Selected Issues and Analytical Notes


Selected Issues and Analytical Notes

Infrastructure Bank: Leveraging Private Capital in the Public Interest1

A. Introduction

1. Investment in infrastructure is a growing component of national economic growth strategies worldwide. While often used as a short-term stimulus to increase demand in an economy, infrastructure is also effective in the long-term by raising labor productivity growth and supporting export performance. IMF research has concluded that there is robust evidence that increasing public investment, and correspondingly the stock of public capital, is positively correlated with economic growth.2

2. In addition to increasing the amount of infrastructure spending, attention is being focused on the efficiency of such spending. Not all public investment is equally productive.3 The World Bank and IMF have jointly developed the Public Investment Management Assessment (PIMA) to promote public financial management (PFM) institutions that, taken together, result in more productive public investment.

3. Countries are exploring institutions to support infrastructure investment. Given that budget funding is limited, many countries are considering institutions to mobilize private capital for infrastructure investment. One area of focus is infrastructure banks, currently operating in a handful of countries (for example, in Australia, the UK, and at the state level in the US) and internationally, such as the European Investment Bank.

4. Canada has proposed the Canada Infrastructure Bank (CIB). Legislation to create the CIB, which has been tabled with Parliament, states:

  • The purpose of the Bank is to invest, and seek to attract investment from private sector investors and institutional investors, in infrastructure projects in Canada or partly in Canada that will generate revenue and that will be in the public interest by, for example, supporting conditions that foster economic growth or by contributing to the sustainability of infrastructure in Canada.4

5. The aim of this paper is to contribute to clarification of a limited number of issues before the CIB design is complete. Principal among them is the objectives of the CIB and the interplay between those objectives and major components of its strategy and operations. Clarity regarding these issues may be helpful in promoting the CIB to Parliament and the public.

6. Below is a short summary of what is currently being proposed for the CIB, subject to change, with a focus on PFM issues.5

  • The proposed Canada Infrastructure Bank (CIB) will be allocated Can$35 billion (approximately 1¾ percent of 2017 GDP) over an 11-year period. It will add to, and not replace, existing methods of financing public infrastructure at all levels of government, including the federal government’s Can$187 billion Investing in Canada plan covering 12 years.

  • Its main objective is to leverage private capital to add to total public spending on infrastructure, not to earn a financial return or to be financially self-sustaining. Can$15 billion of the Can$35 billion authorization is expected to be expensed.

  • The CIB will be a wholly government-owned Crown corporation, subject to provisions of the Financial Administration Act (FAA), including the requirement to prepare a corporate plan, operating budget, and capital budget, for approval by the Government.

  • The CIB will be on-budget. Funding will be provided to the CIB pursuant to the Minister of Finance’s statutory authority under the proposed CIB Act. CIB borrowing is not currently envisaged but should the CIB borrow it would need to submit a borrowing plan, in addition to its corporate plan.

  • The CIB and its investments will be on the federal government’s balance sheet. However, the infrastructure-related special purpose vehicles6 (SPVs) in which the CIB invests will not be on the government’s balance sheet.

  • Explicit fiscal risks are limited to expenses reflecting the concessional nature of CIB investments or realization of associated risks, and to guarantees, which require approval of the Minister of Finance.

B. Attracting Private Capital

7. Attracting private capital requires offering a rate of return acceptable to the investor. Worldwide, there are trillions of dollars looking for safe returns over the long-term. While the supply of capital is a necessary condition, private investment in infrastructure will not occur if the terms of the investment are not acceptable to the investor. Private investors are interested in financial returns, not economic or social returns7. This section focuses on i) how much can a private investor be expected to invest in a project; ii) what is the rate of return that a private investor requires, how can it be reduced, and how to prevent excess returns; iii) the role of the CIB in reducing the rate of return required by private investors; and iv) why the CIB invests equity alongside private investors.

8. The amount of private capital that can be attracted to a project can be described using the elementary finance equation in Box 1. The three components are:

  • Future value, or free cash flow (FCF)8, defines the maximum financial returns from the project that can be paid to private investors over the life of the investment.

  • The risk-adjusted rate of return for an investor has two elements. i) The risk-free rate is the theoretical rate of return of an investment with zero risk of financial loss over a given period of time. Commonly used proxies are treasury bills issued by a highly rated government.

