Thursday, March 23, 2017

Just A Couple Of Questions

Given that I have no background in economics, I will leave it to more finely-tuned minds to debate the merits of yesterday's federal budget. However, there are a couple of things that, from my perspective, need to be answered, and they both relate to the Infrastructure Bank the Liberal government is touting.

Introduced in last fall's economic update, the goal of the Bank, according to Finance Minister Bill Morneau, is
to attract private sector dollars at a ratio of $4 to $5 in private funding for every $1 of federal money.
While that sounds fine on the surface, the question about the returns that will prompt private investors, including institutional ones, to invest in infrastructure projects the bank will help fund needs to be answered. And it is here that things becoming a tad murky.

In yesterday's budget, Morneau had no real details to provide about it, other than a motherhood statement:
Ottawa has said it wants to leverage every dollar it puts in its infrastructure bank into $4 of investment, the balance kicked in by private-sector investors. The government thus hopes to fund $140 billion in infrastructure projects with an upfront Ottawa investment of just $35 billion.
Sound too good to be true? Perhaps it is:
The catch here is that only infrastructure projects with revenue streams will attract private investment. To be sure, that includes a lot of infrastructure, including toll roads and bridges; alternative-energy suppliers that reap revenues from power consumers; and water and transit systems that earn back their cost of capital through mill rates and Metropasses.
One can't help but wonder, like the idea to sell off our airports, this is just another neoliberal ploy, thinly disguised, that will redirect revenue from the public to the private domain.

The Canadian Centre for Policy Alternatives has released a study that suggests we will all be paying more for this largess gifting the private sector:
This study finds that private financing of the proposed Canada Infrastructure Bank could double the cost of infrastructure projects—adding $150 billion or more in additional financing costs on the $140 billion of anticipated investments. It would amount to about $4,000 per Canadian, and about $5 billion more per year (assuming an average 30-year asset life). The higher costs would ultimately mean that less public funding would be available for public services or for additional public infrastructure investments in future years.
The full study, which you can obtain here, suggests there is a better way:
There’s no reason the federal government can’t make the Canada Infrastructure Bank a truly Public Infrastructure Bank, with a mandate to provide low-cost loans (or other “innovative financial tools”) for large public infrastructure projects. The federal government already has banks and lending institutions that provide low-cost loans, financing, credit, and loan guarantees for housing, for entrepreneurs and for exporters. So why not also provide low-cost loans and other financing for public infrastructure projects? This bank could be established as a crown corporation with initial capital contributions from the federal government (and perhaps other levels of government) and backed by a federal government guarantee. It could then leverage its assets and borrow directly on financial markets at low rates and then use this capital to invest in new infrastructure projects.

This approach would involve a slightly higher cost of financing than direct federal government borrowing, but it would be considerably below the cost of private finance.
And finally, is it simply a coincidence that one of the government's tools for borrowing at ultra-low rates is ending?
The federal government is phasing out the Canada Savings Bond, a popular savings vehicle introduced after The Second World War.

The Liberals’ 2017 budget stated the bond program peaked in the late 1980s and has been in a prolonged decline since.

“The program is no longer a cost-effective source of funds for the government, compared to (other) funding options,” the budget document reads.
Perhaps it is naive of me to suggest, but wouldn't paying a higher rate of return on savings bonds that average citizens can benefit from also be a source of much-needed cash for infrastructure?

Just wondering.


  1. It's all about making the world safe for capital, Lorne.

    1. The Liberals certainly have embraced that particular religion, Owen.

  2. Did Justin Trudeau get his infrastructure plan from Donald Trump or did Trump get his plan from Trudeau? Let's hope it's the latter: wouldn't want Trumpism coming to Canada!

  3. What does this 80/20 private-public initiative say about our government, Lorne? My take is that it indicates the Trudeau administration has little faith in a vibrant, prosperous Canada in the future or, more likely, it views policy as something fitting an electoral cycle framework. When great public works were genuinely public that reflected a true regard for posterity, the interests of the nation and future generations. Consigning essential infrastructure to vultures is a rejection of posterity in favour of partisan political advantage.

    1. Very well-said, Mound. I have nothing to add to your analysis. It is a clear indictment of the times.