Is the Canada Infrastructure Bank actually a bank? Don’t bank on it

The new Canada Infrastructure Bank is going to be a lot of things, but the one thing it won’t actually be is a bank.  

This is more than a persnickety point of legal semantics. With the government last week taking some steps to move the CIB off the drawing board and into reality, there’s a greater need to understand just what the so-called bank will do.

To be sure, a lot of private sector observers generally welcome the institution, which the federal government says will help bring private sector and pension fund capital into major infrastructure projects. It’s just that some think calling it a bank is confusing.

“Just by description, I don’t even know that it’s a bank. I don’t think it’s going to be collecting deposits or providing deposit insurance,” said Lou Serafini, president and chief executive of Fengate Capital Management Ltd. “I actually think it should consider a new name. It seems like we’re stuck on the name as opposed to what this agency or crown corporation is supposed to execute on.”

The federal government has made two important moves to put the planned bank into action. The first was last week’s announcement that CIB’s headquarters will be in Toronto, the country’s financial capital. The second was last week’s launch of the search for the CIB’s initial chairman, board and chief executive.

The outcome of that talent hunt will address a key question over the CIB’s future role. The federal government says the CIB will be a crown corporation that operates at “arm’s-length” from the government. But with $35 billion of federal government capital going into the institution, you can imagine that some might question how long the government’s arms are going to be.

Mark Romoff, president and chief executive of the Canadian Council for Public-Private Partnerships, said private investors will use the composition of the CIB’s first board and senior management ranks as a means to gauge how independent the bank will be from the government.

“First and foremost, the recruitment of a first-class chair, board directors, and CEO will be very important elements in all of this,” Romoff said.

“I think what you’ll find is that as the bank is up and running and projects begin to get dealt with, the government will step back and give the chair and the CEO the runway they need to ensure that their projects are considered for the right reason. So I’m optimistic that it will be successful.”

The government’s legislation, when passed into law, will create a crown corporation called the Canada Infrastructure Bank or CIB. The corporation’s statutory mission is to help bring private sector and pension fund investment into Canadian infrastructure projects that are backed by multiple levels of government, including the feds.

The legislation says the bank will invest in infrastructure projects using “innovative” financial tools. The CIB will also accept proposals for new projects from developers. It will collect and share data on projects that should help investors make better decisions on future projects. And it will serve as a “centre of expertise” for governments and investors seeking advice on projects.

Projects must meet at least three criteria to involve the CIB, according to the legislation. Projects must be located “in Canada or partly in Canada.” The “partly” contemplates something like a bridge or border crossing. Projects must be “in the public interest,” perhaps because they foster economic growth or contribute to the sustainability of infrastructure.

A third criteria is a little more concrete and a lot more controversial: the projects must be revenue-generating. This narrows the focus to projects that are commercially viable enough to attract capital from private sector investors and pension funds. Yet that likely means things like road tolls and other user fees that Canadians aren’t used to and might not like.

“They’re going to be looking much more toward user-fee supported infrastructure,” said Matti Siemiatycki, an associate professor of geography and planning at the University of Toronto. “When you think about Canadian infrastructure, and particularly municipal infrastructure, many of the facilities that we rely and depend on don’t generate user fees that can cover their full operating costs, let alone their capital and construction costs.”

Siemiatycki said the CIB should be a “centre of excellence” that can evaluate big, multi-billion dollar projects of national significance. It would give private sector investors the confidence they need to see that Canada properly coordinates projects among various levels of government, and backs the projects that make the most financial sense for private sector investors and pension funds. He thinks the CIB should be called something like the Canadian Infrastructure Investment Agency.

“The issue is how you evaluate projects, and pick which ones are the priorities, and which ones are going to be the most successful and deliver the best value. I think that is a technical job that requires specific expertise,” Siemiatycki said.

So why is the government calling the CIB a bank? In short, because it can.

Canada’s Bank Act says businesses can’t use the word “bank” in their names unless they’re licensed by the federal government or have special permission from both Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, and the Minister of Finance.

Yet there is one notable exception. The federal government, or more specifically, the crown, has the right to set up companies and call them banks. That’s what’s happening with the CIB.

“It is a specific offence under the Bank Act for anyone who is not a bank to use the words “bank”, “banker” or “banking” to indicate or describe a business in Canada, unless you are the Crown,” said Stephen Clark, chair of the financial institutions practice at national business law firm Fasken Martineau DuMoulin LLP.   

Financial Post