  • ii) The risk premium is the rate of return in addition to the risk-free rate that is demanded by investors as compensation for the sum of risks in an investment. There can be many types of risk. While some risks apply to all investments, such as the risk of default, the type and magnitude of risks associated with infrastructure vary according to each project.

Calculating the Amount of Private Investment

A private investor would be willing to invest up to an amount equal to the present value of the future free cash flows of a project. The present value will rise if the future free cash flows increase or if the risk premium becomes smaller.


9. The amount of private capital leveraged will vary dramatically based on FCF and risk premiums. FCF and risk premiums can change through management decisions on a project-by-project basis. The focus of management and financing arrangements is on influencing both these project characteristics in a positive direction (described below). The risk-free rate of return cannot be influenced by project managers.

  • Increase FCF. FCF is the positive difference between cash inflows and cash outflows. Cash inflows can be directly increased by charging user fees. Decreasing cash outflows is most effectively achieved by having the private investor apply expertise to the entire life cycle of the project, from design and construction, to operations and maintenance. For example, it may be worthwhile to have a slightly more expensive design if it would result in significantly lower operation and maintenance costs.

  • Reduce the risk premium required by private investors. Risk to the private investor can be reduced in many ways. Diversification, by distributing capital across many investments or grouping many infrastructure projects in a single financing agreement, is a standard approach. Risk borne by a private investor in a single project can be reduced in other ways, for example:

    • Responsibility for early stage project development could be shifted from the SPV to the CIB. For example, permitting, zoning, and public outreach require extensive staff time to represent and advocate for the project to appropriate authorities, and progress is often highly uncertain. The CIB could also be viewed as a more neutral third party, compared to the SPV.

    • Ensure predictable FCF over the period of the private sector financing, including i) a stable tax and regulatory environment, ii) CIB guarantees9 of minimum user demand, fee rates, or total revenue, and fee rates are adjusted over the life of the asset by a trusted third party comparable to a utility rate commission, and iii) equity investment by the CIB that the private investor would see as a partnership in which the CIB helps it to protect project financial outcomes.

    • Match the project profile with investor knowledge and needs. Capital market expertise of CIB staff, and investor selection procedures, can help identify investors who understand risks and can better manage them, resulting in a lower risk premium. In addition, such knowledge and procedures can more closely match total project characteristics, such as size, term, and liquidity with the investor interests.

10. Investment in existing infrastructure is attractive to private investors because risks are lower. These are commonly referred to as brownfield investments. The development phase for these projects has been completed, and maintenance requirements and user demand are known. The sale of existing infrastructure by governments is often referred to as recycling assets, meaning extracting capital from one project and investing it in another. This is advantageous for the public sector but it often requires the user to make payments for a longer period and possibly at higher rates to satisfy the new investment agreement related to the existing infrastructure asset.

11. The CIB fills the funding gap between private investment and total project funding.10 If the amount of private investment is determined per the formula in Box 1, CIB investment fills the funding gap. Figure 1 illustrates that as the size of the discounted cash flows grows, the size of the funding gap, and thus CIB investment in the project, becomes smaller. Actual FCF exceeding that necessary to provide the private investor the rate of return agreed in the financing agreement should be distributed to the CIB.

12. This figure raises several important additional points.

  • Minimum private investment required for CIB to participate: the figure represents with a dotted line the region in which the present value of future project cash flows, and thus private investment, is below the minimum required by law or policy. The minimum has not been officially announced, and thus the point at which the dotted line becomes solid in the figure is hypothetical. The smaller the proportion of private investment, the closer the project resembles a public-private partnership (PPP).11

  • Forms of CIB investment: since it is desirable that the SPV is majority owned, and thus controlled, by the private investor, any investment by CIB greater than 49 percent equity would typically be loans. The permissible forms of investment by CIB beyond 49 percent of total project cost should be determined.

  • Circumstances under which the CIB would experience financial returns: FCF would first be allocated to private investors, and only then to the CIB for return of capital and financial returns on that capital. If the project generates enough FCF for the CIB to receive returns equal to the private investor, then the entire project could be financed privately (leaving aside non-financial benefits of having the CIB as a partner and cases where actual FCF turn out to be higher than anticipated in the financing agreement). Therefore, the CIB would be expected to indirectly subsidize, or be subordinate to, the private investor by accepting lower rates of return.

