Wednesday, September 13, 2017

Jim Leech on Pensions and Infrastructure Bank

On Monday, Jim Leech, Ontario Teachers' former President and CEO and now Chancellor of Queen's University who was appointed Special Advisor to the Prime Minister on the Canada Infrastructure Bank, gave a speech at the Canada 150 Business Conference at the Rotman School of Business:
Thank you John for that kind introduction.

This truly has been a celebratory year – 175 years for my university, Queen’s, where I serve as the 14th Chancellor; 150 years for Canada (Expo 67 feels like only yesterday); 100 years since the formal establishment of what we now know as Ontario Teachers’ Pension Plan; and 70 years since I was born! These are big milestones and I am pleased that you have given me the opportunity to pause and contemplate the past, present and future.

I have been asked to discuss pension plans and how they have evolved/impacted Canada over the past century and a half – and what the future holds. This is a story of evolution and Canadian innovation – from ad hoc, informal schemes to keep surviving workers out of poverty for the short period from work cessation to death – into a highly successful economic engine that is the envy of the world. In Canada, we are fortunate – our pension plans are able to jump on opportunities, turbo charge our economy and provide retirement security; in most other mature economies, their pension plans are a huge drag on their future.

I said that this is the 100th year for Ontario Teachers’ Pension plan – that is correct in that the plan was formally created in 1917. However, there was an ad hoc plan for teachers set up by Egerton Ryerson that dates back to the pre-Confederation days of Upper Canada. The pensions were funded by an annual grant of 500 pounds for teachers who were “worn out of service to their country”. The plan was to dole out 6 pounds for each year of service to old teachers who could demonstrate that they were “indigent” and “of good moral standing”. If you go on the Ontario Government Archive website you can see applications for pensions from 1853. These applications contain medical documents, certificates of character, statements of teaching experience, and other documents supporting the needs of the applicants. In addition, the files include correspondence between Department officials, applicants and their representatives, and people providing certificates of character. The decision to accept or refuse an application was made by the Superintendent of Public Instruction on the recommendation of the Education Office.

Ryerson thought that his funding formula was actuarily sound but he soon learned what every CEO of Ontario Teachers’ Pension Plan knows – Ontario teachers never die as planned, and as a consequence pensions had to be reduced to 2 pounds per year of service.

But Teachers’ is not the earliest Canadian plan. New Brunswick passed an 1839 pension act for the relief of “old soldiers” of the Revolutionary War. In exchange for a petition that confirmed their loyal service to the King and “indigent circumstances” soldiers would receive 10 pounds per year.

In another Canadian first, North America’s first corporate pension plan was created for Grand Trunk Railway in 1873. In 1885 the Bank of Montreal introduced a pension plan and by the early 1900’s most bank employees could dream of earning an annual pension of $1,000 upon retirement.

Through this period the benefits were largely illusory. Since the employer was funding any pensions paid, they called the shots. For example, workers had to work for 10 years before becoming eligible. If employees were disloyal they were disqualified – both Grand Trunk and Canadian Pacific Railways yanked pensions when workers joined legal strikes in the early 1900’s.

And, of course, you had to be male to even qualify under most of the plans.

The great irony about these conditional pensions is that most employees did not live long enough to collect their pension. When Grand Trunk introduced its plan in 1874, average age expectancy was about 55 years. The average worker had likely been dead for 15 years before they were eligible to collect their pension at age 70! Accordingly, any pensions actually paid were paid out of the corporation’s current earnings.

These “pay as you go”, ad hoc, conditional plans started to change in the 1920’s and 30’s as life expectancies started to catch up to retirement age – workers started to live long enough to collect a pension for at least a few years.

This caused the formalization of many plans: for example, the creation of the Ontario Teachers’ Superannuation Fund in 1917. It was in this era where pension plans started to evolve into “saving pools”. Employees were now asked to contribute a small portion of their wages so that when combined with the employers’ contributions, a pool of assets could be built up over time to fund future pensions. Pension benefits would be based on years of service and compensation level. And eventually even women were allowed into the plans!

