Proceedings of the Standing Senate Committee on
National Finance
Issue No. 25 - Evidence - February 15, 2017
OTTAWA, Wednesday, February 15, 2017
The Standing Senate Committee on National Finance met this day at 6:49 p.m. to study the federal government's multi-billion dollar infrastructure funding program.
Senator Larry W. Smith (Chair) in the chair.
[English]
The Chair: Welcome to the Standing Senate Committee on National Finance. Colleagues and the viewing public, the mandate of this committee is to examine matters relating to federal estimates generally as well as government finance.
My name is Larry Smith, senator from Quebec, and I chair the committee. Let me introduce briefly the other members of our committee.
[Translation]
To my right, Senator Forest from Rimouski, and Senator Elizabeth Marshall from Newfoundland.
[English]
Of course we have Senator Dean. What part of the country are you from? From Ontario, is that correct?
Senator Dean: From Ontario, yes.
The Chair: Thank you very much for coming in tonight.
[Translation]
Senator Lucie Moncion from North Bay, Senator André Pratte and Senator Bellemare from Montreal.
[English]
Our deputy chair, Senator Anne Cools.
I have an announcement but it's not news to the person to whom I will make the announcement. Michael Sabia's mandate was renewed as President and CEO of the Caisse de dépôt et placement du Québec, and that mandate has been renewed until March 21. Congratulations, Mr. Sabia. It's great to have you with us.
[Translation]
Today we are continuing our study of infrastructure spending. We are pleased to welcome other executives from the Caisse de dépôt et placement du Québec to discuss infrastructure.
[English]
From the CDPQ we welcome Michael Sabia, President and Chief Executive Officer. Mr. Sabia is also part of the Advisory Council on Economic Growth put together last spring by Finance Minister Bill Morneau.
[Translation]
We also welcome Mr. Macky Tall, from the Caisse de dépôt et placement du Québec.
[English]
Did I say that right? My clerk gave me strict instructions to make sure I get the name right.
[Translation]
Macky is also vice-president of infrastructure and president and chief executive officer of CDPQ Infra, a wholly owned subsidiary of the Caisse. Welcome, gentlemen.
[English]
Would you please go ahead with your opening statement, Mr. Sabia? At your conclusion, we would be pleased to ask some questions.
[Translation]
Michael Sabia, President and Chief Executive Officer, Caisse de dépôt et placement du Québec: We are pleased to appear before your committee this evening. We are very comfortable answering your questions in English or French. I have a few comments to make on certain matters. To give my introduction more quickly, I will speak in English. If you prefer that I speak in French though, I will certainly do that. Our daily working language at the Caisse is French.
[English]
I'm here wearing a couple of hats: one as a member of the committee that the Minister of Finance put together a while ago which very much bears on the issue of infrastructure on a national basis, and my hat at La Caisse. This is an area of great interest to us. We're trying to do some new things and we're trying to think differently. That's all under Macky's leadership.
The goal of the group working with the Minister of Finance is to find opportunities and to recommend a set of ideas that could help enhance the rate of growth in Canada, which is consistent with many other Western developed OECD countries. It is looking like it will be comfortably below 2 per cent on an ongoing basis as a result of an aging population, low productivity performance, et cetera. Those are not Canadian phenomena; those are global phenomena.
We now have two bundles of recommendations, all with basically two goals. One is enhancing the level of economic growth. We quantified that by saying we want by 2030 to have increased in effect real household income by $15,000 above the level it would otherwise have been; in other words from $90,000 to $105,000. That doesn't sound like a lot but on a national basis it's huge. We've made a set of recommendations to address that.
Equally, we're focused on the very important issue of inclusiveness of growth not just in Canada but in the world. How much are the dividends of growth shared across different groups of Canadians and different income classes of Canadians? That inclusiveness is an important part of the work we're doing.
I was just at a House of Commons standing committee with your House of Commons colleagues on the issue of the work of the advisory council. I'm happy to answer any questions you may have, but I'll just focus on the infrastructure part of the recommendations that we made public and released to the government in October of 2016.
Infrastructure is an extremely important lever of economic development in Canada and globally; in fact it is one of the most important. I say that because infrastructure has some unique properties. It is a way of both enhancing in the near term the level of economic growth from a macroeconomic stimulus point of view. More important than that, infrastructure done correctly is a way of substantially enhancing productivity. By enhancing productivity it enhances the long-term growth potential of the Canadian economy.