  • Degree to which CIB acceptance of project risk would be reflected in the total project cost: in the aim of full disclosure, the estimated value of CIB risk mitigation efforts, including any guarantees and non-financial staff efforts to develop a project, should be reflected in the total project cost, regardless of the extent to which the project financing agreement contains provisions for cost recovery or return on those investments. This raises valuation challenges.


CIB fills the funding gap

Citation: IMF Staff Country Reports 2017, 211; 10.5089/9781484309650.002.A001

13. The risk-adjusted rate of return sufficient to attract an investor is not known with precision ex-ante. Investors will seek the highest rate of return possible above its minimum threshold. There is no objective measure of risk: perceptions of risk will vary based on the familiarity of an institutional investor with project risks, and its ability to manage them. An investor should be expected to reveal its true perception of risk, and thus its acceptable risk-adjusted rate of return, in a competitive bidding procedure, such as for selecting investors. This constitutes market rates. In addition, actual returns to private investors during the life of the investment can be controlled by allocating FCF to the private investor and the CIB in the manner noted in paragraph 11.

C. Effects on Public Finance

14. The effect on public finance can be viewed from multiple perspectives. The objective of attracting private capital to fund public infrastructure stated in the draft CIB legislation is quite general and provides little guidance when determining the role, strategy and operations of the CIB. This section addresses; i) how is maximization of spending for infrastructure measured; ii) how the CIB spends money allocated to it; iii) how budget funds are allocated to the CIB; iv) the fiscal risks arising from the CIB and its investments; and v) the effect of the CIB on the efficiency of public investment.

15. From the perspective of total spending on infrastructure, the objective of attracting private investors could be further refined by adopting one of the following options:

  • Maximize total infrastructure spending by maximizing public and private financial resources

  • Maximize total infrastructure spending under conditions of restrained public spending or borrowing dictated by fiscal policy

  • Maximize infrastructure built by lowering project costs. In other words, the same amount of spending, regardless of financing source, purchases more infrastructure.

16. From a cost of funds perspective, private capital should be employed only if public borrowing is constrained. Government borrowing releases pressure on annual budgets by distributing the cost of a project over many years through debt service. The federal government of Canada currently can borrow using bonds yielding about 1.9 percent annually. Risk-adjusted rates of return required by private investors will likely be between 5 and 15 percent, assuming private investors bear at least some of the project risk. Thus, the same project FCF could support more government borrowing than investor capital. To minimize financing costs, government should borrow to the maximum extent possible within a prudent fiscal framework before using private capital. In the case of Canada, the federal government wishes to limit borrowing and embark on a declining path of debt-GDP. In addition, there is a broad sense that the infrastructure gap in Canada is significant, although estimates range widely from Can$150 billion to Can$ 1 trillion (Advisory Council on Economic Growth, 2016). Accordingly, government alone cannot meet such a large amount of infrastructure demand.

17. A tension can exist under certain circumstances between financial and social returns to infrastructure investment. For example, financing infrastructure through user fees reduces social returns if the public infrastructure is used at less than its capacity.12 Assuming that public infrastructure has social benefits that exceed financial returns, and the financial returns are less than necessary to attract private investors (otherwise the private sector would have already built the infrastructure), society is better off if the social benefits are made available to the maximum number of users through public subsidies until the infrastructure is used to capacity, after which prices would be used largely for demand management. To the extent that prices are charged (i.e. user fees) to finance the infrastructure, demand for the infrastructure may be unduly low and society is worse off. This is a justification for the CIB funding at less than market rates of financial return noted in the previous section, and is graphically displayed in Box 2.

18. Private sector expertise could result in lower project costs or longer asset life, thus offsetting higher financing costs. The likelihood of this potential being realized is enhanced if the CIB and private investor are joint equity investors, thus aligning the interests of both parties to achieve lower total costs in a cooperative fashion. As noted above, a life cycle contract with the SPV covering design, construction, operations, and maintenance would contribute to this aim. A non-financial role the CIB could play would be to document the extent to which private implementation of infrastructure projects reduces total costs compared to similar projects implemented by governments in Canada.

19. From the perspective of how the CIB deploys its funding, there are several possible ways for the CIB to best use taxpayer funds provided to it. Note each objective has consequences for project FCF and risk, which can be adjusted using the mechanisms described above. The objectives have important implications for project selection.

  • Maximize the total amount of private capital leveraged. This objective would be advanced primarily by maximizing the number of CIB projects going forward, determined by selecting projects with ease of implementation in mind. It would also tend to encourage allowing private investors wide latitude from a wide pool in selecting projects they find most attractive, and would have the effect of investors focusing on the least risky projects. Stated another way, this objective maximizes FCF and thus minimizes CIB investment in the aggregate, and may contribute to projects being implemented relatively quickly.