This formalization also allowed plan administrators to start to measure the adequacy of the asset pool to meet future liabilities. I dug out the Actuarial Report for the Teachers and Inspectors Superannuation Commission for 1920. It showed liabilities of:
  • Value of pensions to be granted to survivors of 16,481 working teachers as $13,102,000
  • Value of returns on death to such of these teachers as will die in service as $359,000, and
  • Value of pensions to 299 persons then on pension list as $940,000
for a total of $14,401,000.

The plans assets were:
  • Value of future contributions from the 16,481 teachers of $4,775,000
  • Value of future contributions from the Province of an equal amount of $4,775,000
  • Funds on hand - $3,059,000
For a total of only $12,607,000 – leaving a deficit of $1,792,000.

So from the get go, the plan was in deficit, but the actuary, who is identified in the report as “obedient servant”, MA MacKreyie, was not worried that the fund was only 80% funded, forecasting it would be in surplus within four years PROVIDED new entrants to the fund paid their full fare. I particularly enjoyed his warning about not paying refunds while there remained a deficit: “We cannot eat our cake and also keep it for the hungry teacher in his old age” – clearly an extroverted actuary.

Actually, things did work pretty well for the next few decades as the asset pools in these funds started to grow.

The next big milestone was in the 1950’s – known as the “Treaty of Detroit” when General Motors and the UAW agreed to the establishment of a pension scheme that quickly spread though the auto industry and to most other unionized workplaces. Most of today’s Defined Benefit plans can trace their benefit structure (a percentage of the average salary in the final years) to this Treaty. Embedded in the collective agreements, these pension rights became a legal obligation of the sponsoring employer. And through contract bargaining the unions gradually increased the benefit levels over the ensuing decades, introducing bells and whistles such as early retirement, survivor benefits, inflation indexation.

These plans became so popular that soon close to 50% of all Canadian workers were members of corporate, union or government sponsored pension plans.

And following the private and public sectors’ endorsement of this form of pension plan and in order to ensure that all Canadians had some sort of retirement security, the Canadian government introduced the Canada Pension Plan in 1966.

But there were some who were worried that these plans were not the panacea they appeared to be. Peter Drucker in his 1976 classic, The Unseen Revolution, warned that what General Motors had really initiated was a long-term guarantee that would shoulder the auto industry with unaffordable retirement bills.

Drucker also had some macro economic warnings: he predicted that institutional investors, especially pension plans, will become the controlling owners of America’s large companies, the country’s only capitalists. In other words, through pension funds ownership, the means of production will become socialized without becoming nationalized. Accordingly, how these plans are managed was critical. His other predictions were: that a major health care issue would be longevity; that pensions and social security would become central to American economy and society; that the retirement age would have to be extended; and that altogether American politics would be increasingly dominated by middle class issues and the values of elderly people.

While readers found these conclusions hard to accept, especially his conclusion that the increasing dominance of pension funds represents one of the most startling powershifts in economic history, today Drucker’s work is considered prescient.

In fairness, it was easy to ignore Drucker’s warnings - the last two decades of the twentieth century were good times and the system was working well. Sponsoring corporations were even making money off the plans in that the actuarial return requirements were well below what the pool of savings was actually earning. In other words, the Sponsors were actually earning a spread on these pools of savings. This led to contribution holidays and even surplus removals – a short term windfall for any corporate CFO. And, of course, there was lots of room to give in to employee bargaining demands to increase benefits. What the heck – sweetening pension benefits did not impact the current P & L as the sponsor was not required to include pension status in its financial statements – the costs would not show up for 20 years – not my problem – that’s for the next guy.

It was smooth sailing and everyone was happy.

There was an added benefit for many of the government sponsored plans – these pools of employer/employee savings became a captive funder for their own finances. Canada Pension Plan was restricted to investing in federal and provincial debt. Ontario Teachers’ Pension Plan could only invest in Ontario provincial debentures. And federal tax laws limited the amount of pension savings that could be invested outside the country.

Is it true that all good things must come to an end? – well it certainly was in this case.

