Canada Infrastructure Bank points to 407 toll highway as route for new investments

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The head of the Canada Infrastructure Bank says the 407 Express Toll Route, which has been criticized for its hefty fees, offers a “good example” for how the country can speed the construction of new projects.

Barely a year old, the infrastructure bank is mandated to invest $35-billion over 11 years, with hopes it can leverage four to five times that in outside investments toward building new Canadian transportation networks, energy generation and other priorities.

But in bringing what it considers a new model of infrastructure expansion to Canada, the CIB is also likely to push a country accustomed to free roads and bridges to contend with the costs – and, perhaps, tolls – of new developments.

To date, the bank has funded a single project, providing a $1.28-billion loan toward an electric rail system in Montreal. But governments and companies alike have brought dozens of proposals to the bank. In total, the CIB has held 120 meetings and discussed more than 55 “potential projects,” said Pierre Lavallée, who became president of the CIB in June.

Of those, the bank is “actively engaged” in 10 proposals as potential investments, Mr. Lavallée said in Beijing, where he recently attended a forum organized by the Canada China Business Council, and emphasized the bank’s openness to foreign capital.

The number of proposals shows that “there is a lot of really promising activity that would fit within the CIB’s mandate, and would bring new infrastructure for Canadians,” he said.

But as the bank begins to winnow down project proposals, it is also clarifying its role – one that, Mr. Lavallee said, could see it backing more projects akin to the 407, a privately operated highway that has drawn criticism for per-kilometre fees much higher than some U.S. interstate toll highways.

Mr. Lavallee, however, pointed to traffic data that suggests drivers like the road and see it as worth the money. The number of trips on the 407 rose by three-quarters between 1999 and 2017. The highway’s investors, meanwhile, have “also enjoyed reasonable returns,” he said.

In that sense, the 407 “could be a good example” for the CIB, he said, as it seeks to bring a torrent of private capital into building new ways for Canadians to get around and generate energy.

The Public Policy Forum has called Canada “an infrastructure laggard” in need of $500-billion to $750-billion in investment in the next decade. To close that gap, “traditional government funding at all levels combined, alone, isn’t going to get us there,” Mr. Lavallée said. “And so we have an opportunity, I believe, to complement that traditional funding.”

“The more private capital, the better,” he said, and ”private capital will be attracted if there’s a way for them to earn a return.” The bank is pursuing foreign capital, too, in order to expand the pool of money from which it can draw, he said.

The bank has been open about its model: On its website, it describes its mandate as funding “new revenue-generating infrastructure projects.”

But “the funding of infrastructure in Canada through tolls and user fees has been culturally and politically problematic,” warned Azfar Ali Khan, a director with the Institute of Fiscal Studies and Democracy at the University of Ottawa. Figuring out how to please users and investors alike will form “one of the biggest challenges for the bank,” he said.

Indeed, “the 407 is not a model that should be followed for any new infrastructure project in Canada,” said Heather Whiteside, a political scientist at the University of Waterloo who has studied public-private partnerships. In particular, having toll money flow into private hands “is a lost opportunity to use toll revenue for social and environmental needs,” she said.

Numerous foreign investors already own infrastructure in Canada, not least the 407, whose largest owner is a subsidiary of Spain’s Ferrovial S.A.

But the use of foreign capital, Ms. Whitside said, raises the potential for national security risks – such as those that scuppered the acquisition of Aecon Group Inc. by a state-owned Chinese company – while also depriving Canadians of an “opportunity to democratize infrastructure ownership in this country.”

Private capital is generally more expensive than debt issued to governments, and “then there is the issue of control. Investors will seek out projects that have the highest rate of return rather than necessarily those that meet the greatest public need,” said Keith Reynolds, a researcher who has written critical reports for the Columbia Institute.

Indeed, places that have systematically studied their needs have ”found that 95 per cent of the infrastructure that they will require in the next 20 years has already been built,” Mr. Ali Khan said.

Still, observers say the number of projects coming to the CIB demonstrates keen national interest. The Canadian Council for Public-Private Partnerships (CCPPP) counts an existing countrywide total of 267 such partnerships, so to have 55 proposals now seeking CIB funding is “quite a significant number, in my opinion, given the bank has not been up and running for that long,” Mark Romoff, CCPPP chief executive, said in a written response to questions. “It appears to be a signal that the private sector is very interested in working with the bank to bring projects to market.”

The bank’s success, he said, should be evaluated by whether it delivers projects that raise comfort and convenience at an affordable price.

“However, it’s important to remember that the bank is focused on large, complex and higher risk national or regional projects. These are assets that might not otherwise get built if not for tolls or user fees,” he said.