  • Minimize the risk-adjusted rate of return required by the private investor. This objective would mean that the CIB investment in a project is minimized. It would also mean that there would be an incentive for the CIB to maximize the non-financial methods for reducing risk borne by the private investor, for example by CIB staff handling early project development efforts. The CIB would want wide latitude to choose projects from a relatively large pool.

  • Advance projects where the private sector has the potential to achieve significant economies through its management expertise. These would tend to favor three quite different types of projects. First, projects for which a firm has developed a specialization, and has extensive experience in implementing that type of project. Second, large, complex projects requiring sophisticated technical or project management skills. Third, projects that may benefit from an arms-length relationship from public pressures.

20. From the perspective of allocating funds to the CIB, the CIB would be on-budget. Within the proposed Can$35 billion, the Minister of Finance will allocate funds as needed under the authority proposed in the CIB Act.13 The draft legislation is silent on treatment of return of CIB equity investments or retention of earnings. It is also silent on whether approval in the budget process of CIB investments is in the aggregate or is on a project basis, which has a bearing on the degree to which the CIB can operate at arms-length from the federal government. SPVs in which the CIB invests would likely not be on-budget.

21. Fiscal risks associated with the CIB and its investments are mainly implicit. CIB expenses include investment loses. Whether planned or unplanned, such events lower the government’s net worth but will not place an unexpected demand on spending because cash disbursements have already occurred. As noted above, a policy on retention by CIB of return of capital or financial returns has not been indicated. The CIB may issue guarantees which under the FAA are subject to approval by the Minister of Finance. The CIB will be protected from SPV liabilities by the corporate veil. A risk arises if the SPV, as a private entity, is not required to publish its accounts and the federal government through the CIB may be implicitly liable to finish a project or to operate infrastructure if the SPV fails. In addition, issues of confidentiality may prevent the CIB from publishing the terms of its financing for the SPV.

22. Viewing the CIB through the lens of the PIMA framework, the efficiency of public investment would be enhanced by the CIB in several ways.

  • Lower project costs may result from the private investor exercising greater discipline in project design, construction and operation than might be possible for a government agency.

  • The CIB would need to publish project selection criteria to effectively guide projects submitted to it through the planning process, and to publish investor selection criteria as part of an open and competitive selection process.

23. The efficiency of public investment might be marginally reduced by the CIB in several ways. Some of the points noted below are dependent on the details of the CIB project selection process, described in the next section.14

  • Assets initially owned and operated by the SPV may not be on a government asset registry, and asset and asset depreciation will likely not be on government balance sheets. Although governments would not be responsible for maintenance of an asset until it is turned over to them, lack of information on an asset register could inhibit infrastructure planning.

  • While the project selection process is yet undecided, as discussed below it is preferable that it is built on existing planning processes. If a separate planning process is established for the CIB, there is the potential to fragment priorities. Under all circumstances, additional complexity is added to the planning process if the CIB and private investors exercise discretion about what projects go forward.

D. CIB Project and Investor Selection

24. Selection of projects and investors requires balancing public and private interests. These and related issues include: i) ensuring that projects are in the public interest and are of high priority; ii) consistency with the CIB’s objectives; iii) promoting the potential of private investors to exercise their expertise to lower project costs and find innovative solutions to meeting public priorities; iv) resolving timing differences for factors required in the project selection process but not known with certainty until after the project selection process is completed; and v) selecting private investors in a competitive and transparent manner to establish market risk-adjusted rates of return and avoid the appearance of favoritism.

25. Ensuring that projects are in the public interest and are of high priority should be determined in government planning processes. These processes are intended to identify projects that have high rates of social returns. Currently, municipalities, provinces, and federal departments each have a planning process for this purpose. Existing programs to provide infrastructure funding to provinces and municipalities, such as the Investing in Canada plan, rely heavily on local governments to establish project priorities.15

26. Proposals have been made to establish a consolidated, federally-sponsored list of projects for the CIB. It is not clear why this proposal arises in the context of the CIB but not in discussions of other infrastructure financing programs that are significantly larger. Creating a new planning process that is expected to make trade-offs and establish priorities across jurisdictions raises a host of challenges, especially in country with a federal form of government. Also, it is a tenet of good PFM practice that a single set of priorities should be established regardless of financing source.