Towards the end of the century the music stopped as a bunch of bad things started to conspire against these plans:
  • The liabilities started to grow as retirees started to live longer and benefits were sweetened
  • Investment returns became less certain – in order to earn more to fund these increased liabilities, plans started to take on more investment risk. But they were ill equipped to make such investment decisions and, with risk came volatility eg Dot-Com crash and financial crisis of 2008. Actual returns fell far below previously assumed rates of return.
  • The regulators required a sponsoring organization to include changes in its pension plan status in its current P & L. So much for the free ride - analysts started to view General Motors as a pension plan that made cars on the side.
The chaos of the past two decades caused many pension plan sponsors to withdraw from providing pensions. In the private sector, there has been a huge migration from the Defined Benefit structure where pension amounts are fixed and “guaranteed” by the sponsoring organization to a Defined Contribution structure which is really only a forced savings plan as the amount of any pension is dependent on your personal investment prowess. This has resulted in a massive risk transfer from the sponsor (usually the employer) to the employee who has proved totally incapable of managing such risk. As a partial response, governments introduced tax incentives to save such as the Registered Retirement Savings Plan, but this has been a complete failure.

Students of the math of pension plans find this trend disturbing as it is clear that the cost of providing a fixed amount of retirement income is far less expensive under the Defined Benefit structure than under the Defined Contribution structure. This sounds counter intuitive but it is straight math and largely due to the ability to pool investment and longevity risks under a DB plan. Unfortunately, this logic has not prevailed with corporate CFO’s who are simply interested in getting this “uncontrollable liability” off the balance sheet and income statement. Their incentive system is not impacted if retired employees are struggling. For them, volatile Earnings per Share is a No-No.

The public sector plans are a very different story. I suspect that they simply found it impossible to unilaterally switch to Defined Contribution and so had to make the best of a seemingly bad hand. In the 1990’s they started to “privatize”; fortunately, they borrowed advice from Drucker’s Unseen Revolution:
“The new institutions we have created to administer and invest pension monies must have adequate management and be rendered legitimate. They have to be autonomous institutions, be accountable to their constituencies and free from any suspicion of conflict of interest”
In practice, this meant: having a clear mission, establishing independent governance with professional boards of directors and highly skilled management, and in many cases going as far as joint employee/employer sponsorship. Ontario Teachers’ Pension Plan was the fore runner in 1990; most other public sector plans have been modelled after Teachers’.

This is what the world has named and envies: The Canadian or Maple Leaf Model. Most other countries did not have the foresight to understand what Drucker was getting at. The result is that, these Canadian Model plans have outperformed their counterparts across the world in terms of investment performance, customer service and innovation eg first investors in real estate, private equity, infrastructure, commodities and derivatives.. While the US states and municipalities fail, one after another, under the burden of their insolvent pension plans, by and large our Canadian Model plans are in surplus.

And as Drucker had predicted, as the assets within these “enlightened” public pension plans have grown, they have become a major force in our economy – both as a provider of buying power for our citizens and as an investor in businesses and funder of governments - and world wide as a formidable investor. Whereas most US pension plans are in serious deficit and hence will suck resources from their economies for many years to come, Canadian pension plans are largely in great shape and will act as economic stimulators.

