The Infrastructure Deficit – the role of the Canada Infrastructure Bank

Lisa Raitt: Thank you for tuning in to the Raitt Stuff. I’m your host, Lisa Raitt. And in this podcast, I’m going to share insights on current hot topics in the areas of public policy, politics and business with some guests along the way. Well, welcome back and Happy New Year, everybody. I greatly appreciate you listening in today because we’re starting off to 2023 with, I think, a really interesting discussion on one of the more important issues to Canada today. And actually, I can say that now and it’s it’s true now as it was in the seventies, and that has to do with infrastructure in our country. Now, as many of you know, I’m a former politician, and I can tell you with great certainty that for many years the concept of an infrastructure deficit has been firmly on the minds of anyone developing a campaign platform or even developing what a government is going to attempt to do in their term. Way back into the seventies, you’ve talked about infrastructure, and in fact, in the Harper government we had Canada’s economic action plan and ports and airports try to organise themselves into gateway coalitions in order to attract the attention of governments because they are sorely in need of infrastructure, investment and spending. And this Liberal government, Mr. Trudeau’s government, has taken a bit of a different approach and they’ve put in place something called an infrastructure bank, Canada’s infrastructure bank. And today my guest is the chief executive officer of the Canada Infrastructure Bank, Ehren Cory. Ehren, thank you so much for joining me today.

Ehren Cory: Thanks, Lisa. Great to see you.

Lisa Raitt: Starting off 2023, you know, the Canada Infrastructure Bank, unfortunately, has been the topic of a lot of political discussion in the past number of years. It was not supported by the Conservative Party at various times in the last parliament and in this parliament as well. However, you’re doing a lot of work, you’re getting projects done and you are, I think, filling a need that has been shown to be necessary in order to get projects going here in Canada. So tell me what is going on in 2023 for Canada Infrastructure Bank and the projects that you’re going to be looking at?

Ehren Cory: Well, I really appreciate the opportunity to talk with you, Lisa. I think you and I have had a chance over the last few years. I’ve been in the role now two years, and we’ve had a few chances to talk about the CIB and the purpose, the sort of the underlying logic behind an institution like this. And I love your introduction because it’s where I start from as well. The good news is that the need for investment in critical infrastructure is really well understood and it’s actually non-partisan and every level of government, actually it’s one of the few places you can find consensus from mayors to premiers to prime ministers, from red to blue to orange and green. The need to invest in new infrastructure is actually not a debate in the same way. Many other topics I think don’t have the same level of consensus. And actually funnily enough, when I was thinking of moving from the private sector to doing work in the public good, part of why I gravitated to infrastructure is how clear the need is and how durable the need is. As you say, this is generational. We have failed to invest for decades in the next generation of connectivity and productivity because infrastructure drives economies and it drives societies. It’s what makes us economically productive is what connects us to each other, makes our cities liveable, makes our country liveable. So to me it has a real long lasting flavour to it. It’s going to way outlast the two of us. And so I think infrastructure has this going for it and you can have lots of debate about the tools and the techniques should we use.

Ehren Cory: Is the CIB a good tool for that and should we have private capital? And how much do you can have a lot of debate on them. But actually the consensus is pretty strong on the need to do more. And so I think if you can be a tool for doing more, which the CIB, I think as you rightly point out, we are starting to prove ourselves to be. Then it goes away as an as a political issue because people just see it as a tool in the tool kit to getting more stuff built. So that’s my view and I, I take that seriously. The CIB was launched nearly five years ago, and as you point out, I think a lot of the debate early on was good in theory. Does it work in practice? Great to talk about. Nice soundbite. Can you show results? You know, it’s the say do gap, let’s say. And I think that’s pretty natural when you start a new crown corporation, when you start a new business, it takes a few quarters to get going. And certainly for us, it took a few years to to find our footing in particular, given that what we’re doing at the CIB is we are trying to find ways to grow the pie, to invest, get more infrastructure built than, let’s say through our traditional toolkit. Our traditional tool kit in Canada is sort of two solitudes. It’s mostly publicly financed and publicly funded, grant driven stuff. We build highways, we build transit systems, we build social infrastructure.

