of the reason I tried to speak so emphatically about getting the right board, the right management team and the right degree of independence is so that they can take that approach.

One of the things that is going to be hard is how to measure success of this bank. That's not going to be easy. I know how you measure my success. You look at the rate of return that I'm able to earn over a long period of time and you use that to judge whether I earned a return that was adequate versus the risk.

In the Canada infrastructure bank context, it's hard to measure success because it's not simply how much money they deployed and how much money they got back. It's also the quality of the projects they helped to create that wouldn't have been created absent their money.

I do think that for whoever heads the compensation committee of the board of the Canada infrastructure bank, it's going to be an interesting philosophical debate. But what I hope they do — and I'm repeating myself from an earlier comment — is look at some ratio to say: How much government money did it take to get a project done, and what was the social benefit of that project? Let's look at some way to quantify that so that you can say that was a very successful project, and this was something that was less successful.

Senator Moncion: Mr. Romoff said earlier that we have a funding problem, not a financing problem. Can you explain?

Mr. Romoff: What I mean by that is that, as we have all said, there is a huge amount of private capital around, and that private capital is there to invest in projects; that's financing these projects. Governments have a funding problem because they don't have enough money to continue to build these projects, so they need to find alternative ways to enable these to go ahead. That's where looking at partnerships with the private sector, irrespective of whether it's P3 or another way, collaborating with the private sector to help offset or take some of that demand off the government's books at the outset is really the challenge.

Let's also remember that in the end, when we talk about P3s, we're talking about P3, not P-free. These projects are always on the books of government. They will have debt obligations. It's the way in which they are managing that debt over the next 30 to 35 or 40 years, which is a more manageable arrangement.

Senator Tannas: I'm curious to know what your thoughts would be on deal flow. Where do these deals come from? Do you anticipate that the private sector will be driving proposals into the bank, or do you anticipate that the bank will be looking at the traffic of requests coming from municipalities, provinces and departments and saying, "Oh, look, maybe we can take that one''?

Would it be fair to say that it would be your nightmare if the infrastructure bank becomes the front of all infrastructure spending, so that everything has to go through the infrastructure bank, including an overpass on a freeway or whatever somebody is looking for? Is that the danger you're talking about when you say that this institution needs to stand alone, with experts and a clear mandate, not part of a political shell game of some kind where we say, "We've put all this money in the bank, so you, Mr. Province or Mr. Municipality, go to the bank and see if they can fund your overpass?'' Can you comment on that?

Mr. Romoff: First and foremost, we wouldn't want to see the bank undertaking projects that could be done, and are done now, through the traditional P3 route or through the traditional way. You want to make sure that, in fact, the bank doesn't become a vehicle for that. It really is meant to focus in on those projects that can't be readily done by the private sector.

Yes, these projects will come from municipalities and provinces. I'm sure everyone here realizes that it's actually the municipalities who own the majority of infrastructure in Canada. That's where the projects initially will come from.

There is a provision in the makeup of the bank for unsolicited proposals, and that's still going to require a bit of clarification in terms of how those will be treated and whether they will go ahead or not. Because in Canada, even if it's unsolicited, it has to have the support of the government writ large. It has to be supported by a municipality or a province or a First Nations community, depending on the nature of the project.

Those are some of the issues that I think will be the responsibility of the board and the CEO. That's why, as Andrew says, experience around that table is critical, because they will be making some tough decisions. While $35 billion is a lot of money, when you talk big projects, you can tick down that amount fairly quickly.

Senator Tannas: I understand, but who is actually going to identify these projects and structure the deals? Is it going to come from Teachers', which may say, "Oh, there is a project,'' or is it actually going to be a civil servant somewhere who will say, "Oh, let's make a deal on this''? How is this all going to play out?

Mr. Romoff: My sense is that it's going to be bottom-up. Municipalities, the provinces, the First Nations communities, the people who own the infrastructure will present these projects.

Senator Tannas: They would come to Andrew and then they would come to the bank.

Mr. Romoff: Or the reverse. OTPP may say, "Here is a great opportunity, Sarnia, and we can enable you to achieve what you have been thinking about.'' So there are ways to do that.

Ms. Campbell: One of the benefits is a central clearing house notion, not so that they are crowding out, but lots of times people don't know where to go to have the discussion with people with the background. That is one of the benefits.

It's very helpful that you can come and consider opportunities, and it could come from the private sector or it could come from the provinces or the municipalities. The coordination is important.

Mr. Claerhout: To answer your deal flow question, the more deal flow we can get the better. It would then be the bank's job to say which is the most attractive? Which is going to have benefit from the bank's capital and have a great benefit to society, and it wouldn't want to just be municipalities or provinces. It could be the federal government. It could be construction companies or private individuals. I think the more deal flow we get, the more likely the bank is to choose the best ones.

Senator Massicotte: I have two questions.

I'm a big believer in user pay. It allocates capital more efficiently; it's very good. I'm also a big believer in P3.