Pensions play an incredibly important role in our economy in Canada. I often get the feeling that some people think that pensions represent “dead money” or tax – somehow the funds go into a black box, never to be seen again. Some more Facts:
  • Canada’s ten largest DB Plans are recognized as world leaders.
    • They manage over $I.1 trillion, half of which is invested in Canada, including many of our landmark
    • Together, they provide employment for 11,000 men and women professionals.
    • Three of the funds are listed among the top 20 public pension funds globally. Additionally, the Top Ten remain prominent global players in the alternative asset management industry, with seven funds named among the top 30 global infrastructure investors and five listed as part of the top 30 global real estate investors.
  • Income received by pensioners from the ten largest plans in 2012 is estimated to be between $68 and $72 billion per year; those pensioners pay $14 to $16 billion in taxes each year - money that is sorely needed to deliver healthcare, connect our communities and educate our children; and they spend between $56 and $63 billion on goods and services that their neighbours produce. The numbers are undoubtedly higher today.
  • A recent study by Boston Consulting Group concluded that these pensions alone are an economic engine in their own right, especially in smaller communities. In fact, in Ontario in 2012, DB pensions formed 11.5% of total earnings in small towns. This climbs to 18%, when you add in CPP, OAS and RRSPs. Many cities are much higher: Elliott Lake (37%), Collingwood (25%), St Catherines (22%), Kingston (21%) and Thunder Bay (20%).
  • Only an estimated 10-15% of DB beneficiaries collect the Guaranteed Income Supplement versus 45-50% of other retirees. This saves the federal government about $2-3 billion annually in GIS payouts, freeing up funds for other social spending priorities.
  • Retirees who are members of DB plans actually spend the income they receive as they have the benefit of a predictable income stream and the confidence of knowing that they will not outlive their money. On the other hand, retirees who are not DB plan beneficiaries must be savers in retirement because they have increased uncertainty and have not saved enough during their working years.
As we cross the 150-year mark, I would note that Drucker’s predictions continue to ring true: the pension industry will become increasingly important as Canada has 5,000 new retirees every week and this will grow to 8,000 by 2020 – over the next 20 years more than 7 million Canadians will exit their jobs for retirement that will last longer than anyone predicted. Unfortunately, the percentage of workers who are members of workplace pension plans has dropped precipitately, and membership in Defined Benefit plans is basically confined to government employees. The rest of Canadians have to rely on social security plans (Canada Pension Plan, Old Age Security, Guaranteed Income Supplement) and our own savings.

In The Third Rail, a book Jacquie McNish and I wrote in 2013, we discuss what we believe are three effective and affordable proposals that address our most urgent pension problems:
  • First, introduce an enhanced CPP for the “forgotten middle” in our population
  • Second, ‘redefine’ our defined benefits to reflect today’s demographic reality.
  • And third, we must create a defined contribution model that really works and does not merely pass the “risk buck” from employers to employees.
I am pleased to say that action has already been taken on the first recommendation with a federal/provincial agreement forged last year. You can quibble with the exact formula agreed but it does go a long way to addressing retirement security for the middle-income earner.

The second recommendation is code for restructuring the remaining 1950’s Defined Benefit plans to mirror the Canadian Model. We felt that a wholesale switch by these struggling Defined Benefit plans to a DC structure was counter-productive. Instead these new, evolved, DB plans would offer a base benefit guarantee, with additional benefits contingent upon investment performance. With such an approach, we immediately introduce an aspect of risk and reward sharing among all parties that promotes sustainability and better governance. These plans would also be removed from the push and pull of collective bargaining that is often too short-term focused and in many cases politically motivated.

But what can we do to help the people already in inadequate DC plans … and the 60 percent of employees who have no work place pension plan? There must be ways to build better defined contribution plans for small businesses and the self-employed. What lessons that we can draw from existing failures such as our Registered Retirement Savings Plans?

So, our third recommendation relates to the required design attributes for a successful DC plan:
  • Enrolment needs to be mandatory – it is far too easy to put saving off and the future has a funny way of catching up to us. We need only look to the failure of people to invest in RRSPs to understand that, unless compelled, individuals would prefer consumption over saving.
  • We can pool investments and use those efficiencies to reduce costs, enhance investment opportunities and attract the best professional managers.
  • We can offer fewer investment fund choices, which is more efficient – I am always amazed at how we think we are doing employees, who are not professional investors, a favour by offering them 20 investment choices.
  • We must require annuitization, which addresses longevity risk and gets these plans closer to the security of the DB model.
I believe that this is the next frontier – I hope I am even partially as prescient as Drucker. Canada has shown the ability to stay out in front of the retirement security issue and in doing so we have created huge economic engines. We need to continue with that spirit of innovation and non-conformity.