There is a great range of estimates around what is the gap in infrastructure in Canada. It's somewhere over and above what's currently being spent. I don't know. Pick a number: $200 billion to $1 trillion, $500 billion or $600 billion. Once it has a B after a few figures it's probably a pretty big number.
There is a big need. It's important because it makes Canada more competitive globally. If we have more efficient ports we're better able to compete. If we have more efficient airports, we're better able to compete. If we're better able to connect the country together, we're better able to compete and more productive. The whole issue of building a modern infrastructure for the country is like building the foundations for growth.
For that reason, we recommended and the government embraced the creation of the new institution Canadian Infrastructure Bank. We believe this is an important recommendation. I say that because governments alone are not able to finance infrastructure in Canada to the level required. Levels of indebtedness are what they are. Even though Canada has some fiscal space, particularly at the federal level, it is not a good idea for the federal government to take this on alone. I want to explain that for a second.
I say that not because we're fiscal conservatives on the council. I'm not, nor are many of my colleagues. This may sound strange to you but this is an issue of social justice. Why should governments fund 100 per cent infrastructure development and therefore limit their capacity to fund health care, to fund the programs that indigenous Canadians need and to fund education through the provinces? Those are important things.
Why should a government rely on old-fashioned methods of financing infrastructure when there are literally trillions of dollars of capital available worldwide to participate in the financing of infrastructure?
At the end of the day, at 30,000 feet, ultimately the infrastructure bank is about putting in place an institutional capacity to take perhaps some government money. The government has indicated that it's committing capital to that bank. It will draw on people like us, on other our counterparts in Canada and on funds from around the world. All of them would line up to invest in Canada. Why not do that and free up resources to build a better health care system, a better education system and a better deal for indigenous Canadians, all the things that we talk about in the newspapers every day? That is why I say being creative about how we finance infrastructure is at the end of the day not just an economic issue but a social issue.
We're very happy to talk about this. Macky has prepared a piece that has been distributed. One example of a different way of approaching infrastructure is an urban transit project that we're undertaking in Montreal. It is 67 kilometres of light rail transit. It will be the third largest system in the world.
We're doing it from beginning to end. We're planning it under Macky's leadership. We're organizing the groups of people who will build it. We'll oversee the construction of it. We're going to own it and operate it. That has never been done before by a pension fund.
It will transform Montreal. It will make Montreal more productive. We're doing it not because we're altruistic but because we're confident that we can earn a meaningful return for the pensions of our depositors, in other words the people of Quebec.
Infrastructure has very attractive financial characteristics. It's a long-term asset. It generates a lot of cash. It's the kind of thing a pension fund ought to be investing in, which is why there are trillions of dollars available around the world. We're happy to talk about it. It's a very different model that has not been tried before.
Pension funds like ours have tended to invest in brownfield infrastructure, not in greenfield infrastructure. We are breaking this nut by having pension funds invest in greenfield infrastructure. We're not particularly self-congratulatory people, so don't misunderstand me. It is not because we are doing it. If we crack that nut and people like us invest in greenfield infrastructure, we open a whole new world of infrastructure.
We are all about doing this project in Montreal because we want to export the model around the world. For us, it's a new frontier of investing in something we think we know how to do. I'll stop there.
Senator Marshall: The end-to-end management chart that you handed out on how the model works, is that the way it is set up with the Quebec government? You're aware of the infrastructure bank. We're trying to get a handle on how the infrastructure bank will be set up and what would be the relationship to other entities.
What's proposed there or what's there? That's the relationship now with the Quebec government, is it? Would you see that as working with the infrastructure bank?
Mr. Sabia: I'll let Macky walk you through this page. Different models can be used here, but this one is applicable to how the infrastructure bank could work. The infrastructure bank could also work in simpler ways.
I'll quickly walk you through our notion of the infrastructure bank. Then I'll turn to Macky to walk you through this page. The bank would be a financing organization, a centre of expertise and an infrastructure planning group. Infrastructure planning is important because Canada needs a national infrastructure plan. Part of the mandate of that infrastructure bank would be to develop such a plan in cooperation with the provinces because the provinces are important players in infrastructure in Canada.
Once that plan is developed it would be discussed with government. Some government priorities would be reflected in that plan. Once that is done, the proposal is that the bank would then go forward to implement that plan.
It would identify projects that needed to be done. It would structure those projects. It would invite investors to come into the financing of those projects. Therefore, it would raise capital from people like us and others, and it would use that capital to deliver the infrastructure.