27. There are significant advantages to allowing the CIB and private investors latitude to select from a relatively large pool of projects that are deemed to have high social returns. As emphasized above, risk and therefore risk-adjusted returns are based on investor perceptions and expertise, and will vary widely among potential investors. If the planning process identifies a small number of projects for which the CIB is asked to mobilize private financing, opportunities for private investor participation may inadvertently be missed and may result in selection of projects for which investors demand a relatively high risk-adjusted rate of return. It will also limit the projects for which investors may offer innovative solutions, and limit the ability of the CIB to exercise its judgment regarding what projects can be implemented more quickly and with maximum leverage from public investment.

28. Innovative solutions proposed by private investors should be guided by government-stated priorities. These priorities may be goals and objectives, for which an innovative solution can be proposed, or well-defined projects. Innovation, thus, would typically be focused on issues of project delivery, including design, construction, operations, and maintenance. An unsolicited proposal from an investor for a goal, objective, or project that is not in the pool of proposed projects should not be entertained. Doing so, first, undermines the planning and priority-setting process. Second, it invites bi-lateral discussions between investor and a government that are inherently non-transparent, giving rise to suspicions of improper negotiations. Third, the unsolicited proposal can be written in a way to give an advantage to the investor proposing the project, thus undermining the competitive investor selection process. That said, a private investor could propose projects to governments who then advance the project through the planning process in a transparent manner.

29. Project innovations proposed in the investor selection process must be reviewed by the government that proposed the project. Innovations would typically be proposed at the time that an investor submits a bid in the investor selection process. The investor selection process would be based on projects selected through the planning process, and projects would commonly be described in terms such as physical structure, location, capacity, life-span, and schedule for completion. If an investor proposes an alternative solution, these project characteristics would change. The innovative solutions proposed by an investor must be referred to the originating government to obtain its consent, which should be given before the investor financing agreement is finalized.

30. There are important timing challenges when selecting projects and investors. For example, the FCFs of a project are based on design capacity, user fees charged, and user demand. Preliminary estimates may change significantly following proposals from investors, especially innovative proposals. In addition, as noted above, the rate of return demanded by investors, and therefore the proportion of a project that can be funded by private investors given expected FCFs, cannot be known until the investor selection process is completed. This will determine the investment by the CIB. Such considerations might lead the CIB to employ a two-stage process, a short-listing followed by final selection based on a more detailed proposal, to ensure a fair and equitable selection process.

31. Criteria and process for selecting projects are directly related to CIB objectives. Components of possible project selection criteria have been discussed above. Taken together in different combinations they constitute strategies, which have important implications for how the CIB functions and the projects it undertakes. For example:

  • Strategy 1 maximize infrastructure built: i) maximize annual mobilization of private capital, including quantity and speed of project delivery; ii) FCF is maximized (i.e. user fees are high and costs are reduced to the extent possible); iii) the CIB takes on a relatively large amount of risk in order to lower risk-adjusted return to the investor and maximize leverage; iv) a large pool of projects is available for selection by investors; v) investors will likely choose projects that are relatively simple and low risk.

  • Strategy 2 maximize social rate of return: i) CIB equity investment at less than market rates of return is large; ii) FCF is lower than potential (i.e. user fees are not maximized early in the life of the infrastructure when user demand may be light) and thus the CIB is responsible for a higher proportion of total project funding; iii) the CIB takes on relatively large amounts of risk; iv) the planning process is relatively more important, as it must identify those projects of highest priority; v) the investor selection process would adhere closely to priorities issued through the planning process and requires a second review by the proposing government or by the planning process in the event of proposed innovations which may affect the social rate of return.

  • Strategy 3 maximize marginal benefit of CIB funds: i) the CIB leverages the most private capital per CIB dollar invested; ii) the CIB emphasizes use of non-financial means to lower the risk-adjusted rate of return of private investors, such as the use of CIB staff to assist in the early stage project development; iii) FCF is maximized (i.e. user fees are relatively high); iv) the pool of projects offered through the planning process should be large, allowing the CIB latitude to find the highest return projects; and v) the CIB will tend to encourage private investor innovation to lower upfront cost rather than long-term cost or effectiveness.