Let me leave you with these four thoughts:
  • Retirement income adequacy is one of the most important social issues we will face over the next couple of decades as so many Canadians retire - so it is important to get it right.
  • In the long run, it is far more cost effective to confront our pension failures today by improving pension coverage and adequacy than to wait and deal with it later via the social welfare system.
  • Pensions are critical to our economy, DB pensions even more so, through consumer spending and taxes paid. We ignore this impact and minimize the importance of its reality at our economic peril.
First, let me thank Jim Leech for sending me this speech over the weekend where I got to read it before he gave it as long as I kept it to myself.

If you haven't read his book, The Third Rail, which he co-authored with Jacquie McNish, I highly recommend you buy a copy and do so.

Jim's speech is excellent, it gives you  a historical background and traces how we arrived at where we are today in Canada in terms of our large pensions and their much-touted governance model and benefits.

I had a chance to talk to Jim this morning for a full hour and we talked about this speech, Ontario Teachers' and the latest developments at the Canada Infrastructure Bank.

If you want to know what I love most about my blog, it's these conversations with experts and leaders who share much-needed information which all my readers can benefit from.

And if you want to know why you should be supporting this blog through your financial contributions on PayPal on the right-hand side under my mug shot, it's because of posts like this which you simply won't read anywhere else.

Alright, let's get started because there is a lot to cover. I began by telling Jim that I loved the passage on MA MacKreyie, the "obedient servant" and understanding just how prescient Peter Drucker was, way ahead of the game, laying the foundations for Canada's large, well-governed public pensions.

I took issue with his third recommendation, we must create a defined contribution model that really works and does not merely pass the “risk buck” from employers to employees.

In my humble opinion, the brutal truth on DC plans is they don't work and leave too many people exposed to the vagaries of public markets, shift retirement risk entirely on employees and expose them to pension poverty down the road.

As I've repeated many times on my blog, the solution to Canada's retirement crisis is right there under our noses. We need to build on and expand on our large, well-governed defined-benefit plans that invest across public and private markets all over the world, introduce some form of risk-sharing, and have these plans backstopped by the federal and/ or provincial governments.

Jim agreed with me but said this is never going to happen, "it's not practical," so we need to figure out a way to improve defined-contribution (DC) plans. We both agreed that savings for these plans and employer contributions must be mandatory because voluntary savings means they will never work.

On the history of pensions, we then entered a fascinating discussion on the origins of the Ontario Teachers' Pension Plan and how it was the first to introduce this business model of governance to a public pension.

I told Jim that he, Claude Lamoureux, Bob Bertram, Leo de Bever, Neil Petroff, Ron Mock, Eileen Mercier, and many others need to sit down and write a book on the origins of Ontario Teachers' Pension Plan. At the very least, it would make for a fascinating case study.

The way Jim explained it to me was that Ontario's teachers used to put cash into a pension which invested in notional bonds based on the 5-year average of Ontario Hydro's long bond yield. These were effectively called "phantom bonds" because they weren't real, only notional in the government books.

At one point, during the Peterson government, discussions took place between Ontario's teachers who wanted a broad asset mix to get better benefits and the government which saw these pensions as a liability on its books.

Three proposals came about:

  1. A traditional pension where the government funds it and the teachers' union has no say.
  2. A union plan which is entirely funded and managed by the union.
  3. A jointly sponsored plan where the union and government share the risk of plan equal
It was agreed that a jointly sponsored plan was the best option and initially, they said the board would be made up of four government bureaucrats, four teachers, and one chair.

Now, at the time, the Petersen government was being displaced by the Rae government and there were some very heated discussions that took place where the union and government threatened to walk away. But Bob Rae's government had the foresight to continue these discussions.

Then came the all-important question just how did Ontario Teachers' Pension Plan adopt their arm's length governance model? Jim told me that "urban myth" was the union wanted the former Bank of Canada Governor Gerald Bouey to be the Chair because his daughter was an Assistant Deputy Minister in Rae's government and they respected her.

Bouey accepted the role of inaugural Chair on one condition: Ontario Teachers' Pension Plan had to adopt a business model for its board of directors. The Board would delegate authority to the CEO who would in turn delegate authority to senior management. He demanded there would be no government interference whatsoever.

