Infra banks – a crutch Canada does not need

What a week it’s been for Canadian infrastructure. Ontario retains its title as the world’s most attractive infra market while the government steps in with a move it hopes will “crowd in” – rather than “crowd out” – project lending to drive future nationwide investments.

This time last week we learned that the Government of Canada was closing the doors on PPP Canada after eight years in favour of the C$35 billion Canada Infrastructure Bank. Its plan – to clear the way for an organisation with a wider mandate and larger budget. Fair enough.

At much the same time, we heard that Ontario was coming to market with a wave of new projects… music to the industry’s ears as there’s something to suit all tastes in this pipeline, including as it does healthcare, correctional facilities and transport: road and rail. (See end of this piece for a full run-down on the projects with more information than had previously been available)

Sources on the ground are very positive about Ontario’s pipeline, but concern remains over the forthcoming provincial election – June 2018 – when there is a distinct risk that the incumbent party (the Liberals) will be ousted, changing leadership for the first time since 2003.

From a purely selfish point of view – not political – IJ sincerely hopes to see Premier Kathleen Wynne returned as the Liberal party has been responsible for the delivery of an amazing programme of infra investments over 14 years and there’s no guarantee an opposition party would continue this policy.

As one senior source in Ontario says: “It’s great to have a healthy pipeline being announced… but with an upcoming election the question everyone’s asking is whether it’s going to survive. If there is no change in leadership and the pipeline remains, it’s going to be great for the industry.

“There are lots of large DBFM projects and a good mix between civil and social. There’s projects for everyone in there and it will make Ontario once again the number one province for P3.”

However, the election remains a very real threat and there’s still a heck of a lot that Ontario – and provinces beyond – need to do to improve infrastructure, social and transport.

In Ontario alone, the deficit in social infrastructure has narrowed considerably since 2005 thanks to the projects that have been delivered under Infrastructure Ontario’s AFP model. And that requirement to invest – in Ontario alone – is far from over with the deficit in civil infra remaining acute, especially in the Toronto region.

Infrastructure bank you say…

Most folk in the infrastructure lending community will not welcome the arrival of an infrastructure bank, no matter how much it insists that it will “crowd in” rather than “crowd out”.

It’s at times like this that IJ usually points an accusing finger at the EIB – a favourite whipping post from over the years of European infrastructure procurement – to draw a parallel that may well stand true in comparison with the Canadian Infrastructure Bank.

The primary complaint levelled at the multilateral is that it comes to the table with cheap cash, squeezing out commercial lenders by ponying up as much as 50% of the full package. It hides behind the shield of bringing confidence to other lenders on “challenging” deals. We can only assume these other commercial lenders must have been trembling at the thought of getting involved without the support of a heavyweight like the EIB! Meanwhile the EIB puts on its most innocent face while cutting cheques left, right and centre… desperately shovelling cash out the door as deal fever sets in.

Taking a quick look at the EIB, it is funded by 28 European member states and serves as the EU’s long-term lending institution. It is primarily funded via bond issuance in the international capital markets and its annual funding programme for 2017 is €60 billion. That’s a lot of money and – just as the natural instinct of a glutton is to eat the whole cake – our chums in Luxembourg delight in emptying the pot.

You could batch the EIB (possibly unkindly) in with the likes of KfW, Nordic Investment Bank and – yes, you’re waiting for it – Green Investment Bank (as was).

KfW is the world’s largest state-owned development bank as a percentage of GDP and has assets amounting to some €500 billion. Paid-up capital comes from public sources, but it currently funds itself mainly through borrowing on the international capital markets. It has AA+ credit rating and over the last decade its financing commitments have totalled €750 billion. Take a look at the IJ database and you will see it crop up all over the place, primarily in renewables and mostly across Europe.

NIB is top-rated and serves as the international financial institution for Nordic and Baltic countries, including: Denmark, Finland, Norway, Sweden, Estonia and Latvia. It offers long-term loans and guarantees to clients in the public and private sectors. It acquires funds for lending by borrowing on the international capital markets. Not as active as KfW, it mostly lends to renewables and PPP across Europe.