To put the argument on the table — I'll play devil's advocate a little bit — Government of Canada bonds are currently selling at approximately 2.2 per cent. The Canadian government has immense flexibility, immense space on its balance sheet to take on more debt if they wish to do so, especially when it's user pay infrastructure, therefore there is a corresponding asset to the liability.

Last week, we were in New York. I talked to one of the world's infrastructure investors, and they are creating a new fund. They are telling investors they will provide a 10 to 12 per cent return. I agree that's leverage, but irrespective, it's the indication. Somebody can make the argument that 10 per cent, maybe 7 per cent, compared to 2.2? That's about a 5 per cent difference. That's a 300 per cent increase in debt service cost for the user.

Now if the government was more logical, more scientific in the management of these assets and hired the right people, maybe one could make the argument that they can build this thing as efficiently as private enterprise. I'm sure you'll argue yes, but look at the history of huge cost overruns. I would argue with you that a large part of cost overruns was not cost overruns; they simply told the public the wrong number. They made it easier for themselves by giving a lowball number of what the project would cost. It's fixed price contracts or participating contracts.

So give me the argument why, in spite of all that, we should still pay 7 per cent of cost of funds versus the 2.2 cost of funds.

Mr. Claerhout: You have to look at it from the standpoint of the total cost of ownership. You have already answered some of your own questions. The government is not very good at procuring the asset and not very good at managing it or maintaining it. It gives you the wrong answer, potentially, by just looking at the cost of capital. You do need to say, "What is the total cost of providing the service over a long period of time, rather than how much it cost to raise the capital?''

The other area that I'd point out is that we're not talking about getting government out of the infrastructure procurement business here. Government will still play a massive role in procuring infrastructure. That would be infrastructure that doesn't have a revenue line associated with it and needs to be either procured through traditional means or PPP means. Government will still pay for a large amount of infrastructure and use the 2.2 per cent capital that they can get through their credit rating.

As much leverage as the government can raise, however, it's limited; it's not limitless. So in order to allow it to build even more infrastructure than it would otherwise be able to do absent the private sector, there will be this third bucket, if it's revenue-producing infrastructure, where the private sector is willing to build it, maintain it, continue to invest in and grow it. I would encourage the government to do that, and then use its funds, use its resources, use its people to make sure that the traditional and the PPP infrastructure is funded with their balance sheet.

The Chair: Let's try and roll this along here.

Senator Massicotte: I want to get my second question in before the chairman cuts me off.

The Chair: Don't be too long.

Senator Massicotte: It relates to what we heard yesterday in testimony. If you look at the bank, the government has made it very clear their intent is to minimize whatever money they get to get the projects on their way. Our Canadian tradition is such that with user pay methods, we still don't have the courage to fully bill the consumer for full user pay. That's part of the problem. That's not going to change tomorrow because some Canadians are still skeptical of this whole issue.

Their intent is to put in the minimum possible: "What is the amount of subsidy I have to put up to get this project off the ground?'' That is the mindset. If that is the case, and call it what you wish, it's a funding of a need to make the project work for those who will follow pari passu in the investment. But they are not going to probably invest pari passu with you. They are going to try to minimize the capital. They are going to do whatever they can to get a project going, but they are not there for the long term. They are going to facilitate and incentivize getting the deal done.

You're worried about the independence of the board and the government getting involved. Effectively, they are only going to be involved in the front end. They are not going to be your pari passu investor or partner. That would be the private capital.

One can make the argument that once the bank, which is really a deal structuring team, gets that deal done, do a P3. Get on with it. All they are going to do is provide capital to get the deal done.

Mr. Claerhout: I don't think that you can say that the government is not going to be a partner in the project over the long term. I would encourage them —

Senator Massicotte: Not pari passu; they will be in there relative to a certain structure.

Mr. Claerhout: Let's say you use first loss equity and said we don't know what ridership will be on this toll road for the first five years. So the infrastructure bank is going to invest their equity with a first loss provision. If ridership is lower, they suffer more than Ontario Teachers' or other private investors. If the project goes well, they are pari passu because once the risk of that initial loss is gone, they are our partner.

In all the advice that I have given on this subject, I have said that I want the government to be our partner. I want them to be our partner because if the project goes tremendously well and the investors do better than expected, I also want government to do better than expected. I don't want to have a situation where the government — the bank — looks back and says, "Oh, we provided too much support and we provided it in the wrong nature.'' It turns out that project actually didn't need a grant or a loan guarantee because it makes the bank look like they made a decision that wasn't wise. I want the bank's decisions to look very wise because I want the bank to have a long-term future. I want the bank to be seen as legitimate.

Ontario Teachers' is not investing alongside a government for the next deal. We're investing for the next 10 deals. So we very much want them to be beside us and benefit with us.

Senator Massicotte: I appreciate why you want that. But if the objective is to minimize the amount of capital, the fastest way to get there is simply to subsidize and get the project off the ground.