Ehren Cory: That way. It’s kind of been Canada’s main approach to infrastructure. And then there’s been a little sliver over the years that’s been really private sector led. Broadband is a good example that you and I are talking to each other through the high speed Internet that some companies, ISPs, big and small in our country. He made a commercial decision to build and and did. And it hasn’t been government financed. What’s been missing is a way to crowd in more private capital and add to the pie. So, for instance, a project on, I don’t know, district energy electric vehicle charging where there is a revenue source, there’s someone who could pay for it, but that it’s not quite in the money or that it has enough risk to it that the private sector alone won’t do it right. And that’s where we’ve struggled as a country. The only way we’ve been able to do that historically, by the way, is by governments giving some amount of grants to kind of buy down the capital it costs, enough that the private sector says, okay, it’s risky, but they just shaved off the first couple hundred million bucks through a grant. So now I’ll give it a go.  So the CIB is meant to fill that middle lane. It’s meant to provide a way for us to create aligned incentives for us to partner with people to get infrastructure built. We do that through both loans and equity investments on behalf of governments. We’re using taxpayers money to make loans and equity investments. And the thesis there is we can partner with people to get infrastructure built. That’s stock. Otherwise that’s waiting for a grant or it’s waiting for the risk to go away. It’s waiting for time sometimes to play out so that we see what happens in carbon markets or what happens to demand for electric vehicles or what happens to growth in our cities. That will be the future revenue for a decent energy system. So a lot of times what’s happening is if you leave it to the private sector alone, they’re just going to wait for the risk profile to change. And if you leave it to government, they’re going to slowly drip out grant money and we’re trying to play in the middle of those two things and get more built. And I’ll just say, Lisa, you and I have talked about this before, but the first few years of the CIB was really sharpening that approach, finding a pipeline of projects that meet that mix and getting some things right in what risk we’re willing to take. That all took some work. In the last two years. I’ve been in the role two years now we have made commitments either signed term sheets or reached financial close on nearly $9 billion of new infrastructure projects in this country, 45 projects across this country, from trade and transportation to Broadband to new transit systems to clean power and green energy solutions from $6 million investments in First Nations communities to billion dollar investments in new nuclear. So across the country, across the sectors, across the size spectrum. And so the results are starting to come down.

Lisa Raitt: And what you do is an infrastructure bank as opposed to a commercial bank, for example, or corporate bank is you look at outcomes. It’s not just about whether or not you’re going to pay it with a certain amount of spread and how much interest, etc., etc.. You get to take a look at outcomes. So one of the projects you and I talked about in the past was the Royal York and the outcomes. Tell us a little bit about the outcomes that you were looking at that allowed you to become an investor in this project?

Ehren Cory: Yeah, you and I sometimes have this joke that our names are only one letter off.

Lisa Raitt: Yep, yep.

Ehren Cory: But our purposes are really different. I think sometimes, if I’m honest, calling us a bank sometimes starts people in the wrong place with us. I mean, the best way to think of the CIB is as a development bank. And that’s an important word to add, because what we’re doing is we are investing for outcomes full stop when we do our ROI calculations. I often say to people, we’re just like any other lender you might have. The difference is the R for us in our ROI calculation is tons of GHGs emitted reduction, number of new homes connected to Broadband, a number of new transit riders in our country, increased flow of trade goods through transportation corridors and ports. And we actually look at our investments that way. So when you and I talk about a district energy project or an energy retrofit, as you mentioned, the math we’re doing is what are the tonnes of GHG reduced for our money and for our dollars at risk? And it actually is kind of a bang for a buck calculation. Now what’s interesting is not only if you think of most banks, they priced a risk. We actually don’t price the risk, we price the outcome.

