The Decibel - How a little known bank is trying to build big things in Canada

Episode Date: October 1, 2024

The Canada Infrastructure Bank has been around since 2017, and originally it was meant to help build huge infrastructure across the country. In fact, one person involved in its launch promised you’d be able to see some of the infrastructure from space. But those massive projects never materialized and that put the whole bank at peril until it changed course recently. Adam Radwanski, who covers climate policy for The Globe and Mail, explains how this bank is trying to change its reputation and what likely will happen if it doesn’t. Questions? Comments? Ideas? Email us at [e-mail]

It can be really difficult and really expensive to build infrastructure. So difficult, in fact, that the federal liberals created a bank to do something about it. The Canada Infrastructure Bank exists to help get built the big things that we need for our day-to-day lives, for our economy, whether it's large electricity projects, or whether it's transportation, or whether it's our buildings. And to try to do that in a way that is sustainable, that is aligned with our climate goals and our economic growth goals. Adam Radwanski recently looked into the Canada Infrastructure Bank, which is also called the CIB. The bank should attract investment for those big infrastructure projects that provide

significant public benefit but are really hard to get done. Sounds pretty good, right? Except there's just one problem. The infrastructure bank is an entity that really needs a second chance to make a first impression. It still has a bad reputation hanging over it from a very slow start in which it struggled to get much borrowed time because opposition parties, including the Conservative Party, who have a very good chance of forming power soon, maintain that they will get rid of it if they form government. Adam covers climate policy at The Globe. He'll give us an in-depth look at how things got so bad for this bank and what it's doing to try and save itself from possibly being abolished. I'm Maina Karaman-Wilms, and this is The Decibel from The Globe and Mail. Adam, great to have you here.

Great to be back. So just to start, can you give me the broadest possible understanding of how infrastructure projects are generally built in Canada today? There's basically three ways that you can build infrastructure projects. One of them is that government, either the federal or provincial or municipal level, just pays for them. For instance, a lot of public transit projects would be like that. Through tax dollars then? That's right. Then there are those which the private sector would just cover. Think, for instance, of an electricity project where

there's just enough profit to be made that it might be a public-private partnership in the sense that it's for public good, but the private sector just pays for it. And then there are what we think of as public-private partnerships, which is a combination of public and private dollars, essentially using taxpayer dollars to try to bring in some private money as well to fund things that might not be affordable just with public dollars. Okay. And that third one is what we're going to focus on today, this public-private partnerships, also known as P3s. And specifically, we're going to look at the role of the Canada Infrastructure Bank here. This was launched in 2017 during Prime Minister Trudeau's

first term in office. What is the problem that the bank was designed to solve, Adam? Broadly, the infrastructure bank exists to help us keep pace with infrastructure needs in Canada. So the sense is that we just have too big a gap and a growing gap relative to how quickly the country would be growing in terms of population, economically, and so on, the big things we need were not being built or maintained at the right rate. And in particular, it's there to get built the things that maybe government can't afford on its own, at least that's the perception, but might not have the right reward for the private sector absent some degree of government incentive or help to invest in it. Okay, so essentially this would be like kind of projects that are maybe too risky then for a private company to do on their own? It's often projects where, let's say, the payback period might be too slow or too uncertain

for private investment alone. So for instance, you might have something where you think, okay, we know we're going to need this in 20 or 30 years, but we don't know exactly when they'll be profitable. And that makes it very hard to just get private financing for it. It could also be something where there's a lot of project risk, meaning the costs of building it are uncertain. Maybe it's a relatively new type of project. Maybe there's a lot of fluctuation in things like the materials that you need. So again, that could cause private lenders to not want to back a project. So you might need some degree of concessional lending from some kind of government institution in order

to make it possible. Okay. And is this like a brand new idea that the liberals came up with, or do these kinds of banks exist elsewhere too? What the CIB does is not a new concept. First of all, it exists internationally in various countries, either currently or in the recent past. You've got them in places like Britain, Australia, Germany, Europe, Singapore. I mean, they're all over the place. They do have some history in Canada as well.

In fact, there was actually a much smaller version of this that existed under the previous conservative government. That was called PPP Canada. Same general idea of using public dollars to bring in private dollars. Okay. So let's kind of look at when the bank was launched then, Adam, in 2017. When politicians would speak about it, what were they promising that it would actually do? The CIB was launched with extremely ambitious rhetoric that was somewhat in keeping with Justin Trudeau's first term in office generally. The idea was, never mind the small stuff. We want to build really big generational projects in Canada. What exactly those would be was not totally clear, which was part of his problem initially. But we heard about, you know, for instance, from Dominic Barton, who was the very high profile consultant who chaired an economic council for the government that recommended the launch of this. He described