Senator Wetston: This question may be more for Mr. Claerhout and Ms. Campbell. How many projects do you know of today that have come to you both that you have not financed because the risk-adjusted returns were not viable, that you would now consider proceeding with in this model should it go ahead?

Mr. Claerhout: That's a very hard question to answer, because until there is a bank and a management team in place with an idea what they will and won't do, I would be speculating. The deals that we have done obviously met our criteria. There are many deals that come to us and we decide they are not right for us. Many more deals come to us than we actually do. That's just the nature of the deal business.

Senator Wetston: I think you're getting to the point I'm trying to raise.

Mr. Claerhout: It's hard to say this in isolation, in a vacuum. Until the bank is created and its policy objectives are provided by the government and we actually harness — it's a shame that senator is not here — the deal flow that the senator was asking about in his question, I would be speculating, to be honest.

Ms. Campbell: You're getting at whether there will be anything for this enterprise to do, because are there enough deals?

Senator Wetston: Well, the premise here is basically around risk-adjusted returns. If it's just about risk-adjusted returns, you must see a lot of projects that come your way that you turn away. They must come to you regularly. If it's really about risk-adjusted returns, I am trying to get an idea of magnitude and possibility. I'm not suggesting it's a bad idea. I'm trying to understand it.

Ms. Campbell: We might have gone down a rabbit hole a little in use of the term "risk-adjusted returns.'' I would also insert the word "feasibility.'' Traffic is a really good example. When you are building a new road, and you're dealing with the traffic consultant and there is no history, in those early days it's impossible to get an investment-grade rating, because traffic consultants are going to say, "It's not proven, so we can't.''

So there might be a government role to, as you say, underwrite that start-up risk in the traffic, which the private sector can't do, to underline and say, "We will underwrite that risk during the start-up so this can be financed and go forward.''

Volume risk elements that make it a feasible product, we wouldn't have seen those because people know it's not feasible.

Senator Wetston: I have another question around this issue of institutional design. Mr. Claerhout, you talk about independence. We talk about independence a lot in the Senate as well, as a matter of fact. We're getting there, aren't we?

On a more serious note, you have not invested a great deal in Ontario or in Canada — I'm an Ontario senator — relative to other jurisdictions. I want to be a bit blunt here. Is the main reason for that because of too much political interference in infrastructure projects? I might ask Ms. Campbell the same question. Is that a concern? Is that one of the matters, which is why you're very passionately suggesting that the independence model — the governance model — is really important to the success of the bank?

Mr. Claerhout: The risk of political interference is everywhere. It's not an Ontario issue. I was bringing this up to make sure the roles and responsibilities between the government and the bank are well articulated such that everyone knows the rules.

In terms to the response to your question why we haven't invested more in Ontario —

Senator Wetston: Or Canada generally. I'm not picking on Ontario.

Mr. Claerhout: We haven't seen a lot of investable opportunities, to be frank. We have investments in Ontario in renewable energy, as an example. There are not a lot of other assets that would have been large enough and have the characteristics to attract us.

We don't do P3s. Mark spoke about the hospitals being built. They ended up being too small for our capital; we have a minimum amount we can invest to get the right return on effort as well as the right return on capital.

If you look at most of the assets that were investable, there's the 407, one toll road in Ontario.

Senator Wetston: We almost had another one.

Mr. Claerhout: You had Hydro One. I have said this to Minister Chiarelli and many people in Ontario: I think an opportunity was missed when Hydro One was taken public, because there would have been tremendous interest from Canadian pension plans to keep that in the private sphere and have a more active owner than a holder of a public share.

In my opening comments, I talked about the fact that there is this disconnect between the capital available and the number of projects we have invested in, "we'' being the collective we across Canadian pension plans and foreign investors. That's because there haven't been enough investable projects, period. If the CIB can help create more investable projects, that would be an outstanding outcome.

Ms. Campbell: With regard to the Infrastructure Ontario model, our number one role as the board is to make sure there is not political interference. Key to our success is that the private sector can rely on the fact that once we go to an RFQ or a process, they can be confident the process will play out.

I've spoken a number of times south of the border. They keep saying, "Why can't we get this right?'' Political interference is a big reason why.

Senator Wallin: I will start with a question to Mr. Claerhout, but others may to want comment. It goes back to the beginning and where we're at in terms of structure.

The CEO and the board will be appointed by the cabinet, essentially — the Prime Minister. There are some rules laid out here about who can't be on the board. They can't be a federal public servant, a senator or you shouldn't be bankrupt.

You have said that personnel is so key. I think we all agree on that; you need qualified, accountable, independent people.

What advice do you have in terms of the way legislation lays this stuff out? What language would give you comfort that there is going to be advice sought from the private sector about who might be appointed to these key positions?