And then you’ve got the GIB – now Green Investment Group since being taken over by Macquarie in the summer. It was initially funded in 2012 with £3 billion of UK taxpayer money and was set up to spearhead offshore wind (a lot of people forget that). It didn’t take long before government decided to fork out a further £800 million for it. Up to its sale, GIB had lent £1.6 billion to the UK’s offshore wind sector, backing nine projects with a total capacity of around 3.2GW. Not bad, but it still left £2.2 billion to fritter away on a lot of good assets… and a handful of absolute stinkers. At first the role it played in lending confidence to commercial lenders was essential to get the fledgling sector off the ground.

However, the likes of GIB was dreamt up in a very different market to the one in which it went live. It was first mooted in early 2010, launched October 2012 and had money flowing out the door before Christmas.

To be fair, it did initially play an important role in lending confidence… but it was not resolving the oft-stated (and incorrectly-stated) belief that it was needed due to a lack of liquidity.

As to timing, here we are delving in to the Hadrian’s Wall Syndrome.

Hadrian’s Wall Capital – under Marc Bajer – set up this vehicle in 2007 to provide a first-loss tranche of debt to act as a cushion for senior lenders to allow projects to go ahead. Heck, call a spade a spade, it was essentially junior debt.

This was a genius solution for the market that – had it been deployed immediately – would have changed the shape of European infra financing.

Sadly, it lingered around like Banquo’s Ghost for years, insisting it was about to close its first deal… but that never happened. Finally in 2013 the successor company FHW – which people were cruel enough re-brand Former Hadrian’s Wall – closed Salford Housing PFI and promptly pulled down the shutters.

The right product for the right time… deployed too late.

An answer to a liquidity deficit… when a liquidity deficit no longer exists.

And that’s the fear for the Canadian Infrastructure Bank … solution to a problem that does not exist.

Hadrian’s Wall Syndrome

And here we come – finally – to the Canadian Infrastructure Bank which is chaired by former Royal Bank of Canada CFO Janice Fukakusa, a respected person on the street. The CIB is to be operational by the end of 2017, and it is already understood to be in conversations with pension funds and institutional investors to fill the coffers.

The response to Fukakusa taking to the stage this week to discuss the role CIB will play in Canadian infrastructure was “positive” according to sources, especially when she committed to not duplicating others’ roles.

“Janice said they would not be doing what, for example, EDC does – which is to make loans to organisations that could perfectly well get a loan from Royal Bank,” said one senior source.

“People are interpreting that to mean that where there are aboriginal situations, some kind of counter-party risk – possibly looking at a bank-of-last-resort scenario – they will step in.”

It remains to be seen what services it will offer, but the market suspects it will run along similar lines to the UK’s Green Investment Bank – able to offer debt of all flavours and possibly the capacity to invest equity.

If it is to offer a mezz debt solution, thereby driving down pricing on senior debt to “give confidence” to other lenders, that will be the first time such an instrument has been brought to bear in Canadian infra. It is hard to believe in a market as healthy as Canada this is required.

One is left thinking that – rather than creating a national infra bank – Canada would have been better to have followed their neighbour’s example and wheeled out something along the lines of TIFIA: essentially cheap money from government coffers… a subsidy.

For now, fears are rife that CIB will start competing with commercial lenders and it will recreate the tense situations we have seen elsewhere.

Crystal ball gazing – never a great idea.

We fear the worst.


The Ontario pipeline

Here follow details of the C$15.8 billion (capex) Infrastructure Ontario pipeline in greater detail than has previously been reported:


 Orléans Health Hub

This project will bring a range of specialised and community healthcare services under one roof – offered under both official languages. It brings together eight organisations to target residents of Ottawa East:

  • Youth Services Bureau of Ottawa
  • Champlain LHIN Home and Community Care
  • Eastern Ottawa Resource Centre (EORC)
  • Children’s Hospital of Eastern Ontario (CHEO)
  • Hôpital Montfort
  • Ottawa Public Health
  • Geriatric Psychiatry Community Services of Ottawa (GPCSO)
  • Bruyère Continuing Care

Ontario’s Ministry of Health and Long-term Care in July 2016 invested more than C$5 million to complete the hub’s health services planning as well as the development of architectural plans. It is being discussed at a town hall session on Thursday 16 November.