it somewhat infamously in certain circles as potentially building projects that would be big enough to be seen from the moon. Wow. So they didn't exactly manage expectations in a way where some early struggles would be easy to justify. And we're going to get to that. But I guess just on this idea of what they were promising, what they were trying to do with this bank, how much money did the federal government actually give to the bank? The bank was allotted $35 billion total. Now, of course, that's money that is supposed to be returned because the ideas they lend in are repaid. But that's what they were capitalized at. Okay. And when we say $35 billion, I mean, that's a big amount, but can we compare that to something so we can kind of understand how big that is? It is a very large amount. I mean, for two ways

of comparison, one would be there was a previous iteration of something similar under the previous government. It only spent about a billion dollars in total, a little over a billion. So this is the one that under the Harper Conservatives they established. That's right, PPP Canada. Also, you could look at it as $35 billion is more than several provinces spend in a year. For instance, Saskatchewan, Manitoba, provinces that size. I mean, it's more than the annual provincial budget of some of our provinces. So it's a lot of money.

Wow, okay. Okay, so this bank is mainly in the business of loaning money to developers who want to build big infrastructure projects, right? And then those developers, the idea is they wouldAB finances projects that have significant public good, that are important in terms of services for Canadians, for economic growth, productivity, all of those things, where it can get a reasonable return, be paid back, and where it believes there is a gap that it can easily fill that'll put projects over the top. So there's some private money, but not quite enough, or there will be enough private money if it just delivers a small amount of concessional financing. More specifically, the bank has five different target areas in which it's supposed to finance. And those currently are clean power, public transit, broadband, trade and transportation,

and green infrastructure, which is also a bit of a catch-all. And across all of those, it has a priority of spending on indigenous infrastructure specifically. Okay. And so Adam, how does the bank then decide on these five priorities? In fact, it's the government itself that sets these priorities. And there's a mandate letter every year, although they've been fairly consistent. They get tweaked somewhat. But those priorities are set by the government with some parameters. The bank will sometimes seek clarification on what does or does not fit within them. For instance, on clean power, they had to go back and forth to determine whether nuclear power fit into that or not.

But they don't currently have to run every single investment past the government. They just get these parameters set and then operate within them. There was a point, though, where they did actually have to run every single investment by the government, though just get these parameters set and then operate within them. There was a point though, where they did actually have to run every single investment by the government though, wasn't there? Yes. And this was part of the problem for the bank early on, among many, was that the parameters were more vague, but every single investment had to be run past cabinet essentially, which if you know how government works, is a real recipe for stagnation. I mean, basically it was very hard for them to land on any actual investment. What about risk assessment? Because the bank is loaning out this money then. What is the bank considering when looking at, I guess, how risky a project might actually be to fund? Risk is one of the trickiest things for an institution like the CIB to deal

with. Because by nature, they have to finance things that are risky enough that the private sector won't do it on their own. If it's a real sure thing in terms of both the project costs and the money they'll generate eventually, the private sector would do it. There'd be no need for the bank. At the same time, they have to be sure that they're not going to wind up with too many projects that fail. A little bit of failure is actually okay. And in fact, what they're aiming for is enough of a success rate that their money is eventually returned, but building in some degree of failure therein.

So that's kind of their goal. I'm curious, because you did mention that they kind of bake in this idea of failure into their calculations here. Do we have an example of a project that the bank did fund that failed? There's been one prominent example so far of a failed project, which is something called the Lake Erie Connector, which is an electricity transmission line that was supposed to run between Canada and the United States. It never got off the ground. Ultimately, although it's

supposed to be hundreds of millions of dollars invested, ultimately the sunk cost seemed to have only been about a million dollars in feasibility studies, which is not very much money. However, that is something that the bank's critics, including the federal opposition, repeatedly invoked as an example of failures on its part, which speaks a bit to the risk, because that's not a big loss. But even that kind of thing can get held against the bank, which is one of the challenges that any of these institutions face, that if risk is baked into the model, theoretically, and even some failures baked in, that doesn't necessarily translate in the political context. Yeah. Okay, so I think we understand kind of how the bank works. It was designed to deliver

huge infrastructure projects. It has this massive budget. So Adam, I guess the big question is, has it done what it was created to do? That is a very complicated question, whether it's achieved what it's supposed to do. Early on, certainly not. It had a very rocky first few years where it didn't get much of anything done. The bank became a bit of a punchline in Ottawa and a prime example of the current government's struggles in living up to its own lofty ambitions. The criticism of it really came to a head about three years ago. Ironically, by this point,

it was actually starting to do stuff. But there was a parliamentary committee that examined its performance that had a bunch of fairly critical witnesses come in front of it to say it wasn't living up to expectations, and then ultimately recommended in rather unusually succinct language that the bank be abolished. Now, that was an opposition-dominated committee, so it's worth keeping that in mind, but certainly that indicated the extent to which it was viewed with skepticism in terms of performance. And it's something that is still invoked by

the Federal Conservative Party in particular. And from what I understand of the situation, too, Adam, like the committee, when it looked at the situation, it only came out with one recommendation. And that was the recommendation. That's right. It didn't didn't get into how to fix it. It just said, get rid of it. We'll be right back. All right, so the bank struggled to fulfill its goals early on, maybe in part because of kind of red tape, or maybe in part because the original expectations were a little unrealistic.

