With the arrival of the Canada Infrastructure Bank’s new president and CEO, Pierre Lavallée, the CIB will soon have its operations team in place. For municipalities, there is much anticipation and many questions about how the CIB, will allocate funds for new infrastructure projects.
Lavallée, who brings experience from various forms of private equity investments and who spent the last six years at Canadian Pension Plan Investment Board (CPPIB), was hired because he understands the global capital deal flow. Given his involvement in several of the CPPIB senior infrastructure investment committees and his work as the interim head of private investment, which included the infrastructure portfolio, he’s got the knowledge and experience to make practical and positive impacts on Canadian infrastructure. But, as he explained, he’s only interested in specific types of infrastructure assets.
“I have had pretty good visibility on the global infrastructure investment scene for the last half dozen years, and I have had longer experience in various forms of private equity investments, either as a personal investor in some of the funds, but more relevant, as providing consulting services,” said Lavallée. “I think there’s a really good opportunity for us to build more infrastructure for Canada and […] to make a material impact in helping to close the infrastructure gap.”
For municipalities and water utilities that are scrambling to address ailing infrastructure, achieve the Wastewater Systems Effluent Regulations (WSER), and meet the demands of climate change, the opportunity for another finance option, beyond traditional banks, provincial low-interest loans, and P3s should generate interest.
“We are not trying to displace the traditional government approach, and we’re also not trying to replace the privately–funded infrastructure projects. We are trying to invest in that space in between the two, where our participation will cause the construction of new infrastructure that would otherwise not see the light of day,” he said.
The CIB’s mandate, as Lavallée explained, will be to look for projects that can generate revenue based on user fees, such as water charges, that are of interest to global investors, but also carry risks or whose revenues are insufficient to make the outside investment viable, without the help of the bank.
“We are looking for situations where the additions of a public sponsor […] can play a role to make these things happen.”
In reality, not every water utility is set up in such a way that the CIB will be interested in their projects. In May 2017, an internal federal report commissioned by Infrastructure Canada, and developed by KPMG, noted that historically international private investors have only invested in municipal water assets after the community adopted full-cost accounting and metering of water use. As it was noted in the 2018 assessment of Canadian municipal accounting regimes by the Canadian Water Network, most municipalities do not presently have sustainable financing schemes in place for their water-related assets.
In the CWN report, Balancing the Books: Financial Sustainability for Canadian Water Systems, the analysis showed that Canadian municipal accounting schemes frequently fail to account for inflation, system growth, service enhancements, interest expenses, customer care, and source water protection. These are significant, crucial, and somewhat rudimentary factors for running a utility without deficits. And this is without addressing important external factors, such as rising energy costs and the likely impacts of climate change-related events. Investors will be wise to these inadequacies.
As the KPMG report pointed out, most Canadians are not used to paying the full cost for water services and there is a reluctance to hike rates.
“Catalyzing private capital to invest in Canada’s water utility industry is challenging and would require a transformation of the industry as a whole,” the KPMG report stated.
Lavallée is agnostic about the specific accounting practices used by utilities. However, the fact remains that a sustainable accounting scheme is a requirement of the CIB for any project seeking investment.
“Full-cost accounting has a whole dynamic around it, but the notion of connecting usage to revenues I think is one that private investors would see as a useful connection because it provides visibility of the factors that they can manage to ensure that the projects are sustainable and that services provided on a sustainable basis. If you separate the drivers of revenue from the drivers of cost, that can make for a very difficult equation for a private investor,” he said.
Robert Haller, executive director of Canadian Water and Wastewater Association supports the notion that municipal water utility finance methods need to be revisited. “Here is one more reason—not that we need another reason—to move to full-cost accounting and proper asset management. Perhaps this will help in our efforts to transform our utilities to long term, sustainable enterprises.”
Opening the tap
Once the appropriate financials are in place, the idea is that CIB facilitates the flow of private funds to public projects. But is there a risk that these new, ambitious public works projects are privatized?
“If you think about water, there are private companies that invest in water treatment and wastewater treatment around the world. It’s usually the first step when privatization takes place, and we are not here to privatize assets,” said Lavallée.
Lavallée said he understands that Canada lacks an appetite for privatization of water assets in Canada, and that’s not the bank’s goal.
“There is a lot that will continue to happen with the traditional forms of government procurement, with what’s now called traditional P3s—we are not looking to displace any of those. We are looking to play a complementary role in situations where user-generated revenues will provide a stream of income that private investors would find attractive; yet not so attractive that they could be financed entirely privately.” For the CIB, this is the sweet spot.
“The underlying model is the fact that you can charge the users of water for their consumption and use to finance the maintenance and operations of the facilities for the service and reinvest in expanded capacity. That whole dynamic is one that I think could take place in Canada,” he said.
Meeting the objectives of Canadians
Although the specific details for how each project will be evaluated have not been created yet (the CIB are still hiring the team who will develop the criteria), Lavallée said the bank will ensure that the awarded projects support government priorities, in addition to turning profits for investors.
“We will be looking to ensure that what investments are aligned with governments’—and I emphasize governments’,—different levels of governments’ priorities,” said Lavallée. “Within that, there are the priorities on sectors, which have been published, but also taking into consideration the Framework on Climate Change for example, sustainability factors, greenhouse gas reduction benefits. Those things would all be included in our analysis.”
Given that major infrastructure projects often delve into conflicting or competing public interests, priorities, and regulatory environments, it will be interesting to see which projects rise to the top of the CIB analysis. When asked if he could point to a classic example of a CIB-friendly infrastructure project, Lavallée said, “There aren’t classic examples, because nobody has done this before.” But Lavallée remains focused on shared interests in his aspirations to deliver positive outcomes for Canadians.
“There seems to be broad consensus around the country that we could have better, stronger, more sustainable infrastructure. We aren’t going to solve it by ourselves,” said Lavallée.
Does he believe that the bank will achieve what the country wants? “Obviously, I took the job, so I think there’s great potential,” he said.