Ehren Cory: So the more GHG benefits, use your energy retrofit example when we talk to a building owner, or, they own a portfolio of buildings and they want to do a project to get their buildings to net zero. So this is a deep energy retrofit of a building that’s going to go way beyond the building code requirement, way beyond LEED, and take them actually to net zero ready. It’s a classic because for the building owner themselves, it’s not an ROI positive decision. It’s going to take 20 years for this thing to pay off based on energy savings alone. But if we can reduce their cost of financing through our loan, it can move those projects into the. Money and they can go ahead and do them. And when we do that calculation, what we’re actually saying is how much money do they need from us at one interest rate to make it profitable enough for them to go ahead. So actually we price, therefore to the outcome. And how many tonnes of GHG emissions reduction does that get? That’s what actually sets all of the terms of our loan, how much money we lend for, how long and at what interest rate. We’re trying to close a gap in their financial model, essentially.

Lisa Raitt: Are you going to be monitoring whether or not they hit their benchmarks?

Ehren Cory: Great question. So yes, at multiple stages. So first of all, when we make the investment decision, as I say, that’s the comparison we’re doing. And if you were to look at our corporate objectives in our annual report, again, unlike a commercial banks, ours actually our long term goals are around the impact that our investments make in climate, in connectivity and in trade. Those are the three big categories we look at. And in closing the gap in Indigenous communities, which maybe I can circle back on afterwards. So those are the things we measure and they’re part of it. We have corporate objectives against those things and we have an estimate at the time we make an investment decision. That’s our business case for investment and then it’s our job to track over time were those actually achieved. And in some of our investments, as I say, the interest rate energy retrofits, we charge a lower interest rate, the more energy savings they actually achieve through their project. So, yes, we track it and we even tie results to it.

Lisa Raitt: I mean, I think you do see those products out there in the commercial banking world for sure, but yours just takes it to a different level. What I was jotting down when you were talking about that is a good reason why CIB makes sense is when a government puts money into a project, they always say it’s for a public policy indicator. For example, this project is going to create X number of jobs. That is the currency for for a good politician you want to cut. Talk about how many jobs are created, but there’s never the ability to actually measure the number of jobs that are created. There’s going to be a lot of claims made on how many, but you got to wait for the Auditor General to come in and tell you if you really actually did create any jobs. And oftentimes there’s a big surprise at the end of the day that there weren’t that many jobs created. But you are looking at the outcomes. And that’s, I think, a good reason why CIB exists is you’re doing the back end.

Ehren Cory: and we’re tracking them and we’re measuring ourselves against the achievement of those. So we have accountability for that. That’s right.

Lisa Raitt: So one of the things that I’m going to be focusing on in this new set of podcasts, Aaron, is how to get projects done in the country, because I think that’s the number one question that we have. So we’ve talked a little bit about a financing and you’ve mentioned something that is very, very close to my heart and something that we’re going to be watching very carefully, and that is how to ensure we have Indigenous equity participation and not just Indigenous consultation, not just Indigenous permission, like we’re talking about participation in various ways. You’re involved in a number of projects with Indigenous participation. What do you see are the key things we need to think about in public policy going forward on how to ensure that we’re getting this right so that we can get these projects going?

