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Canadian budget light on details for infrastructure bank

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Canada's finance minister William 'Bill' Morneau calls the financial proposal a 'stay-the-course' budget.

The Canadian government's 2017 budget is big on grand plans for infrastructure improvements in transportation, social needs and environmentally friendly utilities.

But there is relatively little on funding these projects — particularly through the concept of an infrastructure bank mostly funded by non-government investors like alternatives managers and domestic and international pension plans.

Finance Minister William Morneau, who introduced the budget to the Canadian House of Commons on March 22, “pitches it as a 'stay-the course' budget, but people think it's more like a 'wait-and-see' budget,” said Scott McEvoy, Toronto-based partner and specialist on alternative investing at law firm Borden Ladner Gervais LLP. “There wasn't a lot of detail in the budget that the government didn't already give.”

In the budget, the government of Prime Minister Justin Trudeau said that through its planned Canada infrastructure bank, C$35 billion ($26.2 billion) over the next 11 years will go toward transportation, child-care facilities and green infrastructure projects. The C$35 billion is part of the government's pledge made last year to invest a total of C$185 billion in infrastructure, with most of that total coming from direct funding from Ottawa. The bank would offer investments through loans, loan guarantees and equity investments for infrastructure projects.

But most of the initial C$35 billion isn't expected to be government money; the lion's share of the money that will be in the bank, according to the government, will come from non-government investors — including domestic and foreign pension funds — with expectations that C$4 out of every C$5 in the bank will come from non-federal government sources.

“What I get from this budget is that the opportunity here (for the government) is the risk transfer to the private sector,” Mr. McEvoy said.

Added Ian Struthers, partner, and investment consulting practice director, Aon Hewitt Canada, Toronto: “Canada infrastructure bank is just one part of the government's infrastructure spending plan. It's really an enabling mechanism to have a central clearinghouse to make it easier for pension plans to invest, either directly or with co-investments. It's one way to get projects off the ground with a combination of equity financing backstopped by bank financing and debt financing.”

Mr. Struthers said one issue with domestic pension fund investment is the projected size of individual projects financed through the bank, expected to be around C$100 million each or less. The large Canadian pension plan investors that actively invest in infrastructure directly — like the C$298.1 billion Canada Pension Plan Investment Board, C$171.4 billion Ontario Teachers' Pension Plan and the C$85.2 billion Ontario Municipal Employees' Retirement System, all of Toronto — “look across the globe for investment opportunities,” Mr. Struthers said. “They like the C$300 million to C$500 million projects. A lot of this won't be that size. (The government) need to get a lot of investors to get these projects off the ground. If they can get three or four investors in one tranche and give an equity piece to a larger institutional investor like a pension plan, others can work with the debt.”

As for foreign investment, particularly from outside pension plans and sovereign wealth funds, “it would be the hope” that they would invest in the bank as a way to reduce currency and geographic risk through diversification, Mr. Struthers said.

Iftikhar Ahmed, Toronto-based associate partner, illiquid alternative research, investment consulting, Aon Hewitt Canada, said that despite the onerous task of getting so much non-government funding into the bank, the government already has provided C$15 billion in seed funding for the infrastructure bank out of the budgeted C$35 billion, so it's in position to start identifying projects and look for outside investors to join in.

Creating the infrastructure bank as a separate entity from the federal government is nothing new in Canada. Through a governance structure known as a crown corporation, federal or provincial governments create investment agencies that while owned by the government operate without government interference. In Ontario, one crown corporation, Infrastructure Ontario, has successfully funded transportation and hospital construction using public-private partnership investments for years, Mr. Struthers said. “A model of building Canada infrastructure bank is right there,” he said.

For now, the infrastructure bank proposal has yet to be introduced in legislation to the Canadian Parliament, although the government plans to have the bank operational by the end of the year. Mr. Struthers said that's likely: “You can get a lot done in nine months. The concept of who will finance these projects and how is a fairly common one in Canada.”