The infrastructure bank is about planning a national infrastructure strategy. It's about expertise, particularly financial expertise. It's about leveraging private capital into the financing of infrastructure so the government could get on to doing different things. That is the high level of how we see the bank working. This is a little different.
Macky Tall, Executive Vice-President, Infrastructure, Caisse de dépôt et placement du Québec: I will walk you through that model, senator: That's a summary of how our agreement with the Government of Quebec works. The first step is the government remains in control of determining public needs, so it remains the guardian of public interest. It will approach us to identify potential infrastructure projects.
Senator Marshall: You would also participate in the identification.
Mr. Tall: No, the government identifies the project and proposes a potential infrastructure project to us. At that point we take the idea of a potential infrastructure project and basically apply world-class resources and best practices. We study the project and come up with optimized solutions, from both a technical and an economic point of view.
After having worked for a year or 18 months we will come back with two or three options that we feel meet the public interest objective of that infrastructure and are viable from both a technical and an economic point of view. In other words, it's an infrastructure project that is able to generate revenues for our objective of making a commercial return.
If that goal is met properly at that point the government gives us the green light. We act as a one-stop shop, effectively completing the planning process, doing the financing, and executing construction. Because we're a long- term investor we're a natural corridor for that investment pretty much throughout its life, which would be over decades.
A unique feature of the model is in that one-stop execution. We would be taking those risks away from government in terms of delivering the project on budget and on time. We would be alleviating the risks and ensuring that operational costs are kept under control. In our case we're investing retirement money to generate stable, long-term cash flow to pay income, and that's where we get the virtuous circle.
Mr. Sabia: We call this a virtuous circle. What does that mean? We invest now to create a new public transit system. That improves the daily lives of people in Montreal. It also improves Montreal's productivity and makes it a more viable, more attractive urban economy.
We're delivering benefits to people now. We're also earning returns from that investment, but those returns go back into people's retirement income because we're a pension fund manager. When somebody buys a pass to use our service, they're really contributing to their own pension fund.
It's a virtuous circle in that we're doing things to help people today that deliver returns to us which allow us to help them in the future.
Senator Marshall: Once the government gives the green light to go ahead is there any involvement by the government? I probably shouldn't use the word interference, but once you're given the green light you're off and running on your own.
Mr. Sabia: That's right, from the provincial government point of view. We work closely with Montreal's urban transit authorities. We want this to work in a seamless way with all other transit operations in Montreal, from a customer point of view.
Senator Marshall: I am looking in your document at The Canada Line and Heathrow Express. Do you invest in social infrastructure? Would that also be in your mandate?
Mr. Sabia: The answer is yes. Macky could give you examples of things we've done in Australia. We need to be careful with the definition. In social infrastructure, for instance, we've invested in a successful set of cancer research centres and hospitals in Australia that have done extremely well. They generate revenue for us. Macky can go over the details.
Often some forms of social infrastructure may not do that. For instance, there's an enormous social need for simple things like better water systems for indigenous Canadians, particularly indigenous Canadians living on reserve. Often a project like that won't generate a revenue stream and therefore we won't do those kinds of things.
Senator Marshall: In the media recently there was mention of an option.
Mr. Sabia: You should not often trust what you read in the media.
Senator Marshall: I know, but I still have to ask you a question.
Mr. Sabia: Except when it's on the editorial page.
Senator Marshall: One option is the sale of large airports in Canada. Based on the documents you handed out, it looks like you're interested in The Canada Line, Heathrow Express and a few things like that. Would buying airports be something within your mandate?
Mr. Sabia: Yes.
Senator Marshall: As long as there is a revenue stream.
Mr. Sabia: We've done it in many countries around the world. Heathrow is a good example. Airports are great infrastructure assets for pension fund investors or infrastructure investors like us.
I understand this is an issue to be discussed. Canadian airports would be attractive on a global basis. Even selling small minority stakes would be a way of monetizing 20 per cent of the value of an airport. Government could take that and recycle it into other forms of greenfield infrastructure, social programs, social infrastructure, or whatever it wanted to do.
Senator Marshall: You're looking for big projects to make money for the pension fund.
Mr. Sabia: Yes.
[Translation]
Senator Bellemare: My questions pertain in particular to the Canada Infrastructure Bank. Coming from Quebec, I am more familiar with the Caisse and its investments. I know you are experts on infrastructure investments and that you have completed a number of projects. I am happy to hear you say that the bank will look after infrastructure planning and expertise.