Mr. Claerhout: I don't think it's currently described in a great amount of detail in the existing legislation, but I would like to see the idea of a governance committee being part of the board, where a committee is established, and there are some criteria away from having to be over 18, not bankrupt and you need to be a Canadian resident — away from these kind of minimum requirements to some that talk about the background, the level of professionalism and the experience that board members should have. There should be more meat on the bone around what that would look like.

You didn't ask this question, but when it comes to the actual appointment of the board and the management team, I don't think it's unusual for the board to be appointed by government at the end of the day. The government provided the capital. The government created the institution. Although, I would prefer that board members cannot be removed by government, away from cause, the same way it is structured with the CPP, for example. You are going to have a challenge when it comes to recruiting the best directors if they think the government of the day can change. You see this happening in Crown corporations: The government of the day changes, and there are wholesale changes in the organizations. We want to create this to be quite different than a Crown corp. We want it more independent than that.

Senator Wallin: You would suggest some language to that effect.

Mr. Claerhout: I would.

Senator Wallin: Anybody else?

Mr. Romoff: You talked about identification of candidates. As you know, there is a recruiter appointed by the government to take this on. They are consulting broadly. We have been actively engaged with them in terms of trying to identify candidates to either be the chair, be on the board or be considered for the CEO.

Who knows where that process will end up, but the reality is that at the front end, it is open to any and all candidates. As you know, quite apart from the recruiter undertaking this sort of management of that process, it is incumbent on those candidates to actually make applications through the government process — the Governor-in- Council process — as you would for any other Crown board.

At the front end of trying to identify the world of possible candidates, there is a very aggressive effort being undertaken to scour well beyond Canada as well.

Senator Wallin: Thank you.

The Chair: Should there be a geographical mix?

Mr. Romoff: I think so. There are a couple of things that would be important to us as a council. We're no different. We have got a geographical mix on our council. We're a national organization. This bank will be a national entity. We're very focused on gender balance. It's really important.

It's a little more challenging in the infrastructure sector because it hasn't got the same history. But there are a number of very capable people, and some of the senators in the room who were with us a couple of days ago would have met some of those people. We are very focused on those kinds of issues. You don't compromise capability at the same time. You can put together a heck of a board with some of those criteria in place.

The Chair: I'm sure. I agree.

Mr. Claerhout: I agree with Mark on that point. This is a federal creation. It should reflect the diversity of the federation, although it shouldn't be "each province needs to have one representative.'' I think that would be counterproductive. At the same time, you shouldn't have 70 per cent of the board of directors come from Ontario.

There has to be some thought around getting enough diversity of gender, province, skills and backgrounds such that the board of directors as a whole functions at a very high level and represents Canada more broadly.

Senator Marshall: I want to pursue this issue of the board. Specifically my question is for Mr. Claerhout, but I would appreciate hearing the views of the other two witnesses.

When you gave your opening remarks, you said they would be suitably independent from government and that independence from political intervention is the single most important issue in your mind.

Right now the legislation states that the directors will be appointed by government, the chairs will be appointed by government, the government can terminate them and the government has to approve the CEO. Based on what is there in the legislation, because that is what we are studying, do you think there is a possibility that within that framework you can have an organization that is suitably independent from government, or will we need amendments to the legislation?

Mr. Claerhout: If you were to ask me what I would like to see — and I made reference to the way CPP is structured — should the government be appointing the board? Absolutely. It is a government-created entity with 100 per cent government money. But I would prefer the government not to be able to "early terminate'' the board. I would prefer people to only be terminated at the end of their term or for cause if there is a good reason and they have done things wrong. That would be my preference.

Can we live with the legislation that the government has an early termination right? Sure. Ontario Teachers' is structured in such a way that the government directors on the Ontario Teachers' Pension Plan board can be removed before their term is done without cause; so it can work. But if you are asking what I would prefer, I would prefer that.

In terms of terminating the CEO, again I would prefer that to be a board-directed activity. Good governance 101 tells you that you elect the board and the board hires, fires, compensates and oversees the CEO. Having a higher power do that risks the government of the day changing, for example, and the CEO being terminated for a political reason rather than a performance-related reason. I would like to see the board be the ones that appoint and terminate the CEO, as an example.

Senator Marshall: What is there now wouldn't be a deal breaker for you. If the legislation goes through exactly as it is, you are saying that you could make that work. You would not say, "No, we're not interested''? You could make that work?

Mr. Claerhout: That is not my preference, but with the right caveats around it and the right understanding, it could work.

One thing you didn't ask that I am probably most worried about in the legislation is there is talk that individual investments will require cabinet approval. That's probably the thing that has given me the most pause. If you're Teachers' or you're Aecon or EllisDon, the construction company, you want to know who you are negotiating with. Are you negotiating with the bank or with cabinet?

Political intervention can become very ripe if people think cabinet is the decision maker, not the management team. You will have a heck of a time recruiting a good CEO when the CEO doesn't have confidence that he or she is the decision maker but feels that people can go around them to cabinet. There needs to be more clarity around what is desired in that regard, because if the cabinet gets a final look, that's very negative, in my view. If it is that they get the first look, that the Canadian infrastructure bank comes and says, "There is a project that we think could be very valuable and we would like to pursue it,'' and they can give the checkmark early on, before negotiation starts, then we can probably live with that.