Ehren Cory: Well, it is a really important part of our mandate. As I said, we measure our outcomes in four ways. We look at emission reductions, connectivity, both physical connectivity like roads and transit, but also Broadband, digital connectivity. We measure economic growth. So how do we grow our trade capacity, The job creation that you mentioned? And then the last one is Indigenous benefit and Indigenous participation. And so to your point, and you’re passionate about it as I am, because as we’ve over the last few decades, as we talked about, we have underinvested in infrastructure. That level of under-investment is multiple times worse when it comes to our northern, remote and indigenous communities. And I think what we’ve experienced so we’ve now done we have now made investments in seven so far Indigenous led and owned projects. We have a number of additional projects which I can talk about, a second where we have Indigenous partners, but they are not the leaders in those projects. So let me talk about them in the two buckets. First, on our Indigenous community projects, what we’ve learned, obviously when the CIB was created, part of it’s part of its investment thesis was that it was going to make investments with a minimum ticket size of $100 million. Well, you’re not getting an Indigenous community off diesel or Broadband to 2000 families in northern Alberta if that’s your minimum ticket size. And frankly, I don’t think you can be the Canada Infrastructure Bank like that, you would end up being the eight biggest cities infrastructure bank or something. So that was something we had to change. And in 2021 we launched this idea of the Indigenous Community Infrastructure Initiative, and we were given a target by Minister McKenna at the time of making a minimum of $1,000,000,000 of investment in the coming years in Indigenous communities themselves to the benefit of Indigenous communities.

Ehren Cory: So what does that look like? It looks like us partnering with Indigenous communities where they’re putting in a piece of equity, they’re making an investment themselves in the project and we’re making the loan and the majority of the money is actually coming from our loan. So very different terms than what I would lend to electric vehicle charging company or to OPG to build a nuclear plant. So it’s a loan from us. There are some skin in the game from the community and we’re investing in building expansion of reserves, wastewater treatment facilities, Broadband, clean power, all of those sectors at the scale that those communities need and in partnership with them. And I think to answer your question, the lesson we’ve learned from that is twofold. One, Indigenous communities know what their infrastructure needs are. They don’t need someone else to tell them. What they need is a partner to help them achieve their goals. So we have very different projects depending on the community. So we have an urban reserve in Saskatchewan on the outskirts of Saskatoon. It’s a really, I would say, sophisticated partner. They’re developing a subdivision essentially in Saskatoon. That is a mix of community benefits. So community space health treatment for their members who are living in an urban setting because you have reserve members on reserve and off. But it’s also partially a commercial venture.

Ehren Cory: There’s going to be for profit businesses and we’re helping them build out the water mains, the Broadband, the streetscape, the electric power to grow that. So that’s like an advanced infrastructure need. We’re working at the other end of the spectrum with a community that does not have a viable wastewater treatment solution and is dumping sewage into the ocean. And we’re working with them to get on to a clean water system. So my point is each community knows what they need and it’s our job to help facilitate, not to tell them what they need. Lesson one. Lesson two is that many of these communities do actually have and this is, I think, an important lesson for and what we hope we can show commercial banks. Many of these communities have the capacity, both financially and from a project perspective and our good borrowers. And the barriers to the borrowing sometimes are really procedural or technical, like I can’t take security in properties on reserve, so I don’t think I can make a mortgage. Well, okay, but we have found ways to do it by taking security in either general reserves of the community or other streets. They often own businesses. So we’ve done two or three loans where our repayment source is an Indigenous owned business in the community. It’s so they are creating revenue streams to pay back our loan that we actually can really clearly see and measure. And and in some of the cases, we think that if we do this a few times, we can actually help the rest of the market get there and we won’t be as needed anymore.

Lisa Raitt: Right. How about the equity side, Ehren, when we start talking about resource projects where there is going to be Indigenous participation as well, there’s really limited places where they can go for equity. I know you can’t do it at the Canada Infrastructure Bank. What’s the public policy fix on this?

Ehren Cory: Yeah, it’s a great question. And so as I mentioned earlier, when we do those Indigenous community investments which have been as as as small as $6 million, as big as $100 million so far when we’ve done those, we have typically done them with an equity slice from the community and then a loan from us. and that depends on the community being able to have sufficient money to put in 20 or 25% of the money as equity. Right. So not all communities are in that position from a cash perspective. I think there are two things I would say about that. One, where we have had some success. It’s not our mandate right now. It’s to lend money to a community as a loan that they turn around and invest as equity and in project. And you can kind of like that’s a that’s a bigger question for government and we’d be completely capable and willing to do it. But it actually has much broader implications because essentially you’re providing a loan at an interest rate to somebody and then they’re turning around and investing in a project assumedly at a higher rate of return. And there’s a there’s a part of economic reconciliation in there that’s really important. And I think valuable as a public policy tool is just not mine to set. So you know what I mean? So that’s us work. I do, and we’re working really closely with our colleagues in government around what the parameters for those sorts of equity loans could and should be. I think the Federal Government understands their necessity and that the CIB could be the gateway to that. But as I said, that’s a bit of a of a broader government policy question that we’re happy to help fill.