Those are two things that are of concern to me so perhaps you can tell me more about them. I think it is an excellent idea, since it will increase planning productivity in Canada and in the provinces and municipalities as well. How will the bank proceed to achieve balanced planning among the regions? How will it address expertise issues, not just in finance, because I think the Caisse is very strong in that area? We know, however, that in Australia, in countries that have long-term investment plans, expertise in human resources is also vital for delivering projects on time and within budget. Do we have all that expertise in Canada? I always thought the Infrastructure Bank served primarily a financial role, but I see it encompasses not just the financial aspect, but also planning and expertise.
In these two areas therefore, planning and non-financial expertise, what approach will the Infrastructure Bank take, since a federation also includes the provinces and municipalities?
Mr. Sabia: I find it surprising that, in a developed and highly sophistical country such as Canada, we do not have an inventory of the quality of our infrastructures. There is no such inventory anywhere in Canada. For planning purposes, the first step is to take an inventory in order to understand how things stand in Canada. What is the quality? Are there issues? What needs to be done? That is the first step. From there, the second step is to set priorities in order to move forward.
To answer your question about the nature of Canada as a federation, in my view the starting point for planning is to focus on the federal government's assets and to show everyone that this organization, this bank, has the necessary expertise to develop a plan. The third step in developing a national plan is to invite the provinces to become involved and to work with them to develop a national plan that includes activities related to the provinces. We are not suggesting that the federal government should require the provinces to participate, because that is not the nature of our federation. I think we have to start with a demonstration process because, with its expertise, the bank will be able to demonstrate to everyone that all this expertise is available and that it will help improve the quality of infrastructure planning in Canada. That is how I see the planning and development process at the national level.
With regard to expertise, a lot of people underestimate the importance of financial expertise in structuring projects properly. Macky has spent nearly his whole career doing exactly that. Thanks to Macky's efforts, we now have a strong team, which is no mean feat. The bank's goal is to create a centre of expertise that includes planning as well as financial expertise.
There is also another aspect that you raised, project management. Structuring a project effectively is one thing, but delivering on it is quite another. In order to deliver the project Macky spoke about, we have developed a strong project management team. Our goal is to do the same thing and develop that same expertise at the bank. The bank is not just a bank.
Senator Bellemare: I see that.
Mr. Sabia: It is a bank, but also a centre of expertise, and the combination of these two things does not exist in Canada.
Senator Bellemare: That sheds some light. I also understand that, in terms of planning, you want to remove the political pressures related to our federation and focus instead on the existing inventory as a start, in order to provide a basis for your planning as regards real infrastructure needs.
Mr. Sabia: I will choose my words very carefully since I am before a committee of the Parliament of Canada and you are all parliamentarians. One of the key features of this bank, the central idea, is to get away from the process of setting priorities and making decisions at the political level. Why? This reflects the importance and strength of an infrastructure development strategy designed to substantially strengthen and increase the level of productivity and thereby economic growth in Canada. The goal is to identify projects that are most likely to significantly impact productivity. That is not always the most important consideration at the political level, for obvious reasons.
We are not saying that decisions should be based solely on financial and economic considerations, to the exclusion of political ones. We have to include both. That is why we have structured this recommendation in this way. We have divided it into two parts: major projects that generate revenues and in which investors such as the Caisse de dépôt et placement du Québec or the Infrastructure Bank or other funds could invest; and other infrastructure projects that are less appealing to investors such as the Caisse de dépôt et placement du Québec and that require more conventional decision-making.
Senator Pratte: My question is further to your remarks. I share your enthusiasm and that of the Caisse de dépôt et placement du Québec for major infrastructure projects. I also share the enthusiasm of the committee, the council and the finance minister. I do, however, have a concern.
In the infrastructure programs in Canada over the past 10 years, we have seen tremendous enthusiasm for infrastructure projects of all kinds, with mixed results. The model you are proposing would take political decisions as far away as possible in favour of a different governance model. It is essentially a model with the private sector's focus on profitability, with the clear objective of increasing productivity in Canada. That is perfect in theory, but the private sector can also make mistakes.
Mr. Sabia: Yes.
Senator Pratte: The Government of Canada would provide $35 billion or $40 billion in upfront capital.
Mr. Sabia: It would be $35 billion.
Senator Pratte: Thirty-five billion for the first 10 years. It is not enough to say that the federal government is removed from the process. We are talking about $35 billion. Taxpayers will expect accountability. I am not sure that the federal government could be completely set aside.