Senator Marshall: I would like to raise one other point before I go to the other two witnesses, and that is who the board reports to. The legislation says the corporation is not an agent of Her Majesty, so it seems like the intent is not to make it a Crown corporation. But who does the board report to? Does it report to the minister or to someone else? I would also appreciate hearing everyone's views on that.

Perhaps, Mr. Claerhout, you could respond to that and then we'll go to the other witnesses.

Mr. Claerhout: I think naturally the board reports to whomever appoints them. That is how I would answer that question.

Senator Marshall: So that would be the minister.

Mr. Romoff?

Mr. Romoff: I have a couple of comments. I would defer to Colleen on much of this because, as we have mentioned here, the Infrastructure Ontario approach has been very successful and is what is seen around the world as being truly the gold standard.

You have to distinguish, when you talk about the bank, in terms of who identifies the project and then who undertakes the deal. In the case of Ontario — and Colleen can correct me if I am wrong — line departments through a budgetary process identify the projects that the government wants to see go ahead. Then they turn to Infrastructure Ontario and step back and say, "Procure,'' and we don't interfere in that process.

If this arrangement looks like something similar, I don't see any problem with projects being given a first look by the federal government. After that, if they have said, "These things seem to make sense to us, so over to you, bank,'' and step back, you have a process which I think can be very effective and engages both. I will leave Colleen to flesh that out a bit; I apologize if I have said anything that's wrong.

In the end, like everything else in life, everything will turn on interpersonal relationships. We will need a board chair and a board and a CEO who understand government — no mean feat — and can actually develop the relationships necessary to make this little ecosystem work because they will not be able to operate independently, irrespective of what the legislation may say, without dealing with senior government officials along the way. That dynamic will be critical.

Senator Marshall: Government likes to control and they don't like to relinquish control.

Ms. Campbell?

Ms. Campbell: You are correct in what you said. As Andrew said, once the process is under way with the private sector, they have to be able to rely on the process, away from political interference. It's the government's decision with what they decide to go ahead on.

Senator Woo: I know I am not a member of this committee, so I appreciate having the opportunity to ask a question. I appreciate you bringing up the KPMG report as well, which I am fortunate to have received two days in advance because I am on the Finance Committee. I strongly commend it to all of you.

If I could make a small suggestion to this committee, another KPMG report is publicly available specifically on the bank, and I think it might be helpful for the committee to also see that report, which was released in February 2017.

I want to follow up on the issue of project selection, which I think is the key issue. It connects the governance; it connects the political interference and all of that. I have a general question and then maybe one more specific for Mr. Claerhout.

I understand the very real and serious dangers of political interference, but could you also comment about the risk of private sector capture, which government has to be worried about, particularly when we have the lower levels of government, as you say bottom-up approach, municipalities, First Nations groups, provincial governments even, that simply do not have the knowledge and capacity to come up with projects that are attractive to the private sector.

The instinct, of course, is to go to advisers. They go to Colleen, perhaps, and other parties that would end up also, perhaps, being underwriters and participants in the projects. I worry a bit about that, too.

Could you talk a bit about the balance between, on the one hand, political interference, which we all recognize, but also private sector capture to the detriment of the public interest in this project?

Mr. Romoff: I have a couple of comments.

In the case of public-private partnerships, I think it also happens in traditional procurement. If you are advising government, you cannot advise the bidders. There is a real Chinese wall there — sorry.

Senator Woo: The Chinese wall failed, by the way, in China.

The Chair: It is still a great wall.

Mr. Romoff: That is really a fundamental piece to all of this, and you need to ensure that happens. That is absolutely true.

I also believe that quite independent from the bank, the government does have this $186 billion infrastructure investment. That is not, in most part, going to be delivered by the federal government. They are in the process now of negotiating agreements with the provinces and engaging municipalities in that process. In the end, the funds will be transferred under agreements to those entities, and they are the ones who will have to decide what kinds of projects they want to go ahead with.

Our caution always with those communities is that if you are new to the game, or if you don't have a wealth of experience, consult broadly with the advisory community. That is why I am encouraging the federal government to put in place a fund which would enable municipalities that don't even have the money to pay for those advisers, because they can be expensive, to enable that to happen.

My final point is that I am hoping the bank will be looking at projects which, for lack of a better term, are nation building. If we decided to move ahead with a national broadband strategy, that is far beyond what is happening in southwestern Ontario right now or what is happening in the Northwest Territories. As I have said in other fora, at one time Canada was viewed as number one in the world in broadband. We are not there anymore. Yet we have a huge need to connect our communities and to increase our gigabit capacity in Canada so that we can continue to be a world player and attract talent from around the world.