Social Versus Financial Returns to Investment1

Which projects should the government do? Figure 1 shows a rate of return for a private infrastructure investor on the vertical axis and a social rate of return (which includes the externality effect arising from an investment project) on the horizontal axis. Projects with a positive externality are on the right side of the 45-degree line. The private sector is willing to undertake an infrastructure project if its rate of return exceeds its costs of funding (Regions A, B, and F). The government may want to prioritize projects with a high social rate of return. Thus, it prefers projects in Regions A, B, and C to those in Regions D, E, and F. However, the government does not need to undertake these projects on its own, as the private sector is willing to invest in Region A and B. This leaves Region C to the government. In Region C, projects have a high social return, but its private return is not high enough to cover costs of funding the project.

Figure 1.
Figure 1.

Which Should the Infrastructure Bank Do?

Citation: IMF Staff Country Reports 2017, 211; 10.5089/9781484309650.002.A001

How can the Infrastructure Bank help? The government does not need to carry out all infrastructure projects in Region C on its own. It can provide financial incentives in various forms to the private sector so that the risk-adjusted rate of return for them is higher—which is shown an upward shift from X to X’ in Figure 2. However, there are operational challenges. One of them is that such financial incentives should not be too generous: otherwise, the private rate of return (after including government financial incentives) could be higher than social rate of return (point X”). Thus, fair and transparent competition and professional expertise are required in the process of selecting projects and negotiating financing terms.

Figure 2.
Figure 2.

What Roles Should the Infrastructure Bank Have?

Citation: IMF Staff Country Reports 2017, 211; 10.5089/9781484309650.002.A001

1/ The analytical framework in this box largely draws from Warner, A., 2013, “A Framework for Efficient Government Investment,” IMF Working Paper, WP/13/58.

E. Comparative Advantages of the CIB

32. Two aspects of the proposed CIB enable benefits that cannot be obtained from other Canadian public infrastructure institutions. First, only the CIB is directed to invest in revenue generating infrastructure. PPPs in Canada generally employ budget financing, and revenue generated by a PPP is typically deposited into the general treasury. Second, only the CIB is directed to invest in equity alongside private investors. This signals government commitment to a project and establishes a partnership with the private sector even with symbolic levels of CIB investment. Such equity partnership aligns interests of all parties owning equity, and enhances monitoring by providing access to SPV operational and financial information.

33. The issues identified in previous sections have implications for the CIB as an organization.

  • The CIB is better characterized as a fund than a bank. It cannot be financially self-sustaining. However, substantial benefits can be derived from the CIB as a fund.

  • The respective roles of the CIB and the planning process must be clear. The planning process is the primary channel for evaluating project social rates of return and determining a limited pool of projects available for private investment that enhance the public interest. Asking the CIB also to evaluate social rates of return is redundant and could result in conflict with previously published priorities. A clear role for the CIB would be to focus on financial issues integral to its strategy, and move projects previously screened for the public interest forward as quickly as possible.

  • The skills set of CIB staff should reflect its role and strategy. If the strategy emphasizes non-financial risk reduction, increases the intensity of interaction with governments, or focuses on social rates of return, more weight should be given to staff with government and public service skills. Conversely, a strategy that emphasizes creative financing, financial means of risk reduction, and matching of investor financial needs with project characteristics, more weight should be given to staff with capital markets skills. This decision will likely affect total staff compensation.

F. Possible Public Concerns

34. The federal government may wish to address early in the public debate on the CIB objectives, policies, and procedures of concern to Parliament or the public. Explaining why certain policies and procedures are necessary to achieve widely-agreed objectives may make them more acceptable. While it is impossible to anticipate all such concerns, a few seem likely:

  • User fees: public surveys consistently report public resistance to user fees. However, revenue generated from infrastructure is perhaps the single most important distinguishing characteristics of the CIB. In addition, user fees supplement government financial resources obtained through taxation, and increasing infrastructure investment requires additional revenue.

  • Perceptions of excess returns to investors: the process for selecting investors must be open and competitive. This is especially important if the public perceives the rate of return to investors to be high. A competitive selection process must assure the public that private investor rates of return are the lowest possible rate given the risk of each project, and that a sub-set of investors do not receive any form of favoritism. This process should parallel good procurement practices. The CIB must be prepared to withdraw a project that requires unusually high risk-adjusted rates of return, and must have the staff capacity to make this assessment.

  • Subsidizing private investors: CIB financing at a lower rate of return, writing-off investments, or granting funds may be necessary to give private investors the rates of return acceptable to them. The public interest is served through such funding if the alternative is that government fully funds the project itself and bears all the project risk. It is highly likely that many people will characterize such funding in support of private investors as subsidies, and as being unfair.