First, how can we make sure that the projects are well selected, without any political pressure? Secondly, how can we make sure that all these projects address the needs without anything going wrong? We are talking about very large sums of public money as well as money from pension funds and institutional investors.
Mr. Sabia: Exactly. That is the rationale behind the planning and priority development process. The idea is to ask the bank to set 10 priorities every two years, let's say. Before these projects begin, government approval will of course be needed. It will be up to the bank to recommend certain projects, on a "fairly technical'' basis, by demonstrating the impact or importance of each project.
You are right, though. Given the federal government's financial stake, it has to be involved in approving this plan. The idea is to encourage that participation because it is crucially important. As Mr. Tall said, the government must safeguard the public interest. Once the plan has been approved, the bank will have to be given the necessary leeway to carry out each project. The bank will not, completely independently, choose and carry out each of the projects. The parties will play an important role before each project is launched.
Senator Pratte: How can you prevent all the participants from getting carried away? These are major projects we are talking about. They are probably bigger than the one in Montreal. They are at least on that scale and are very broad.
Mr. Sabia: Yes, but allow me to make a correction. Our project has a value of about $6 billion. There is nonetheless a whole range of projects, from approximately $500 million to $1 billion or $1.5 billion. They are major projects, but perhaps not as large as the one in Montreal.
Senator Pratte: Human nature being what it is, I am worried. There is a lot of money involved and some major projects. Things can sometimes go wrong under those circumstances, whether the private sector or the public sector is involved. That is what worries me. We need safeguards to make sure things do not go off course.
Mr. Sabia: Yes. You raise an important point. For our project in Montreal, we have given that a great deal of thought. In our opinion, we must avoid not only an actual risk, but also the perception of risk. The Caisse de dépôt et placement du Québec invests in all kinds of companies. We have devised a whole structure to eliminate risks and conflicts of interest.
Mr. Tall can tell you about the external audit process and the committee we announced this week.
Mr. Tall: As you pointed out, this is a very important aspect for such a large project. For our project in Montreal, the procurement process meets and exceeds the highest local and international standards. At every stage in the process, there is truly open competition. At each stage, transparency criteria are established as part of the process. We have two independent auditors at each stage who track all aspects of the work. Once the work is completed, the auditors have to prepare a report that is published in order to confirm that, at every stage of the process, the highest level of integrity and transparency was evident in all the decisions made and in the evaluation of the bids received. This report is published. Once the independent auditors have completed the process, they report not to us, but to an independent, three-member committee.
This committee is made up of a former justice of the Supreme Court of Canada, a retired lawyer, and a trained accountant. They review these reports and further certify the integrity and probity of the entire process. This very high standard was established specifically to confirm the rigour of the process.
Senator Pratte: Thank you.
The Chair: I hope our questions will be rather brief because we have a long list of them.
Senator Forest: I do not know why you are looking at me, Mr. Chair, as you say that.
I would like to thank the witnesses for being here. I think there is a huge challenge with the infrastructure inventory in Canada. You surely know that over 50 per cent of public infrastructure in Canada falls under municipal jurisdiction, and that municipalities receive about 8 per cent of all revenues from income tax.
The municipalities have invested $4.3 million every year since 2007, when the first infrastructure component began. Over 10 years, that amounts to an investment of close to $43 billion. I could talk in particular about the condition of drinking water and wastewater treatment facilities, which had huge deficiencies and were losing 35 per cent of the treated water in our networks. At the same time, this work, which was driven by program objectives presented to the municipalities, also increased the debt load of municipalities, which failed to invest in other, more social types of infrastructure.
As to the bank, there is some interest in investing in major projects, but is that also true for smaller projects in the regions of Quebec?
One of the greatest challenges, in my opinion, is demographics. Our communities must be appealing and offer basic services, along with other services such as a library or any other kind of facility in order to attract new families, who will take over our businesses, research centres and universities.
Does the bank have an interest in investing in the regions through less appealing or smaller projects than the Réseau électrique métropolitain?
Mr. Sabia: Of course the bank has no interest in fully replacing the work of Infrastructure Canada. Our approach focuses on the most important projects as regards productivity, and also on projects that generate a source of revenue. For certain activities, if we see fit, the current infrastructure funding programs will continue. It is not a question of replacing all those activities.