Moreover, it was Bouey who demanded the Board be made up of very qualified people, not government hacks or union members, but people who understand investments and how to run an organization.

He told the unions that the Board needed at least one accountant/actuary, one economist, one HR person, etc., and all these requirements are still enshrined in Ontario Teachers' Federation internal guidelines till this day (the Board is now made up of 10 people plus a Chair).

He and the Board hired Claude Lamoureux who then hired Bob Bertram as the first CIO, and the rest, as they say, is history.

I asked Jim a question on compensation if there was ever any push back. He said no because it Ontario Teachers' always emphasized proper communication and full transparency to its members.

However, he did recall a time at a meeting when a teacher raised concerns over executive compensation and then someone else followed up thanking them and saying the results warrant the compensation and if they hadn't been there, the state of the plan wouldn't anywhere near as healthy as it was at the time.

We also discussed OTPP's mid-year 2017 report where I stated the following toward the end:
I have mixed feelings about this passage in Ontario Teachers' press release:
In June, as a result of the preliminary surplus reported as of January 1, 2017, the Ontario Teachers' Federation (OTF) and the Ontario government, which jointly sponsor the pension plan, announced they will use surplus funds to restore full inflation protection for retired members and decrease contribution rates by 1.1% for active members. Both changes are effective January 1, 2018.
Don't get me wrong, it's great for Ontario's working and retired teachers and for the Ontario government, but I think this was a premature and very shortsighted move, one they will end up reversing over the next three years as the pension storm cometh, hitting all pensions, including OTPP and HOOPP.

This is a very important point I need to make, no matter how great Ron Mock and his team or Jim Keohane and his team are in terms of investing over the long term, they don't walk on water, and they cannot just invest their way into fully-funded status if a serious shock hits the global economy and global markets.

This is why they're jointly sponsored plans which have rightly embraced a shared-risk model which essentially means, if their plans hit a deficit in the future, some form of risk-sharing must take place among their respective plan sponsors, and that typically means cuts in benefits (typically partial or full removal of cost-of-living adjustments) or increases in contribution rate or both.

If I was advising the Ontario Teachers' Federation and the Ontario Government, I would unequivocally have told them to stay the course over the next three years and change nothing now that the plan is fully funded (save for a rainy day because a major shock is on its way).

It wouldn't make me popular but I'm not the type of person who is trying to win a popularity contest. I tell it like it is and if people don't want to face reality, they can deal with the consequences later.
Well, it turns out I was wrong and Jim explained to me why.

Basically, there are two levers Ontario Teachers' Pension Plan uses when the plan goes into deficit to restore fully-funded status:
  • It partially or fully removes cost-of-living adjustments (conditional inflation protection) and
  • It raises the contribution rate from the base of 9% to an agreed upon rate (a special levy)
After the plan ran into deficits after the 2008 crisis, the contribution rate was increased to 13% and since it is a jointly sponsored plan, both teachers and the government needed to contribute this rate.

However, unlike 1997 where benefits were increased, now that the plan is fully-funded,  the new agreement is simply to restore full inflation protection and reduce the contribution rate back to the base case of 9% (can never go lower).

The key here is there are no increases in benefits, it's simply restoring full inflation protection and reducing the contribution rate going forward to the base rate of 9%.

Canada's New Infrastructure Bank

Our conversation then moved to the new Canada Infrastructure Bank where Jim filled me in on the latest developments.

Last month, Infrastructure Minister Amarjeet Sohi announced that Janice Fukakusa will be the new chair of the Canada Infrastructure Bank. Fukakusa retired in January from Royal Bank after a 31-year career at the bank where she was its Chief Administrative Officer and Chief Financial Officer.

She will now have a role in selecting the remaining members of the board of directors that will oversee the agency's operations, as well as the chief executive.

Jim told me he "was extremely impressed" with the over 300 candidates they are reviewing for board positions. Not only are they highly qualified and experienced, "the diversity in terms of gender, background, and geography" is all there.

As far as the CEO position, it's a Crown corporation, which means candidates need to apply on the Government of Canada website, and they have a stack of interesting resumes to go over.