  • Input on project selection: the process for selecting projects for which private investment is invited is of key concern to all governments and the public. These concerns may relate to the distribution of projects geographically and across jurisdictions, and how governments at all levels have a voice in the project selection process.

  • Input on project implementation: all projects will be physically located in one or more provincial and municipal government jurisdictions, even if the project is under the responsibility of a federal department. Local governments need to be assured of opportunities to provide input on the final design and implementation of the project, especially if innovative proposals have been made.

G. Conclusions

  • The CIB is expected to be an effective new tool to increase investment in public infrastructure by mobilizing private capital. It adds to existing Canadian programs and resources in support of public infrastructure.

  • The public interest would be served by instituting a process for selecting projects, to which private investment is invited, that builds on, without replacing, the existing infrastructure planning process at all levels of government.

  • Private capital will be attracted by acceptable risk-adjusted rates of return. While private capital is costlier than government financing, private investors are expected to apply their expertise to lower total project costs, thus offsetting at least partially the higher financing costs. Private investors should be selected for specific projects in an open and competitive manner to minimize the risk of these rates of return being excessive.

  • The CIB is expected to enhance public finances. User fees add to public funds available to support infrastructure. The size of private investment would be determined by the size of project-generated cash flows. The CIB will be on-budget in aggregate and will be reflected in the federal government balance sheet. Measures are available to contain explicit fiscal risks.

  • The CIB should be thought of as a fund rather than a financially self-sustaining bank. Its main role is to match private investors with a short-list of high priority revenue-generating public projects, and find ways to advance those projects. It will be unique in its ability to invest public funds in equity alongside private investors, thus aligning private capital and expertise with public interests.

  • Communicating to the public CIB’s objectives, and policies and practices required to meet these objectives such as the need for user fees, is critical to gaining approval to establish the CIB and ensuring ongoing public support for its operations. Some public concerns can be anticipated and should be addressed proactively, such as resistance to user fees and public perceptions of high rates of returns benefiting private investors at government expense,


Prepared by David Gentry (FAD) and Kotaro Ishi (WHD).


See Chapter 3, IMF World Economic Outlook, October 2014. See also “Estimating the Growth Effect of Public Infrastructure: Evidence from Canadian Provinces,” in this selected issues paper.


Making Public Investment More Efficient, IMF Staff Report, June 2015


First Session, Forty-Second Parliament, 64-65-66 Elizabeth II, 2015-2016-2017, Bill C-44, Division 18, paragraph 6


Obtained from the draft legislation, public announcements, and discussions with federal government officials


A special purpose vehicle (SPV) in this context is a legal entity created to finance, construct, own, and operate an infrastructure asset. Equity investments by the CIB and the private investor would be in the SPV.


Social returns are effects on society that are not reflected in prices charged to users, often referred to as externalities. While these can be positive or negative, reference to social returns in this paper assume they are positive.


Free cash flow is calculated as cash revenue minus cash operating costs and minus cash required to maintain productive capital (in the case of infrastructure, this would be interpreted as capital replacement, while routine maintenance would typically be treated as a cost). Cash generated to provide financial returns can also be obtained through innovative tax measures, such as capturing an increase in property values due to the public infrastructure. This assumes no assets sales or borrowing to finance distributions to investors.


The CIB should be cautious when awarding guarantees, in terms of number and potential payout, so as to limit contingent liabilities.


To simplify the analysis in this paper, it is assumed that there are only two investors in a project: the CIB and one private investor. In fact, there are many possible combinations of investors, including federal, provincial, or municipal governments, and multiple private investors. The fact of multiple investors in a project does not invalidate this analysis.


A key distinction between CIB projects and PPPs in Canada is that CIB projects must be revenue generating whereas PPPs need not be.


The economist William Vickery explored in detail optimal pricing for public services


Subsection 23


While a pool of projects with high social returns are identified in the planning process, the CIB will likely focus on those projects within the pool with relatively high financial returns. That said, the CIB is intended to free up budget funds for infrastructure projects with high social returns that generate none or little revenue.


Local governments are responsible for more than 90 percent of all infrastructure spending in Canada, including financing provided to them by the federal government

Canada: Selected Issues and Analytical Notes
Author: International Monetary Fund. Western Hemisphere Dept.