Secondly, as to whether such a bank would be able to work in the municipal arena, the answer is yes, but it depends on the decision-making and the preferences of any given municipality. One of our suggestions is to open the bank and the bank's expertise to the provinces and municipalities throughout the country. Why? Because one of the issues in Canada in the most important municipalities like Toronto, Montreal, Calgary, Vancouver —
Senator Forest: Rimouski.
Mr. Sabia: Rimouski, of course.
So, one of the issues is that there is a lot of expertise in some of the larger municipalities, but in a lot of other municipalities that expertise does not exist. If the bank can improve expertise and make it available to everyone, we will see an improvement in the quality of project management, and probably also in the meeting of deadlines and budgets in most municipalities. This is not a request or a requirement on the part of the bank, because that is not part of its mandate; the idea is simply to open the doors.
Senator Forest: That aspect of the national strategic infrastructure plan seems like a fundamental element to me in light of all of the levels you spoke of, but making the information more available, as you described, also appears fundamental. I have put that forward for a long time. Information is available on public infrastructures, but being able to carry out comparative analyses of projects is a basic element, in my opinion, and the bank could do that. As an example, when a city or a business upgrades 26 kilometres of its streets, knowing the cost of the project would allow us to make comparisons.
In your opinion, to establish a national infrastructure strategic plan, is there an inventory that needs to be taken, in addition to the priorities that must be defined together by the bank, the federal government, the provinces and all of the partners? Is that the vision?
Mr. Sabia: Over time, yes. In the beginning I think we have to launch the process somewhere. Simply to demonstrate the efficiency of the process, in my opinion, it is preferable to avoid the process at the federal level. But yes, I am entirely in agreement with the idea of encouraging provincial participation.
There is another important point which is the structure of the bank's board of directors. We feel it is important that the bank and its board reflect the regional structure of Canada. We have to invite the provinces to participate, potentially, in time; perhaps not in the beginning, but at some point. The board of directors of the CPP Investment Board is structured like that — it asks for the approval of the provinces for each appointment to the board of directors. It would be very important for such a bank to have among its members, for instance, someone from British Columbia, the Canadian west, Ontario, and Quebec, because that is the nature of our country.
Senator Forest: Regarding the Réseau électrique métropolitain, clearly the realization of that project will have a major impact on metropolitan areas. In developing your project, beyond the planning of the network, are you in contact with the services in the cities concerned? That project will have a major impact on the concentration of dwellings and nearby services. You are going to change the urban landscape with this project; are you in constant communication with city planning services and municipal authorities?
Mr. Tall: Yes, you are quite correct, that is an important element and that is the reason why, since we launched the project a little less than a year ago, we have held hundreds of meetings with all of the municipalities that are close or will be traversed by the REM. This includes mayors, technical services, and last but not least, the transportation authorities, as Mr. Sabia indicated earlier — in order to ensure integration among the bus networks, the REM, subways and trams.
And then there are, last but not least, the citizens. We held 12 open door events over the past six months during which we met over 3,000 citizens to obtain their reactions on how they see this project integrating into the urban fabric.
The Chair: Dear colleagues, we are going to have to hurry because we only have 10 minutes left with our two witnesses, and then we have to continue our work in camera.
[English]
I would like your questions to be direct. We need quick questions and long responses.
Senator Dean: This is a wonderful discussion. Critical issues were raised: governance, capacity in the private sector and the public sector, risk transfer, and the need in government for a very different approach to oversight.
This is about government as a steward of a new and emerging public/private sector market as opposed to being a micromanager. It will need to build that capacity. I don't believe it has it now. I will leave it at that.
I will now talk to you in your pension plan capacity. You are one of several pension plans recognized globally as a hugely successful enterprise and investor, partly because of the governance structure and partly because of the capacity.
Mr. Sabia: Every time I hear that I worry about what is in the market tomorrow but go ahead.
Senator Dean: It is easier for me to say it than for you to hear it.
Mr. Sabia: It is.
Senator Dean: First, congratulations on that success. Second, as a result of the creation of an infrastructure bank and initiatives like the Montreal Metropolitan, could we assume that some pension plan investment funds that otherwise would have inevitably flowed overseas will remain in Canada?
Will more investment money managed in Canada by Canadian enterprises remain in Canada for investment for the benefit of Canadians as opposed to going to Hong Kong, London or New York?
Mr. Sabia: This is an enormously important question. I am not surprised, given your former work, that you thoroughly understand the change in governance and the change in functioning of government that underlie this proposal.
