Annex A and B
Annex A – High-Level Investment Priorities and Criteria
Infrastructure projects in the public interest
The determination of whether projects are in the public interest should be guided by federal infrastructure policy objectives, which are currently outlined in the Investing in Canada plan and the Pan-Canadian Framework on Clean Growth and Climate Change. Therefore, the Bank's investments should be informed by the criteria for projects supported under an existing Government of Canada program, plan or stated policy priority, as well as federal practices related to consideration of climate impacts and community benefits. I encourage ongoing dialogue between the Bank and officials in my department, and bringing in officials of other ministries as appropriate, to ensure that the potential project pipeline aligns with the high-level policy priorities of the Government of Canada.
The Bank should focus its investments on new or "greenfield" infrastructure or infrastructure with new elements. Consistent with Budget 2017, the focus of the Bank should be on identifying a pipeline of large, transformative potential projects and investment opportunities that provide the greatest economic, social and environmental returns. This includes building a portfolio of investments, that when taken together, make a substantive contribution to supporting Canada's greenhouse gas reduction goals.
As announced in Budget 2017, the Bank should aim to invest at least $5 billion, on a cash basis, over the next 11 years in each of the following areas: public transit; trade and transportation infrastructure; and green infrastructure, which includes projects that reduce greenhouse gas emissions, deliver clean and safe water systems, and promote renewable power. The Bank should be prepared to consider provincial and territorial projects, such as the Réseau électrique métropolitain project in the region of Montréal, as well as federal projects, and assess whether they meet the Bank's investment criteria.
Effectively working with government partners
The Bank should be open to potential projects identified by provincial, territorial, municipal and Indigenous partners, as well as the federal government. The Bank should be open to projects that would meet the needs identified by provinces and territories in their Infrastructure Plans, where these projects align with the priorities outlined above.
Projects supported by the Bank should respect all applicable federal, provincial, territorial and municipal laws and regulations, including any applicable environmental impact assessments. Furthermore, whether infrastructure projects should have a business model based on user fees or other revenue sources will ultimately be a decision for the government partner responsible for the project.
As the Bank is an optional tool there are no regional allocations or quotas for the Bank. The Bank should assess projects on their own merits and strive to be open to projects from across the country. The Bank should work with partner governments from coast to coast to coast to help them determine the most efficient way to deliver infrastructure, whether it be through co-investments alongside the Bank, public-private partnerships or other traditional forms of investment. When assessing potential projects located in rural and northern communities, the Bank should take into account the specific challenges of developing infrastructure in these regions. The Bank should also consider how it can contribute to the Government's commitment to achieve reconciliation with Indigenous people through renewed nation-to-nation, government-to-government, and Inuit-Crown relationships.
As per the Act, the Bank should also be open to unsolicited proposals from private sector investors, in order to fully harness innovation, encourage project development, and align incentives. The Bank should develop a process to ensure that these proposals are subject to appropriate competitive tension in order to ensure that the risk-adjusted return for the investor is appropriate and reflective of the fair market value.
Efficient use of federal support
Given the objective of making public dollars go further, the Bank's investments should be selected and structured in order to attract as much private sector and institutional capital to projects as possible, subject to the other objectives outlined in this letter. With its mandate to attract more private sector capital than otherwise would have been invested and relieve the burden on government funding, the Bank must be careful to not compete with, or crowd-out, private sector investment where the capacity to invest already exists. The Bank should also be mindful that partner governments should appropriately share in costs where they are the project sponsor and traditionally would share in costs.
The Bank's investments, in the form of debt, equity or other innovative tools, may be on below market or subordinated terms to attract private sector investment to projects that otherwise would not be viable. The Bank should be in a position to demonstrate that the project would not have been viable without such below market or subordinated investment, and how its investments benefit Canadians relative to standard funding and procurement as well as traditional public-private partnership approaches.
The Bank should seek to attract investment from both domestic and global investors, subject to applicable laws such as the Investment Canada Act¸ and should ensure that all investors have a fair opportunity to work with the Bank. Being open to a wide variety of potential investment partners, domestically and globally, will allow for the development of competitive tension and ensure that public sector dollars go further, and will allow the selection of private sector investment partners based on merit and collaboration.
Transfer of revenue risk to the private sector
The Bank model means that federal support can be used more strategically through managing the risk transfer to the private sector. Putting private investors' money at risk aligns incentives to parties best able to manage those risks, and drives creativity in the planning and design of projects to respond to the needs of users. This approach improves the management of infrastructure throughout its lifespan.
Therefore, when structuring its investments, the Bank should ensure that appropriate revenue risk is transferred to the private sector, in addition to appropriate risks relating to developing, building, financing, operating, and maintaining the project. Returns to investors should be calibrated to their investment size and the amount and nature of risk that the investor is undertaking, on a project-by-project basis. I envision that loan guarantees, or equivalent instruments, should be limited in nature and used only if they can be structured to ensure private capital is also at risk. Furthermore, to ensure that sufficient private sector capital and expertise is crowded in, I envision that for projects under the jurisdiction of other orders of government, the Bank take only a minority shareholder position whenever it invests in equity, and also be a minority participant in the overall financial exposure of a project. In both instances, minority means less than fifty percent.