I am really hoping there won't be this conflict between, whether we have to pick municipal projects necessarily, and let's think big. There is some talk about transmission systems that cut across provincial boundaries. The minute you start to think more broadly, a national waste water strategy — every municipality has a creaky, leaky water infrastructure. If we can think bigger that way, then the bank can play an interesting and constructive role. That would be my comment.

Senator Woo: I specifically appreciate your suggestion of a project preparation facility. This may be something that the committee thinks about. It would be a terrific adjunct to the infrastructure bank in general.

Do others want to jump in?

Mr. Claerhout: I may sound like I am repeating myself, because I am. I think this is why it is critical to have a very strong management team at the bank. There is a saying that I like to use which is, "Everyone welcomes a fool and his money.''

Senator Woo: That's right.

Mr. Claerhout: Any time you create a fund that says we have $35 billion here, you will have a bunch of people bring ideas that are not in the best interest of a municipality, a province or the federation of Canada. They are there in their own best interest. You need to have a team that has experience running with the wolves and can identify when that situation is there and ensure that you are using the money wisely for the benefit of cities, provinces and the nation.

Senator Woo: That's right.

Ms. Campbell: The other thing connected with that, which is absolutely critical, is a collaboration between the enterprises. One of the concerns you always have is that people stay in their verticals and you end up with this redundancy with what a municipality, one of the provincial authorities or the federal government is doing. It's important that that collaboration through relationships is there and there is a lot of communication.

Senator Woo: Those are very helpful answers.

This specific question is for Mr. Claerhout. In your testimony you talked about creating parameters around the eligible projects, and you singled out trade and transportation, essentially. I'm not sure what the logic is behind that in the sense that projects will only go ahead anyway if there is an acceptable risk-adjusted revenue stream for the participating private sector partners. I can think of projects outside of trade and transportation that might well generate that kind of revenue stream to make it attractive. Why have you suggested such a narrow set of parameters?

Mr. Claerhout: I don't want that to be misinterpreted, so thank you for the question, senator. I put that out there simply as examples. If you identify a policy objective of the government, then the government can articulate, "We want more foreign trade corridors or less congestion in the top eight cities in Canada.'' Then the bank can say, "We will encourage bids to come in that help try to solve that problem and we will direct capital to help achieve those policy objectives.''

It was more around trying to articulate the difference in governance; that is, the federal government appoints the board and provides the capital. The federal government should also provide the policy objectives it is trying to achieve with this capital such that the bank can interpret those and give priority to those projects that the government would most like to see built, presumably because they have tremendous value to the inhabitants of Canada.

Senator Woo: That is very helpful.

The Chair: Thank you very much to all three of you.

We have one more witness. I am now pleased to introduce Blair Patacairk, Chair, Government Relations Committee from the Consider Canada City Alliance, who will speak to us about Division 20, the proposed "Invest in Canada Act.''

Please proceed with your opening remarks, after which we will go to Question Period.

Blair Patacairk, Chair, Government Relations Committee, Consider Canada City Alliance: Thank you, Mr. Chair. I don't think I will be as spirited as that last conversation — nor do I think I want to — but I will try to keep it under five minutes.

It is a pleasure to be here today to support Division 20 of Bill C-44, the "Invest in Canada Act.'' I am the Government Relations Chair for Consider Canada City Alliance, CCCA; and the Managing Director of Investment Trade for Invest Ottawa.

I have three points to address today: the support of the CCCA and its members for the investment hub to be established by Bill C-44; the benefits of the relationship that would be established between our members and the hub; and, ultimately, the activity already under way to ensure that the economic opportunities presented by the establishment of the hub are quickly and effectively achieved.

First, a short note on CCCA.

Seven of Canada's largest cities came together in 2007 to explore common challenges in attracting foreign direct investment to Canada. The collaboration between the cities expanded to include joint activity with the invest in Canada bureau with Foreign Affairs. As that activity increased, the group incorporated as a not-for-profit organization in 2012. Today the CCCA includes 13 of Canada's largest municipalities in the promotion agencies, stretching from Halifax to Vancouver. Together, the economic influence zones of the members encompass all or part of 14 of Canada's census metropolitan areas that represent almost 60 per cent of Canada's population, 65 per cent of Canada's GDP in 2016, and 83.4 per cent of Canada's GDP between 2011 and 2016.

The mission of the Consider Canada City Alliance is to contribute to a sustainable and globally competitive national economy built on the collective strength of the ecosystems of each member region.

The members of the CCCA are therefore delighted with the announcement in the 2016 Fall Economic Statement of the intent to create the "Invest in Canada'' hub. The members of the CCCA view the creation of the hub as a significant commitment by the Government of Canada to the importance of the foreign direct investment portfolio as wealth generators, creators of jobs across all demographics and an essential stimulant to the innovation strategy for Canada. The "Invest in Canada Act'' in Bill C-44 translates that into reality.