The new Board will be announced next month and shortly after, a new CEO of the Canada Infrastructure Bank. Things are moving fast so they are operational by the start of next year.

Jim told me his "$1 contract ends at the end of the year" and he will move on and perhaps play an advisory role. He told me they hired a major consulting firm to help them get up and running and that "a dedicated team of 19 government employees in Ottawa have been instrumental in helping them cut through red tape and get up and running quickly."

On governance, he explained to me it's crucial they get it right to bring talent in but the governance model will not be exactly like the one at CPPIB:
"The Board will hire a CEO first but it needs to be approved by the Minister. Compensation is not subject to Treasury Board rules but the governance is different from CPPIB because it is 100% funded by taxpayers so the government is more involved. CPPIB is like a trust where 30 million Canadians pay into CPP and the federal government, nine provinces and territories have a say in CPP but not in the way CPPIB manages the money."
He told me the focus will be on large greenfield projects where the Infrastructure Bank takes a portion of the risk to allow institutional investors to invest in these projects.

Greenfield projects are fraught with risks (construction, regulatory, etc.) which is why most investors focus on investing in brownfield projects with well-established sources of revenue.

In order to entice private capital into greenfield projects, the Infrastructure Bank has to de-risk these projects.

He gave me an example of a toll road where projections can go out 5 years but there is no guarantee use traffic will be there after. The Infrastructure Bank will put up $500 million, for example, and then take a 20% equity stake to allow $5 billion of private capital to come in.

Interestingly, he told me out of the $185 billion the federal government has budgeted for infrastructure spending over the next ten years, the bulk of it is traditional programs where the federal government spends a third, the province a third and the municipalities a third.

"It will be up to the municipalities and provincial governments to find projects that have good potential sources of revenue but the Infrastructure Bank will help them. There will be an internal consulting group working with provinces and municipalities, a sort of investment bank looking at potential projects and their revenue streams."

If the Infrastructure Bank approves these projects, and investors are onboard, it effectively frees up public funds to spend on other services.

Apart from consulting, Jim told me the new Infrastructure Bank will act as a central database to keep tabs on all of Canada's infrastructure needs. "Right now, there is nothing centralized." so they new Bank will aim to rectify this.

Jim is right, this is a truly innovative way of spending on infrastructure and the world is taking notice. (See my comment on Canadian pensions on lagging US infrastructure). Nobody, not even Australia which is often touted as an infrastructure success story, is doing anything nearly as innovative as this new Canada Infrastructure Bank.

He told me the Caisse's REM project is being funded the traditional bilateral route "but there is a possibility the Bank will invest in that project first early next year once it's operational."

Also worth noting, Washington state is exploring whether Canada's new infrastructure bank could help finance a multibillion-dollar proposal for high-speed rail between Vancouver and the US northwest.

Lastly, I couldn't resist expressing my disapproval that Toronto -- TORONTO!!! -- not Montreal was chosen as the headquarters of this new Infrastructure Bank.

Here too, Jim made a great point: "I got emails from Calgary expressing the same frustration. I told them while the headquarters will create 80 to 100 jobs, it's more important to focus on the infrastructure projects which will create thousands of good paying jobs."

Good point and he eventually sees satellite offices all over Canada similar to other Crown corporations like the BDC and EDC. "You need people all over who can work with the governments to identify the projects with the best potential for revenues so the Bank can take part in them."

I want to thank Jim Leech for kindly taking an hour of his time this morning to talk to me. If there are any errors or omissions in this comment, I will edit it as soon as possible.

As always, please remember to kindly contribute to my blog via PayPal on the right-hand side under my picture (use web version on your cell) and support my efforts in bringing you insightful comments on pensions and investments. I thank all of you who contribute and truly appreciate it.

Below, the Honourable Amarjeet Sohi, Canada's minister of Infrastructure and Communities was the keynote speaker at a CCPPP luncheon event on April 25th, 2017 at the Delta Toronto Hotel. Minister Sohi committed a portion of his remarks to discuss the Canada Infrastructure Bank.

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