But Adam, what has it done since then to actually fix those issues? So a few things have changed since the bank's early days, at least per their own explanations and speaking with them. One of those is just a matter of experience and getting into the sectors that it's supposed to be serving, and it just takes a while to do that. A second would be, there was quite a bit of staff turnover. I mean, that includes at the top, the current CEO, Aaron Corey came in three or four years ago, and I think has generally been credited with a turnaround there. Early on, I think they had fairly traditional, if accomplished finance people who were viewing this not that dissimilarly in terms of potential investments from the way that private lenders would, and were therefore struggling to figure out what to finance,

how to deal with the risk. They were a little bit risk averse, understandably. Since that time, the staff seems to have shifted a little more toward people who maybe see themselves more as impact investors. They tend to be a little bit younger. They tend to be drawn in by the opportunity to work on things like addressing climate change, as opposed to just treating it as another finance job. That seems to have helped. The other really big difference is more structural. In the past few years, it's instead had a model where it has clearer priorities set by the government, but it doesn't have to run every single investment past the government. It's essentially free to operate

with a little more independence as opposed to getting caught in months or years of back and forth. And then less structurally, but kind of fundamentally, there has been the shift from aiming for a few really big projects, which can bog anybody down, to going with a lot of somewhat smaller ones, you know, say projects in the hundreds of millions of dollars or less, instead of all being in the billions of dollars. And so I guess as a result of that, do we know like how many projects are they actually funding now? Yeah, they've got about 70 projects that they've closed financing on for about $13 billion of government money. And the projects are worth cumulatively about $36 billion.

Okay. And is this a pretty steady stream of things that they're getting now? Yeah, they're now announcing at least plans to invest roughly a couple times a month on average. I think it's two and a half times a month on average. So yeah, there's a pretty steady stream happening right now. Okay. I want to ask you about another big goal that we talked about here of this bank, Adam. The premise really of the bank, of course, is to attract private investments as part of this, right? So is that happening? The question of how much private money the bank is crowding in, whether it's enough, is a really contentious one because it depends how you look at it. Initially, and per their mandate, it's supposed to be about four private dollars attracted for every

public dollar spent. Of course, because the government was prone to over-promising early in its mandate, at some points they were talking about things like 11 to one early on. Wow. I don't think the bank has ever totally embraced that goal. At first glance, it is not achieving the four to one ratio right now. The bank has spent or committed about $13 billion. The private sector has also committed about $13 billion. And then the rest on these projects tends to come from other levels of government and

agencies and so on. So instead of the four to one, that sounds more like one to one. Sounds more like one to one. Yeah. Per the bank's explanation, it is on pace to ultimately achieve about a four to one ratio, maybe even up to a six to one ratio once the loans are paid back. So the idea is every dollar spent by the taxpayers here is going to be well worth it and achieve the original targets in the long run. The issue is that that's not exactly how it was initially described, or at least that expectation wasn't clearly set,

that it wouldn't be an upfront multiplier of 4 to 4, 6 to 1, or 11 to 1, or whatever they were saying. Okay. We've been kind of talking about this at, I guess, a high level here, Adam, but can we look at a specific example? Is there an example of a project that this bank has actually recently funded? One of the better examples of a project that's well underway already is called the Oneida Energy Storage Project that's in southwestern Ontario.

This is something the bank is pouring more than $500 million into. It is a battery storage project, billed as being the largest in North America to date. And it's sort of an intersection of a bunch of different goals for the bank and public policy goals. Obviously, one of those is electricity supply, of which we need more, a lot more. This is one way of doing that. It aligns with climate goals in that this is a low carbon way of producing or storing and then producing electricity. It has heavy indigenous equity in it, which is another key goal here.

So it appears to align in a bunch of different ways. And it's one where the bank stepped in because of a couple of different risks that exist. There's, first of all, the project risk, which is things like lithium prices fluctuate wildly. So that could dissuade private investors. In fact, private investors told me that they would not have invested otherwise because of that. And then also revenue risk. So this is not the type of project that has been built in Ontario or nationally previously, but there is just project risk and there's uncertainty

as to how long it'll take to repay. How will this work financially once it's operating? And it fits that category of things where we probably know we're going to need it in 10, 20 years, but the five to 10 year period after it could be pretty rocky enough to dissuade banks or others from investing in it. So this is one where the bank could come in, provide just enough financing to get off the ground, and be told by all concerned that it wouldn't have happened without them. At $500 million, over $500 million, Adam, that still seems like a fairly big investment. You also mentioned that they are working on smaller projects. What does that kind of thing look like?