On the issue of pension funds, most pension funds are a lot more comfortable engaging in brownfield investment. What is brownfield investment? Acquiring Highway 407 outside of Toronto and an existing airport and running those assets efficiently is something pension funds around the world do well. Canadian pension funds are global leaders in doing that.
We are of a view that the next frontier for pension fund investing is in greenfield infrastructure. On the distinction between greenfield and brownfield, I say to my counterparts who run other Canadian pension funds that I don't see green and brown anymore. I just see khaki, in between the two.
Why do I say that? We bought a big chunk of Heathrow years ago. Since then we've invested billions of pounds in building Terminal 5 and Terminal 2. Is the building of Terminal 5 and Terminal 2 brownfield or greenfield? I don't know. I know as a group we took on the construction risk of what were huge projects. It took billions and billions of pounds to build those terminals.
Pension fund thinking is evolving. The project we're doing in Montreal is being closely watched by my Canadian counterparts. Some of them are watching with some skepticism, which worries me because they're smart. If they're skeptical I keep asking what I am missing.
Could I give you a guarantee today? No, but I can say that if this bank were created, with the rigour and the discipline it would bring to project development, structuring and execution, I think it would be a big step forward in encouraging other Canadian pension funds to invest in the Canadian infrastructure market.
The nightmare for an investor like us is when we have invested $40 million, $50 million or $60 million preparing bids and proposals and then at the last minute there is a political decision not to proceed. That risk freezes a lot of institutional investors because they worry if they get too close to a greenfield project whether politically it will actually happen.
We are trying to be conscious of the importance of governance in the way we are structuring the bank so that there is political decision making on the selection of these projects. However, once that's done, the investor can then count on the fact that the project is going to be brought to completion. That would substantially open the door to counterpart funds like ours.
The Chair: We need to move on.
[Translation]
Senator Moncion: My question is about the whole planning process. If I understand the type of investments the Caisse de dépôt du Québec is looking for, these are long-term projects that will generate long-term revenue. In Canada, we have short-term projects that do not generate a lot of income, and they are what could be called "social projects''. On the other side there are long-term projects Canada should invest in, and which should indeed generate long-term income.
What I understand from your statement is that the Canada Infrastructure Bank would focus on long-term infrastructure projects that would generate long-term revenue, and societal or more local, concrete projects would be funded from the government's general operating funds.
Mr. Sabia: Yes.
Senator Moncion: Can you tell me what the relationship is between the Caisse de dépôt et de placement and the other financial institutions on the market?
Mr. Sabia: I agree with the fact that we have two completely separate elements, but I did not quite understand your question.
Senator Moncion: The Caisse de dépôt invests in long-term projects.
Mr. Sabia: Yes.
Senator Moncion: How do you work with the other financial institutions like the Royal Bank or all of the other players that are in those markets? Or, on the contrary, do you compete with them?
Mr. Sabia: That is a very good question. In my opinion, it's not a competition, and it is often misunderstood. The Infrastructure Bank and the Caisse de depôt invest in project equity. In financing infrastructure, the banks — the Royal Bank, Bank of Montreal for instance — are present, but they deal with debt.
Frankly, I think the bank will broaden the funding market for Canadian banks, but it is not a matter of competition between the bank or an investor like the Caisse de dépôt and the commercial banks, not at all.
Senator Forest: I would like to specify that to fund infrastructure projects, among others, municipalities go to the bond market and not to financial institutions.
The Chair: There are two levels, if I understand correctly.
[English]
There are high-end markets where you need returns over a long period of time from major projects. If you have a $100 million social project that won't give you the type of return you want, as part of the federal government strategy, tied in with the provincial strategy, you would take the debt money or the operating capital out of the government to use in that investment. Is that correct?
Mr. Sabia: Yes, you did separate the two parts.
The Chair: There is a demarcation line for all of us to understand which creates opportunity for the bank. One challenge, it would appear, would be staff competence and technical expertise in that operation so that you could not only do the analysis but the delivery.
Mr. Sabia: Yes, that is absolutely correct and that is fundamentally important.
Senator Tkachuk: There is a lot of play here because governments gather cash money through taxes for the very purpose of supplying infrastructure for its citizens, whether it's city governments, provincial governments or federal governments.
I remember the privatization of airports. Governments paid for all the airports. They paid for all the controllers. Planes flew in and planes flew out. Then they privatized them.
Mr. Sabia: They didn't really privatize them.