Trillium Health Partners

This redevelopment plan involves a new acute care tower at the Mississauga Hospital and new post-acute complex at the Queensway Health Centre. The proposed projects will free up significant capacity at the Credit Valley Hospital site.

Mississauga Hospital:

  • new acute care tower
  • new emergency department, surgical operating rooms, diagnostic imaging

Queensway Health Centre:

  • new rehabilitation and complex continuing care beds
  • renovation and expansion of urgent care centre and ambulatory services

Credit Valley Hospital

  • relocation of post-acute beds to new Queensway Health Centre site will allow expansion of more acute beds to serve our growing needs


Hamilton Health Sciences

This project will involve the update of aging infrastructure at the facilities to meet current hospital standards.

This is a cluster of five hospitals and a cancer centre serving more than 2.2 million residents of Hamilton and Central South and Central West Ontario. These facilities offer a range of acute and specialised services, catering to healthcare needs from preconception through to aging adults. Each of the hospitals has areas of expertise and combined, Hamilton Health Sciences is one of the most comprehensive healthcare systems in Canada.

The facility is affiliated with McMaster University's Faculty of Health Sciences and is able to offer an academic environment where patients benefit from some of the most innovative treatments.


Niagara Falls Hospital

This will be a new, state-of-the-art hospital for patients and families in the Niagara Falls area. The replacement facility will provide health care to more than 434,000 people through modern facilities designed to meet the region's changing healthcare needs. Patients will have access to emergency and urgent care, laboratory services, ambulatory clinics and full diagnostics including MRI, CT scans, ultrasounds and X-rays.

Once complete, patients in the region will also have access to general surgical services; a regional stroke programme; senior wellness and aging programmes; breast screening services; integrated chronic disease management programmes; mental health and addictions programmes; and outpatient services for children, youth and adults.


Windsor Regional Hospital

Infrastructure Ontario is building a new hospital – Windsor Regional Hospital – to support service transformation in the region.


Weeneebayko Area Health Authority

A new hospital to serve health care needs of the population along the James Bay coast. This project has been under discussion since 2007.


Kingston General Hospital

Renovations and new construction on Stuart Street to upgrade the emergency department, operating rooms, clinical labs and inpatient units, as well as the redevelopment of the neonatal intensive care unit and labour and delivery suites


Correctional facilities

 Ottawa Correctional Complex

A new multi-purpose correctional centre to replace the existing Ottawa-Carleton Detention Centre with a new, larger facility and retire the existing overcrowded prison. It is understood that the new facility will house 725 inmates.


Thunder Bay Correctional Complex 

A new multi-purpose correctional centre to replace the existing Thunder Bay Jail and Thunder Bay Correctional Centre. It is understood that it will have 325 beds.



 Halton Region Consolidated Courthouse

A new 21-courtroom facility offering a range of justice, family, social and victim services, bringing the Superior Court of Justice and Ontario Court of Justice operations in Milton and Burlington together at one location.

The new building will feature new technology – including video conferencing – to make the court more efficient and speed up the criminal justice system in the Halton Region.

Halton is one of the fastest-growing regions in the province, with a projected growth rate of more than 60% up to 2041.


Women and Youth Justice Facilities Redevelopment

A redevelopment project to support the province's corrections system by developing smaller community-based, secure custodial facilities for youths within the Greater Toronto Area. It will involve redevelopment of the Brookside Youth facility in Cobourg and converting the Roy McMurtry Youth Centre into female detention centre.


Rail projects

Regional Express Rail projects with Metrolinx include:

  • Milton Corridor Upgrades Project – expected RFQ fall 2017
  • Lakeshore West Corridor – expected RFQ fall 2017
  • Lakeshore East Grading Package West Corridor Expansion – expected RFQ 2018


Other transport

Highway 7 – expected RFQ spring 2018