The members of the CCCA welcome the opportunity to contribute to the overall success of the hub, but also of the municipal focus to attract investors to Canada. We do not minimize the complexity of this challenge but, rather, look at it as an important stepping stone for innovation and the economic strength of our country.

We agree with the assertion made in the Fall Economic Statement:

Around the world, leading companies are looking for stable places to invest and grow their businesses. Smart countries are mobilizing to take advantage of the opportunities and jobs that go hand in hand with the global investment. Canada cannot afford to be left behind.

We look forward to the hub becoming a "single window'' for the investor looking to invest in Canada. It is our hope that the hub will become the single access point for municipalities to the Canadian government for matters relating to investment attraction. Therefore, it is our aspiration that the hub would have the capacity to assist, advise and champion on matters such as: the responsibility delineation between the hub and the investment and innovation branch for Global Affairs Canada; immigration policy and procedures; federal incentive programs; federal economic development strategies; policies with respect to investment promotion; the development and marketing of the Canada brand; lead generation and client servicing; data collection and development relevant to investment promotion; and single source of federal funding for investment promotion agencies.

Similarly, the municipalities will ensure that each designated area has a contact for the hub on matters relating to investment attraction within their jurisdictions. Furthermore, should the decision be made to place hub officers in locations across Canada, we recommend that the officers be collocated with our respective member.

Finally, we welcome the role of the hub in coordinating Team Canada missions in support of trade investment agreements to assist in addressing bilateral and multilateral issues and other opportunities.

It is our hope that the operating relationships are founded on the following principles: collaboration. The hub can expect that Consider Canada City Alliance members will share their strategies, operating model, metrics, value propositions, marketing materials, et cetera. This will enable the hub to be aware of the opportunities and priorities of the CCCA members, their approaches and tactics.

An operating understanding on the sharing of active leads with the hub will have to be discussed and developed. The objective must be to ensure that approaches to potential investors are coordinated to avoid the possibility of confusion and conflict.

CCCA members would expect a similar degree of transparency from the hub with respect to strategies, operating model, metrics, value propositions, marketing materials, structures, et cetera.

Second, complementarity: The CCCA and its members recognize that the Government of Canada will have capacities and capabilities that far outreach our own. Similarly, municipalities will bring to any proposed transaction, information and data relating to regional assets, attributes, value propositions and strategies to share with them.

This complementarity approach is critical to ensuring that potential investors receive accurate, relevant and timely information relative to their inquires.

Finally, consistency: To the extent possible, the relationship between the hub and the municipal IPAs be reflected in some form of protocol, agreement or other arrangement whereby each party can expect a consistent relationship regardless of the circumstances. This would mean that the hub and the CCCA would have regular and structured discussions on the status of the relationship and seek improvements wherever possible.

CCCA members are already working to make the hub a success. Each member already has a concierge service for incoming and existing foreign direct investment. A close working relationship has been established with the hub and the implementation team. All members participated in the KPMG Outreach led by the Privy Council Office on attracting foreign direct investment to Canada. All members have been invited to be referral partners for the new dedicated service channel being established by Immigration, Refugees and Citizenship Canada in preparation for its launch in June 2017. The CCCA chair participated in a deputy minister level consultation round table on the development of the hub. And members are working with the Trade Commissioner Service to ensure that the 15 new investment officers expected to be hired this year under the hub program are fully aware of the services, capabilities and value propositions presented by each of our members.

In summary, the CCCA fully supports the "Invest in Canada'' hub, Bill C-44, and is fully committed to the economic advantages to be gained by Canada through the provision of a single service window for foreign direct investment, and is actively working with the hub implementation team and its federal partners to ensure that Canada reaps the maximum economic benefit from the global opportunities available today.

Senator Wallin: Thank you for being here today.

We were speaking with the government officials yesterday about this and are all still wrestling with it a bit. We have an awful lot of government employees whose job this currently is: trade commissioners, program ambassadors, consul generals, people who work for innovation in Canada. The list is long and you have laid some of them out.

What is not being delivered to you? And why you think this is important?

Second, your assumption seems to be that somehow there will be this mass of people that will be collocated in every city in Canada. For someone who comes from a rural area, we will have a discussion about that. Is that what you see? Is that what you have been led to believe?

Mr. Patacairk: Let me start with the latter of the two.

Invest Ottawa is the lead economic development agency here in Ottawa. The other 12 cities have a similar organization that does foreign direct investment.

When we established the CCCA, it was really to get a single voice for the cities across Canada. They embedded an individual from GAC with us purposely to be that voice that would go to Global Affairs Canada, "Invest in Canada,'' et cetera. We are already dealing with the Trade Commission Service. I will address that in a second.

With the new hub, our understanding is that there would onboard some additional folks. Right now you don't have that grassroot person that can champion at a municipal level on up. Our comment on it is simply that we have had a good working relationship with the individual embedded with us who is taking care of all Canada. The members came together multiple times and said if we are going to do this properly, we probably should have a voice sitting in the different cities so that we can go up to the top. That is just our thought. We don't know if that will happen for sure.