Senator Tkachuk: No, no, let me get to that. They charged rent. It was local non-profit organizations, supposedly, running these community airports. I didn't see a reduction in my taxes to compensate for the fact that they no longer paid for the airports. As a matter of fact every time I buy a ticket I pay. Every time I buy another ticket I pay again. Then there is another charge for security. The government has abandoned that, but we never got our investment back. We lost it all and the government used it for other purposes.
If an infrastructure project is economically viable, why do you need government money in it at all?
Mr. Sabia: Sometimes you don't. It depends on the nature of the project. Not every project will be completely financeable from generated revenue sources. I'll give you an example of one that is. Highway 407 was not well designed at the beginning, but it enormous amount of return. I wish we owned a chunk of it. In fact we did many years ago but we sold it, which was really stupid. It's unbelievable. There are lots of other infrastructure projects that require some level of financial participation.
I'd encourage you to think differently about how we do this. Government participation in financing an infrastructure project does not have to be a traditional write-a-cheque expenditure. As we are doing with the project in Montreal, it can be structured as an investment in the equity of the project that will generate a return. Saying to governments pick a number, invest a billion dollars and you will earn a return that meaningfully exceeds your cost of capital, is a revolution in how governments go about doing things.
Senator Tkachuk: I am getting at why you need government to risk the money. Why is the government risking taxpayer money? If you get a return on investment, why isn't it all private sector money?
Mr. Sabia: There are going to be some projects that by their nature are perfectly legitimate. For public policy reasons government may want to keep aircraft ticket prices down or toll prices on a highway down at a more meaningful level. It could be that with an absence of financial participation on the part of the government the returns available from that project will not be sufficient to attract capital from a pension fund.
The government is still, net, far better off to partially finance the project and draw on, say, $2 billion of investment from people like us, from teachers or from the New Zealand Superannuation Fund, or whoever the capital comes from for that investment, be it Abu Dhabi or wherever. To have that investment made and then potentially make a sidecar investment or an equity investment in the project of, say, $500 million, which is far less than would have been required to develop the project in the first place, and potentially earn a return off that $500 million is far better financially than any other government financing infrastructure in Canada before.
Senator Tkachuk: I don't buy any of this argument. Nonetheless, go on to the next question.
Senator Marshall: We're talking about the way you're set up now and how you think it will work when the infrastructure bank is set up. Once the government sets up the infrastructure bank and you see its governance structure and all the terms and conditions, it's quite possible you might not want to go into any type of arrangement with the federal government. Isn't that possible? There are some organizations that don't want to do business with the government.
Mr. Sabia: I guess the answer to that is yes. That's why the setting up of the bank is so important. It has to be structured properly. It has to be governed properly. It has to be seen by private sector investors and public investors like us as having some arm's-length relationship operating on the basis of professional principles. If not, you are 100 per cent right. There are a lot of people who will wonder.
Senator Marshall: I know. Governments like to control and they do not like to give up control.
Mr. Sabia: That's a really important issue in the setting up of this bank.
[Translation]
Senator Bellemare: For the Canada Infrastructure Bank, since this is a public-private partnership, even if we don't like to use that term in Quebec for all kinds of reasons, transparency will be very important for the population so that the whole exercise has credibility. Have you thought of some way of communicating directly with the public, for instance through a website? I think that is something people would like.
Mr. Sabia: I will answer your question in two parts. I think, given the nature of the planning process, that there will be a major increase in transparency, and that that will apply to the governance of that organization also. The institution will have to present annual or biannual statements about its activities. That will be necessary because credibility requires an increase in transparency.
Secondly, for our Montreal project we have said publicly that we would release our performance results. We will be asking outside auditors to verify our performance levels and compare them to what is available on the markets. You are quite correct about the issue of transparency. Given the nature of the new model, we have to build credibility with the citizenry. We are going to go two or three levels beyond the status quo in order to present our performance in all transparency, as well as our decision-making, in order to build credibility. That is what we will do.
[English]
The Chair: You did a great job. We know you had a busy time at the Commons and we certainly appreciate your taking time with us.
We will be giving our first interim report on the infrastructure study that we've done. We're quite excited about that because you have mentioned some of our points in terms of strategy and some of the roles the government needs to take to improve its own situation.
Mr. Sabia: I'm speaking on behalf of Caisse de dépôt. We have done an enormous amount of work on these issues. Macky has succeeded in building a small army of people who report to him. If there is anything we can do to move your thinking along we're very happy to do it. You should treat us as a source of expertise.
(The committee continued in camera.)