Managing projects throughout life cycle
The Bank is expected to focus on due diligence and structuring robust agreements and transaction structures that contemplate how risks and costs will be managed throughout a project or asset's full life cycle, from planning to decommissioning. The Bank should work with its investment partners to evaluate the many options available to them for the delivery and procurement of projects. In this regard, the Bank should work in partnership with procurement agencies and departments from other orders of government.
Forward-looking investment possibilities
As the Bank matures in capacity and expertise, it should consider, whether and how it may support investments in smaller projects, or bundling of projects that may not individually have scale to attract investors, such as bundles of municipal projects. Additionally, the Bank should explore whether, over time, the Bank model would be an appropriate tool to be applied to a wider category of infrastructure, including the construction of new, affordable housing, such as those around transit projects, large scale energy retrofits to commercial entities, or different types of green infrastructure projects offering environmental returns and significant greenhouse gas emissions reductions, the assessment of which can be guided by the way in which the government monitors and evaluates environmental returns. As with all types of projects, the Bank should assess these types of projects against its investment criteria, including whether there is a market for attracting more private sector investment into those types of projects with revenue risk transfer.
Annex B – Accountabilities through the Corporate Plan
Developing the corporate plan
A Crown corporation's corporate plan is required to encompass all the businesses and activities of the organization and any wholly owned subsidiaries, including investments. The Bank's corporate plan should reflect the overall strategy and controls for the organization, the management practices and the primary characteristics of any proposed project investments that the Bank wishes to advance towards final negotiation and execution. The Bank's corporate plan, and operating and capital budgets should be in line with the Financial Administration Act, Corporate Plan, Budget and Summaries Regulations,and relevant Treasury Board guidelines. In developing the corporate plan and operating the Bank, the Bank should work collaboratively with officials from my department, Infrastructure Canada, and from the Department of Finance and Treasury Board Secretariat, as appropriate. The Bank's next corporate plan is also expected to provide an update on the design and governance of the institution. This should include the status and key milestones of operational set-up of the Bank, the Bank's organizational structure, and any by-laws, charters, policies, and board committee mandates that have been adopted by the Bank.
The next corporate plan should outline the process that will be followed for determining, in collaboration with governments, whether projects are in the public interest and meet the Bank's other investment criteria to determine whether projects are bankable. The corporate plan should also describe the Bank's methodology for ensuring that its investments provide benefits to Canadians relative to traditional financing approaches.
Descriptions of potential projects where the Bank expects to negotiate and potentially execute within the next year should be included as part of the Bank's corporate plan process, including financing requirements that it seeks to have authorized through the associated budgets. I envision this corporate plan process following the Bank's initial market sounding, due diligence, and discussion with counterparties of potential project structures and should occur prior to the Bank independently finalizing negotiations and executing investments under its mandate. For each project listed as part of the corporate plan process, the Bank should include a brief description of the project, the maximum size of investment that the Bank is seeking to have authorized, the project's preliminary planned financial structure, and an explanation for how the project is expected to generate revenue. Please work with officials from my department to determine how this process will work in the next corporate plan, as well as the long-term.
Demonstrating prudent investing
The next corporate plan should describe the Bank's strategy for prudently conducting due diligence and analysis, managing its resources and investment portfolio and protecting Canadians under an adverse investment scenarios. Given that the Bank is generally a non-agent Crown corporation, its obligations are not backstopped by the federal government. The plan should also describe the Bank's plans for developing a holistic risk management approach to ensure that investment and other risks are appropriately managed, and its plans for using the innovative financial tools at its disposal.
Forward-looking national project pipeline
The next corporate plan should also describe the Bank's plans to develop a five-year forward-looking national project pipeline of potential projects or types of projects. This pipeline could include projects that might be proposed by any level of government or by potential investors and should be made public on the Bank's website to promote transparency and long-term planning, and promoted through other public fora in Canada and abroad. Details made publicly available about projects should include asset classes, project objectives/outcomes, estimated costs, timelines and other relevant details. This pipeline should be designed to generate investor interest and innovation with regards to potential projects, therefore it should be interpreted broadly as communicating potential project opportunities, and not limited to projects the Bank may invest in. It should also be operated in a manner that is respectful of the jurisdiction of the Bank's government partners. In developing its pipeline, I encourage the Bank to collaborate with other domestic and global bodies that keep, or contribute to, infrastructure project pipelines, and to follow best practices in promoting long-term investment possibilities in Canada. The Bank should develop practices for determining how projects are added to, and removed from, the pipeline.
Advice, centre of expertise, and data
I would also like to see in the Bank's next corporate plan a description for how the Bank plans to carry out its functions related to (i) providing advice to all levels of Canadian government related to assessing the suitability of projects for revenue models and the financial structuring of potential projects, (ii) acting as a centre of expertise, and (iii) collecting and disseminating relevant data in collaboration with all orders of government.
I envision the focus of these functions to be centred around helping governments build capacity to make evidence-based decisions to help evaluate and select the most appropriate model for infrastructure, on a case-by-case basis, in order to help achieve better results for Canadians. The Bank should work collaboratively with other advisors, such as provincial procurement agencies and private sector advisors, consultants and other experts, and refer provinces, territories and municipalities to these resources as appropriate. Additionally, in situations where the Bank is acting as an agent for the government in accordance with the Act, such as in the provision of advice to the federal government, I would like for the Bank to cooperate appropriately with federal officials.
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