Remarks by Pierre Lavallée President & CEO, Canada Infrastructure Bank CCPPP Conference November 6, 2018 Check Against Delivery
CCPPP Conference November 6, 2018 Bonjour. Good afternoon. Thank you for giving me the opportunity to discuss with you the progress that we are making in building the Canada Infrastructure Bank. Over the last four months, I have had the opportunity to meet many of you individually and it has been gratifying to feel such enthusiasm for the potential opportunity that we all have to build more great infrastructure for Canadians. In the process, we also have the opportunity to create a great new Canadian institution that others around the world will seek to emulate. As the Minister said yesterday, we have a lot to be proud of in the development of the Canadian P3 model over the last 20+ years. Canada is a global leader in P3 and I strongly believe that we must pursue new ideas and new approaches if we want to stay ahead. Last year at this conference, you heard our Board Chair Janice Fukakusa describe the governance and mandate for the Bank. At the time, she was in the middle of forming an outstanding Board of Directors, which was selected after a thorough assessment process that lead to the directors’ appointment in late November 2017.
With solid professional credentials and deep experience in a variety of infrastructure and investment areas, our pan- Canadian Board is well equipped to deliver on its governance mandate, including the approval of our investments. Among other duties, the Board recommended my appointment as CEO, which became effective in mid-June. It has been a whirlwind since then, as we moved into full start- up mode. Our activities have varied greatly from day to day. We have moved from temporary office space to our permanent office, we have met provincial and territorial ministers of infrastructure to launch our dialogue on future infrastructure priorities, and we have met with both Canadian and international investors to discuss opportunities to invest in Canada. But I am getting ahead of myself. Slide 2 The Bank’s mandate is to invest $35B of capital alongside private capital in new revenue-generating infrastructure built in the public interest, where significant usage risk is transferred to private investors. It is worth spending a bit of time on a few of the main points here.
The $35B may be invested anywhere in the capital structure of a project. Fundamentally, we are looking to fill the gap that prevents a project from seeing the light of day or from being structured in a way to best attract private sector capital and risk transfer. We know that that could come in various forms of equity or fixed income instruments, with plenty of structuring to ensure an appropriate allocation of risks and returns among co-investment partners. Over the last six years, through my participation on investment committees at CPP Investment Board, I witnessed first hand the hard-fought competition for mature infrastructure assets that have transacted at ever increasing multiples. The list of potential investors has lengthened and the fund commitments have also increased substantially. There is a supply shortage of good quality infrastructure assets to invest in and I think that we can change that. We have seen this movie before in real estate. As institutional investors piled in, cap rates compressed and investors in mature assets expanded their scope to include more development and ultimately full re-development and greenfield investments. As this dynamic has been playing out in infrastructure, we have seen investors’ interest broaden to take on more development risk, albeit in a measured and progressive way.
We believe that there is a real appetite to invest in new infrastructure projects with a reasonable risk-reward equation for private and institutional investors. Since June, I have heard this many times already from institutional investors who have traditionally shied away from greenfield projects. The revenue generation component is important to the financial structure, as investors will get their returns from usage-generated fees which could take the form of tolls or shadow tolls, fees, fares, tariffs and mechanisms based on appreciating land values. In essence, we are looking for projects that will transfer significant usage risk to the private investors. Our mandate also covers the codification and dissemination of global best practices, the creation of an Inventory of Canadian Infrastructure Projects and the synthesis of data and information to support better evidence-based decisions. Slide 3 We have no fixed investment allocations by sector for our $35B, but our goal is to invest at least $5B in each of our three priority sectors, which are: • Green infrastructure; • Public Transit; and • Transport and Trade.
We can also invest in other areas of infrastructure, if they are supported by government policy. As we deploy capital across these sectors and broader infrastructure projects, we will seek to build on and complement the existing P3 market. The Bank was created to address a gap in the market that sits between traditional government funded infrastructure, including both traditional procurement and P3s, and projects that are privately funded. Our investments will fit in the middle of the two. Slide 4 By transferring operational, usage and revenue risks from governments to the private sector, we will grow the requirement for both debt and equity investments compared to the various forms of traditional P3s. Although this slide is illustrative, we are purposely highlighting that private capital is meant t o be a multiple of the bank’s investment. It is also possible that some government financing from provincial, territorial, municipal and indigenous levels remains part of the equation, confirming that the projects are aligned with these governments’ prior ities.
By convening this additional capital and by injecting our own where needed, we will reduce the need for government financing. As a result, governments can shift scarce resources to other priorities where revenues are insufficient or don’t exist at all. This is why we strongly believe that our investments will add to the pool of infrastructure for Canadians and will create new investment opportunities for the private sector. Let me give you a bit more detail on what we are looking for as we evaluate each project. Slide 5 We are looking for transformative projects. We have the means to make large investments. We are also seeking to convene a multiple of our investment from private sources, so in aggregate, we are looking to have a material impact. Each project must pass a public interest test to ensure that the project is well aligned with the relevant governments’ priorities and policies, that it contributes to economic growth and that it contributes to sustainability.
The project ’s sustainability includes both environmental considerations and the notion that in its very structure, the project will provide self-renewing infrastructure to Canadians. By thinking in terms of lifecycle costs, we can deliver better infrastructure that lasts longer. Our first round of project analysis also addresses three sets of questions: 1) Is the project bankable? Will there be sufficient revenue streams – broadly defined - to fund the project through its lifecycle? 2) How will the sponsors go to market with the project? How will investors, proponents and bidders be approached and with what? 3) Given that some projects may affect other existing privately financed infrastructure, how will we ensure that our investment will not distort the market? Can we invest in a project while maintaining a level playing field? I will now contrast what we are looking for with what we are looking to avoid.
Slide 6 We are looking to finance projects, not to provide recurring funding nor on-going operating cost subsidy. We are not looking to take all of the risk. We may accept more risk than our expected returns would warrant, but let’s be clear, we are looking for the private capital to bear significant risks. Of course, we expect our partners to earn reasonable returns for the risks that they shoulder. We will structure our investments to support a strong alignment with our partners. We are certainly not looking to crowd-out private investment with our cheap capital. In fact, we are looking to do exactly the reverse, which is to crowd-in private investment and convene capital from both domestic and international investors. We are quite clear about the markers of what is and what is not a CIB investment, but we remain very flexible in how to invest our capital for the benefit of the project. We are in the business of custom financing solutions. Slide 7 Within the overall capital structure parameters where private capital is a multiple of our investment, we are flexible as it relates to the detailed capital structure itself and what security we will hold and for how long.
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