There's a whole bunch of different types of smaller investments that the bank has helped facilitate. For instance, it's worked with cities, including some smaller cities, to help them invest in electric school bus fleets. It's worked with some owners of commercial buildings to retrofit them, to make them more energy efficient. Those are often in the low hundreds or even the tens of millions of dollars. Perhaps the best example, though, is indigenous infrastructure, where there are some instances of under $10 million for something like a broadband network to remote communities or wastewater management. Those are things where it doesn't seem like a broadband network to remote communities or wastewater management.

Those are things where it doesn't seem like a lot of money. It's a lot of money there. The financing is not arriving otherwise. And in fact, they've tweaked the mandate in recent years to enable more of that kind of investment. So particularly on the indigenous side, where a lot of investments have flowed recently, that's where some of the smaller investments in critical infrastructure come in. Okay. Adam, in our last few minutes,

let's come back to talking a bit about the politics of this. Because we touched on earlier how that committee a few years ago basically recommended that this bank be abolished. So obviously it didn't have kind of broad support from parties at that point. But as the bank has tried to fix its problems,

have the other parties besides the liberals, have they changed their opinion about the bank? The other parties have not changed their opinion about the bank at all, which is one of the things that drew me into covering this. You know, the Democrats, for instance, do object in principle to the public-private partnership model, to some extent at least, and Labour's never been comfortable with it. They would prefer to see just more public dollars going in. The Bloc Québécois is probably never going to love a lot of federal involvement in building infrastructure in Quebec. It would rather funds just be transferred to the province. The conservatives are the most interesting one here for a bunch of reasons. I mean, one is they are, frankly, by far the

likeliest to form government after the next election. They also don't have an obvious ideological problem with this. You know, public-private partnerships, if anything, are kind of a right of center concept. I mean, you said like the Harper government, right, established something similar to this bank. Harper government established something similar. The Ontario government under Doug Ford is in the midst of launching something similar. This is not an offensive concept in principle to conservatives, but they have continued to criticize it essentially on the same grounds as previously, including invoking the report from the parliamentary committee that called for abolition, although they were kind of probably behind that,

but they would invoke the extremely slow start and how long it took them to get projects off the ground. The one somewhat high profile failed investment, the Lake Erie Connector, which again was only about a million dollars in sunk costs, but they invoke that. They invoke executive compensation, the exact level, which isn't clear, but basically complaining these guys are paid too much. They essentially just say the whole thing is a failure and that they would get rid of it. Wow. Okay. So I guess, as you mentioned, you mentioned, good chance the Conservatives might form the next federal government. What are the possible scenarios

for the Canada Infrastructure Bank if the Conservatives win the next election? One of the possible scenarios is if the Conservatives do exactly what they say they're going to do, scrap the bank. A second scenario, which I think a lot of people

who I speak to in this kind of policy space think is still quite possible, is that maybe they change the name. Maybe they- Rebrand it a little bit. Yes. Change the leadership. Most significantly, I would say, change the priorities. They could shift it a little bit away from, say, the climate-heavy focus that it's had, which is less of a priority for them, and more toward traditional infrastructure, even more toward oil and gas infrastructure. They can do what they want with it. But I think it is possible that they come in and say, okay, let's not start from scratch. Let's adjust this thing to be more what we want it to be, which would be a risk because who knows if it can succeed in a

dramatically different form. But I think that's also a possibility. Interesting. Okay. So just very lastly here then, Adam, given all the issues that we've talked about that the bank has had in its first few years and kind of the political situation right now, I guess I wonder what the bank's response has been to all of this. Like, how does the bank itself justify its own existence? The bank can make a lot of different arguments for itself. It can say, look at all the other international examples. It does say that. It can say, look, we're now achieving a lot and we're bringing benefit. What it says in sort of an overarching way is, if not us, then what?

We have an infrastructure gap. All parties basically agree on that. We're going to have to invest heavily in infrastructure. Nobody disputes that. No politician is against investing in infrastructure. This is a way of somewhat minimizing how much public money has to go into that because it's incentivizing the private sector to invest. So what they would say is, what are you going to do otherwise? Do way more grants, way more direct spending? We can't afford to do that. And why would a conservative government,

which they don't usually get that political, but the implication is why would a conservative government want to spend that much more money when they can use us to bring in private money? Adam, thank you so much for taking the time to be here and walk us through all of this. Thank you. That's it for today.

I'm Mainika Raman-Wilms. Today's episode was edited and mixed by Ali Graham. Our producers are Madeline White, Michal Stein, and Ali Graham. David Crosby edits the show. Adrienne Chung is our senior producer, and Matt Frainer is our managing editor. Thanks so much for listening, and I'll talk to you tomorrow.