Aon Risk Solutions Construction Services Group Aon Infrastructure Solutions An Early Assessment of the Proposed Canadian Infrastructure Bank March 2017 Risk. Reinsurance. Human Resources.
To attract and manage new investment streams and help address Canadian infrastructure needs, the Canadian government proposed the creation of a Canada Infrastructure Bank (CIB) in the Fall of 2016 that would work with provinces, territories and municipalities to further the reach of government funding directed to infrastructure. The CIB, governments, and investors would work together to identify a pipeline of potential projects and identify investment opportunities that provide significant economic, social, and environmental returns. Canadian infrastructure spending is set to grow continuously from a yearly CAD$8 Billion in 2016 to CAD$17 Billion in 2027. 1 The CIB will be pivotal to execute complex infrastructure deals using a wide breadth of financial instruments at its disposal, including loans, loan guarantees and equity investments. 1 Fall 2016 Economic Statement, Government of Canada, p.17 Aon Risk Solutions An early Assessment of the Proposed Canadian Infrastructure Bank 2
1. PROPOSAL The CIB will be responsible for investing at least $35 billion on a cash basis from the federal government into large infrastructure projects that contribute to economic growth through direct investments, loans, loan guarantees, and equity investments. Part of this amount $15 billion would be directed as funding for public transit, green infrastructure, social infrastructure, trade and transportation, and rural and northern communities. An additional $20 billion in capital will be available to the CIB for investments in the form of equity or debt. Thus, the expectation is that this $20 billion would not result in a fiscal impact for the government. The CIB would be accountable to, and partner with, the federal government, but would operate at greater arm s length than a department working with provincial, territorial, municipal, Indigenous, and private partners to transform the way infrastructure is planned, funded and delivered in Canada. Mandate The CIB will invest in revenue-generating infrastructure projects. Its initial proposed mandate would be to: Structure, negotiate and deliver federal support for infrastructure projects with revenue generating potential Use innovative financial tools to invest in national and regional infrastructure projects and attract private sector capital to public infrastructure projects Serve as a single point of contact for unsolicited proposals from the private sector; and Improve evidence-based decision making and advise governments on the design and negotiation of revenuegenerating infrastructure projects Governance The government will be responsible for setting the overall policy direction and high level investment priorities for the CIB, consistent with the commitments outlined in ministerial mandate letters. Though arm s length, the CIB would be responsive and accountable to the government for the allocation of federal resources. On February 14, 2017, the former CEO of Ontario Teachers Pension Plan, 2 Jim Leech, was appointed as Special Advisor for the launch of the CIB. 3 His work will include guiding an implementation team, engaging with stakeholders, providing strategic advice on investments, and counseling the construction of several projects throughout the country. Such an appointment reveals the level of expertise and experience the CIB will be able to deploy to structure and complete Canadian infrastructure projects. Financial Tools The CIB will be integral in conducting and executing complex infrastructure deals using a wide breadth of financial instruments at its disposal, including: Direct investments Repayable contributions Debt (e.g., loans, loan guarantees), both unsubordinated and subordinated Equity investments, both unsubordinated and subordinated; and a hybrid of the above 2 Ontario Teachers Pension Plan is one of Canada s largest institutional investors having reported $171.4 billion in net assets on December 31, 2015 3 Infra-Americas, Former Ontario Pension CEO to Advise Federal Infrastructure Bank, February 14, 2017. Aon Risk Solutions An early Assessment of the Proposed Canadian Infrastructure Bank 3