Ehren Cory: But in the meantime, I think there are other ways of achieving similar. So I’ll give you a live example. We’re working on on a really large battery storage project here in Ontario. It’s an exciting project that has a private development partner in our store. Yeah, and Equity from Northland Power and Equity Participation from Indigenous Community, Six Nations of the Grand. And I think what’s interesting about that project is we’re not lending money directly to Six Nations of the Grand River Development Corporation. We’re lending money to the project. But what we’re doing through our loan again. When we look at outcomes and we measure our ROI, our ROI on that project is both clean electrons to the grid, cause they’re going to store renewables when the wind’s blowing and sell it back to the grid when it’s so there’s an environmental benefit, but there’s also an economic value to the Indigenous community by being a equity partner in that. So when we set our interest rates or when we set our terms of our loan, we can set those in ways that improve the economics for all participants, including the Indigenous partners. And so right now that’s how we’re solving it. And we have some real examples like Oneida, where we have made a loan into the project, but that has facilitated participation of the Indigenous community. And so I think that’s an okay way to do it. Ultimately, what it’s going to take is unlocking the full participation of Indigenous communities is going to require more capital for them to make bigger equity investments.

Lisa Raitt: Great. You know, Ehren, I want to talk about decarbonisation writ large and energy transition, but we’re out of time, so I’m going to have to say that you’ll come back again in the spring and we can have that discussion about where that’s going.

Ehren Cory: I would love that.

Lisa Raitt: Yeah, I would too. I appreciate that.

Ehren Cory: My one sentence on that, Lisa, is that when you look at our portfolio, we have $35 Billion to invest. Right now, when we think of our portfolio allocation, about half of that is invested in things that broadly speaking, you would say speak to energy transition and climate. So whether that’s clean electricity and and decarbonising our generation, the transmission grid storage that I mentioned district energy or on the low carbon fuel side, the hydrogen value chain, other forms of low carbon fuels and CCUS that that that collection of stuff all oriented around making Canada a leader and energy transition and setting us up to be economically competitive in a net zero world is half or more than half of where all of our money is going, and that’s in a whole bunch of different ways. It’s EV charging infrastructure so that we can get electric vehicles on the road. It’s battery storage, it’s new small modular reactors. So it plays out across a whole bunch of different places. But it’s the single biggest area of investment focus for us and we’re looking for great projects and great partners. So anyone listening to this wants to talk to us about those types of infrastructure investments, we are ready to talk.

Lisa Raitt: Well, I can’t say that you can get a better advertisement for CIB. There you go. I think that’s amazing. And I would point out as well that I am going to ask you to come back to talk about just that after the federal government budget, because I would expect that there will be some serious looks at how we’re going to match up with the Inflation Reduction Act in the United States in that budget and what role CIB could play. And and I know that’s something that our clients at CIBC are very, very interested in. Exactly how does this all fit together and how are we going to move forward and get these projects built and done?

Ehren Cory: Totally. We’re looking forward to it.

Lisa Raitt: Okay. Thank you so much, Ehren. Much appreciate it. And I want to thank everybody for listening in today. Thanks so much for tuning in. Now, if you have any questions or comments or even requests on topics to discuss, drop me a line at [email protected]. Your interactions actually will make this better. I’m your host, Lisa Raitt, and this has been The Raitt Stuff. I’ll talk to you next week.

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