Opinion: Infrastructure Bank of Canada: Good idea in principle, bad idea in practice

“The Government of Canada abolishes the Infrastructure Bank of Canada.”

That was the remarkable recommendation of the House of Commons Transport Committee in its latest CBI report – surprising, both because of its end (end it, don’t fix it) and because it was the only recommendation in the report.

Not that anyone should have been entirely surprised, given the leanings of the three supportive opposition parties, who together make up the committee’s majority (whose liberal members objected).

CIB was set up in 2017 as a commercial agency with a mandate to coax private capital to invest in public infrastructure, in return for a share of the returns from those investments – from user fees and the like. To smooth out the deal, the bank will start with the money from Its own capital fund of $35 billion. The goal was to raise four dollars of private capital for every dollar of public money.

So there is something out there that not everyone likes. The NDP doesn’t like it because private money is involved. Bloc Québécois doesn’t like it because he wants to give any federal money to the Quebec government. And conservatives don’t like it because, well, because liberals thought of it, someone doubts.

To be fair, the bank’s performance so far has been disappointing, to say the least. As of March 2021, the Parliamentary Budget Office found, after four years of its 11-year mandate, that CIB had allocated only $4 billion of its $35 billion, 80 percent of which is in two projects. No private capital has been attracted.

Since then things have improved a little. CBI now claims to have “approved investments” of $7.2 billion (although only $4.2 billion of that amount is described as “closed”). It also claims to have raised a total of $7.6 billion from “private and institutional investors”, which would make it well below the desirable four-to-one ratio even if it fell into the CBI scam of raising institutional investors – public pension funds, in Mostly – the really special kind.

As this suggests, the bank’s transparency record has been well below Sterling. For example, he refuses to disclose how much he pays in performance bonuses to senior managers. However, little is known about its operations. The executive group’s turnover, in fiscal year 2020, was $3.8 million in compensation for departing senior managers — more than the $3.4 million it paid to those still on the payroll.

It is difficult to defend the bank’s performance. But the basic concept remains intact – or at least, there is a version of the basic concept. It makes sense, first, to use private capital instead of public capital wherever possible, for the simple reason that it leaves more public capital invested in things that private capital would not.

Even if private capital were not involved, it would also make sense, as a matter of public policy, to charge a price where possible to users of public infrastructure: road tolls are a good example. Again, insofar as something can be financed by means other than taxes, it leaves more and more scarce tax revenue to pay for things that can only be paid for through taxes: purely public goods like police and fire protection.

User fees also provide a good test, for a preliminary approximation, of whether the investment is really in the public interest – whether it, that is, provides a greater return to society, measured by what people are willing to pay to use it, than it costs society to provide. It is very difficult to make “bridges of pork kegs to anywhere” if the bridge has to be paid for by the people crossing it.

The problem with CIB, instead, and what might explain why it has this problem of attracting private capital, lies in the first part of its mandate as I described above: it is not really an independent agency, of that kind. From a purely commercial mandate that private investors might understand. Investment policies are set by the government. The government can dismiss its board of directors and chief executive.

But the biggest obstacle to private investor participation may be the very thing the government was hoping to entice them with: that $35 billion public money. It’s a bad idea in terms of policy, because the subsidy, insofar as it makes investment less dependent on user fees, undermines the market discipline that it was meant to justify.

But it’s also likely to make private investors wary, because public money always – always – comes with political strings attached. Do you want to bail out the Bank of Canada for infrastructure? Make it more like an actual investment bank, and less like another government fund.

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