Innovative Infrastructure Deals That Deliver More Value for Canadians The CIB will have the flexibility to participate in complex infrastructure deals in new and innovative ways, which could include: Participating as a subordinated equity partner in a new large public transit project to encourage the transfer of revenue risk to the private sector investor. The CIB anticipates a 4 to 1 leverage structure to attract private capital. Facilitating an interprovincial clean energy grid project through the provision of a loan guarantee to lower risk and reduce financing costs for the proponent; and Providing low-cost loans to private sector investors to advance complex trade corridor projects. 2. CHALLENGE: LACK OF IMPLEMENTATION STRATEGY To date, the Canadian government hasn t provided a definitive roll-out strategy for the CIB. Hence, explanations regarding the mandate, structure, funding, processes and final capitalization plan for the CIB have not been sanctioned by the government. Consequently, it leaves many infrastructure stakeholders to advocate for different visions and structure for the Bank. For instance: The Federation of Canadian Municipalities (FCM) is pushing for a Bank to provide low cost financing for affordable public housing. 4 The Canadian Council for Public-Private Partnership (CCPPP) is advocating for a bank to be a vehicle for private sector investment and profit making. Moreover, there is no certainty which model the CIB will adopt. Will it be a Bank started with public funds but destined for privatization at a later point in time, such as in the case of the UK Green Investment Bank? The latter was created in 2012 to align with government policy objectives (wind, energy efficiency, waste, bioenergy) and was started with 3.8 billion in public funds. By 2015 the British government was looking at a partial privatization, particularly to target pension fund investment and other institutional investors (mutual funds, insurance companies). Or will it be modelled after the European Investment Bank which is owned by EU Member States and operates to finance and advise on infrastructure projects that fulfill EU policy objectives? 4 Federation of Canadian Municipalities (FCM). 2016. Cities and Communities: rising to the moment. Federation of Canadian Municipalities. http://www.fcm.ca/documents/reports/2016-fcm-fedbudgetsubmission-en.pdf Aon Risk Solutions An early Assessment of the Proposed Canadian Infrastructure Bank 4
Additionally, what type of projects will be favored? Stakeholders like the Residential and Civil Construction Alliance of Ontario (RCCAO) want to see a Bank targeting innovative projects in priority sectors that may be deemed too risky to attract standard private financing. This includes affordable housing or green energy projects, as well as transportation projects which rely on unpredictable user-fee revenues to recoup the upfront investment. 5 While the Canadian government is looking to Canadian pension funds as key equity participants for future projects, this strategy is not likely to align with their global capital allocation. For instance, the Canadian Pension Plan Investment Board (CPPIB) 6 asset mix holds only 5.4% and 7.6 % of its assets as Canadian equities and global infrastructure, respectively. It is therefore unlikely that they will be changing their proven global allocation strategy by shifting significant investment in Canadian greenfield infrastructure projects. 3. INSURANCE CONSIDERATIONS FOR THE CANADIAN INFRASTRUCTURE BANK The creation of this new institution will require knowledge and experience from insurance advisors experienced in Canadian infrastructure and Private-Public Partnerships. Aon Construction Services Group (CSG) and Aon Infrastructure Solutions (AIS) in Canada are a highly integrated team of advisors with wide-ranging backgrounds and experience including: law, procurement, construction, credit ratings, corporate strategy, surety, project finance, finance, risk management, and project management. With experience across asset classes, CSG and AIS can bring invaluable market insight and risk solutions to the future Canadian Infrastructure Bank and advise stakeholders on comprehensive and detailed insurance solutions. CONCLUSION The creation of the Canadian Investment Bank will bring additional sources of alternative financing, private-public partnership expertise, and infrastructure financing to the forefront of Canada s long-term economic growth and stability. Risk management and insurance advisory will be pivotal in the success of the Bank s projects. Aon Risk Solutions will be in a prime position to leverage its industry leading experience and reputation to contribute to the success of the Canadian Investment Bank and to Canada s economy. 5 Siemiatycki, M. 2016. Creating an Effective Canadian Infrastructure Bank. Commissioned by the Residential and Civil Construction Alliance of Ontario (RCCAO). 6 The Canadian Pension Plan Investment Board is a Canadian Crown Corporation whose mandate is to oversee and invest the funds contributed to and held by the Canada Pension Plan. As of December 31, 2016, the CPP Investment Board manages over C$298 billion in investment assets for the Canada Pension Plan on behalf of 19 million Canadians Aon Risk Solutions An early Assessment of the Proposed Canadian Infrastructure Bank 5
Contact Cedric Franklin Senior Associate Aon Infrastructure Solutions +1.416.868.5882 cedric.franklin@aon.ca Aon Risk Solutions An early Assessment of the Proposed Canadian Infrastructure Bank 6