Have we been led to believe that? We know they will be onboarding a number of people. They haven't said where they will be yet. That is just our view on the world because one person isn't enough.

I will take a step back before I answer the other question about how many people are out there doing it.

I have been doing foreign direct investment for over 20 years. The competition is fierce. Our neighbours to the south are quite frankly much more aggressive than we are on the international scale of doing foreign direct investment in trade. We have done an admirable job through our Trade Commission Service and "Invest in Canada,'' getting our message out there, but we are a bit of a drop in the bucket compared to the big brother south of us.

The Trade Commission Service is a great window front for us for national things that are happening. They are so dang busy most of the time with ministers, mayors, senators — and the list goes on and on of high-ranking officials coming in — that it's tough for them to do just one job. Right now, with the fierce competition on foreign direct investment, it behooves us to put some power behind this, like the hub, to sharpen that up and get it going. I'm not saying they aren't doing a great job; they are just so busy doing so many things.

Part of what we do in Canada is the diplomacy in the statesperson function that helps with our foreign direct investment.

We know right now that our new Prime Minister is a business development person, and thank goodness for that. He is out there pounding the pavement, trying to bring in the Amazons and the Googles of the world. The list goes on. While we are trying to figure out what we will do next, the cities have taken it upon themselves, while this hub is being set up, to be the liaison to help out the Prime Minister or the PCO or anyone who is going out there.

We need a coordinated way of going out versus how many people are going out right now to go find those nuggets and bring them back in, because we will get beat out there every time if we don't have enough people coordinating messages, et cetera, as we talked about in the speech.

Senator Wallin: This raises the next question. Yesterday some of the discussion was about who these people would be and what their level of expertise would be. We needed that private sector cred so they could go talk somewhere. If you are in a consulate or an embassy, you are not seen as serious on the business front in that way.

You also see these people as local champions. They will be in Ottawa saying, "Come to Ottawa.'' Then the other guy will be in Saskatoon saying, "Come to Saskatoon.'' They will live there and try to make the case. Where does the expertise come from that they are going to Google or to Amazon, anywhere, and saying, "Come here''? What gets them in that door, other than they are there to champion City X?

Mr. Patacairk: I'm going to separate the question into two.

One is the hiring of the person; that is, who it really should be. Far be it from me to tell the government how to hire, but having been in a Fortune 500 and in two bootstrap start-ups, and having come from government, public-private, I have done multiple things — and I'm not looking for a job. You need somebody who understands those pieces, especially on the industry side.

The way it works in foreign direct investment is if I'm going to Amazon — let's pick on them because, thanks to the Prime Minister, he helped seal the deal on that; I thank him a lot for that because it came to Ottawa. It's already here, but it largely came to Ottawa. In order for us to win that FDI, that was a two-year process, with the Prime Minister sealing the deal. That took business people to understand how the ecosystem of Amazon works, how to get through the maze. It's not our maze and our government stuff. It's how do you compete with the family of Amazon to win that deal back in Ottawa?

Most people think it's a country-to-country thing, which it is; it's fierce competition. But it's really an internal business decision. It needs to make sense to the business people because they might be able to put it out West. They might be able to put it somewhere else, getting political pressure from the United States. They might say they want to go to China or somewhere else. If somebody has a business background and has been in these fields before, they know how to position the deal.

I'm not saying your Trade Commission Service folks don't, but they lean a different way a bit.

Does that answer your question?

Senator Wallin: Well, in part. I guess what I'm getting at is the person that is going to champion Ottawa and knows how to deal with Amazon may not be the person that can champion Wadena or Saskatoon, Saskatchewan, in the field of agriculture.

Mr. Patacairk: That was the second part of the question, I'm sorry.

With the advent of the CCCA and the working relationship between the hub and the CCCA, that's where that gets tied together. What happens is you have a champion at a municipal level that understands what is going on — not just in Vancouver, but Vancouver proper, the whole area; not just Ottawa, but Almonte, Arnprior and places like that. That catchment area isn't just that city. That was the one thing that the hub has insisted on, namely that we look more broadly. The one thing that we insist on is that we need to help not just the selfish interests of our city but those around us.

Precision agriculture is a great example. You wouldn't think Ottawa is doing precision agriculture. A lot of it is coming out of Calgary and Guelph, for example. We already know that because we're looking into supercluster stuff. But the enabling technology for ICT is coming out of Ottawa. So now, through this chain, we can connect the dots and get things like that rolling.

Why is that important for foreign direct investment? Because when we're going out and selling it and putting our tool decks or our marketing decks together, that becomes part of the value proposition.

The hub needs CCCA as much as we need them to put that story together. We want to be able to help all that catchment area — not just the city, but where you come from in your region as well, and put it into the value proposition.

Does that answer the question?

Senator Wallin: Getting there.

The Chair: Thank you very much.

(The committee adjourned.)