Remarks by Pierre Lavalle President & CEO, Canada - - PDF document

Remarks by Pierre Lavallée President & CEO, Canada Infrastructure Bank CCPPP Conference November 6, 2018 Check Against Delivery

CCPPP Conference November 6, 2018

• Bonjour. Good afternoon.

Thank you for giving me the opportunity to discuss with you the progress that we are making in building the Canada Infrastructure Bank. Over the last four months, I have had the opportunity to meet many of you individually and it has been gratifying to feel such enthusiasm for the potential opportunity that we all have to build more great infrastructure for Canadians. In the process, we also have the opportunity to create a great new Canadian institution that others around the world will seek to emulate. As the Minister said yesterday, we have a lot to be proud of in the development of the Canadian P3 model over the last 20+

• years. Canada is a global leader in P3 and I strongly believe that

we must pursue new ideas and new approaches if we want to stay ahead. Last year at this conference, you heard our Board Chair Janice Fukakusa describe the governance and mandate for the Bank. At the time, she was in the middle of forming an outstanding Board of Directors, which was selected after a thorough assessment process that lead to the directors’ appointment in late November 2017.

With solid professional credentials and deep experience in a variety of infrastructure and investment areas, our pan- Canadian Board is well equipped to deliver on its governance mandate, including the approval of our investments. Among

• ther duties, the Board recommended my appointment as CEO,

which became effective in mid-June. It has been a whirlwind since then, as we moved into full start- up mode. Our activities have varied greatly from day to day. We have moved from temporary office space to our permanent office, we have met provincial and territorial ministers of infrastructure to launch our dialogue on future infrastructure priorities, and we have met with both Canadian and international investors to discuss opportunities to invest in

• Canada. But I am getting ahead of myself.

Slide 2 The Bank’s mandate is to invest $35B of capital alongside private capital in new revenue-generating infrastructure built in the public interest, where significant usage risk is transferred to private investors. It is worth spending a bit of time on a few of the main points here.

The $35B may be invested anywhere in the capital structure of a project. Fundamentally, we are looking to fill the gap that prevents a project from seeing the light of day or from being structured in a way to best attract private sector capital and risk transfer. We know that that could come in various forms of equity or fixed income instruments, with plenty of structuring to ensure an appropriate allocation of risks and returns among co-investment partners. Over the last six years, through my participation on investment committees at CPP Investment Board, I witnessed first hand the hard-fought competition for mature infrastructure assets that have transacted at ever increasing multiples. The list of potential investors has lengthened and the fund commitments have also increased substantially. There is a supply shortage of good quality infrastructure assets to invest in and I think that we can change that. We have seen this movie before in real estate. As institutional investors piled in, cap rates compressed and investors in mature assets expanded their scope to include more development and ultimately full re-development and greenfield investments. As this dynamic has been playing out in infrastructure, we have seen investors’ interest broaden to take on more development risk, albeit in a measured and progressive way.

We believe that there is a real appetite to invest in new infrastructure projects with a reasonable risk-reward equation for private and institutional investors. Since June, I have heard this many times already from institutional investors who have traditionally shied away from greenfield projects. The revenue generation component is important to the financial structure, as investors will get their returns from usage-generated fees which could take the form of tolls or shadow tolls, fees, fares, tariffs and mechanisms based on appreciating land values. In essence, we are looking for projects that will transfer significant usage risk to the private investors. Our mandate also covers the codification and dissemination of global best practices, the creation of an Inventory of Canadian Infrastructure Projects and the synthesis of data and information to support better evidence-based decisions. Slide 3 We have no fixed investment allocations by sector for our $35B, but our goal is to invest at least $5B in each of our three priority sectors, which are:

• Green infrastructure;
• Public Transit; and
• Transport and Trade.

We can also invest in other areas of infrastructure, if they are supported by government policy. As we deploy capital across these sectors and broader infrastructure projects, we will seek to build on and complement the existing P3 market. The Bank was created to address a gap in the market that sits between traditional government funded infrastructure, including both traditional procurement and P3s, and projects that are privately funded. Our investments will fit in the middle

• f the two.

Slide 4 By transferring operational, usage and revenue risks from governments to the private sector, we will grow the requirement for both debt and equity investments compared to the various forms of traditional P3s. Although this slide is illustrative, we are purposely highlighting that private capital is meant to be a multiple of the bank’s investment. It is also possible that some government financing from provincial, territorial, municipal and indigenous levels remains part of the equation, confirming that the projects are aligned with these governments’ priorities.

By convening this additional capital and by injecting our own where needed, we will reduce the need for government

• financing. As a result, governments can shift scarce resources

to other priorities where revenues are insufficient or don’t exist at all. This is why we strongly believe that our investments will add to the pool of infrastructure for Canadians and will create new investment opportunities for the private sector. Let me give you a bit more detail on what we are looking for as we evaluate each project. Slide 5 We are looking for transformative projects. We have the means to make large investments. We are also seeking to convene a multiple of our investment from private sources, so in aggregate, we are looking to have a material impact. Each project must pass a public interest test to ensure that the project is well aligned with the relevant governments’ priorities and policies, that it contributes to economic growth and that it contributes to sustainability.

The project’s sustainability includes both environmental considerations and the notion that in its very structure, the project will provide self-renewing infrastructure to Canadians. By thinking in terms of lifecycle costs, we can deliver better infrastructure that lasts longer. Our first round of project analysis also addresses three sets of questions: 1) Is the project bankable? Will there be sufficient revenue streams – broadly defined - to fund the project through its lifecycle? 2) How will the sponsors go to market with the project? How will investors, proponents and bidders be approached and with what? 3) Given that some projects may affect other existing privately financed infrastructure, how will we ensure that

• ur investment will not distort the market? Can we invest

in a project while maintaining a level playing field? I will now contrast what we are looking for with what we are looking to avoid.

Slide 6 We are looking to finance projects, not to provide recurring funding nor on-going operating cost subsidy. We are not looking to take all of the risk. We may accept more risk than our expected returns would warrant, but let’s be clear, we are looking for the private capital to bear significant risks. Of course, we expect our partners to earn reasonable returns for the risks that they shoulder. We will structure our investments to support a strong alignment with our partners. We are certainly not looking to crowd-out private investment with our cheap capital. In fact, we are looking to do exactly the reverse, which is to crowd-in private investment and convene capital from both domestic and international investors. We are quite clear about the markers of what is and what is not a CIB investment, but we remain very flexible in how to invest

• ur capital for the benefit of the project. We are in the business
• f custom financing solutions.

Slide 7 Within the overall capital structure parameters where private capital is a multiple of our investment, we are flexible as it relates to the detailed capital structure itself and what security we will hold and for how long.

We have some leeway on the risk-return equation that allows us to earn lower returns than what would be expected commercially for the amount of risk that we are taking. We can also design terms that provide the project with the necessary flexibility to come to life, so long as there is a strong alignment among the partners. As we seek to find and help define investment opportunities, we are actively engaging with the market and as our staff continues to grow, we will continue to ramp-up our outreach efforts. Slide 8 We are reaching out to both public and private sponsors and we have been pleasantly surprised by the large number of inbounds from the private sector. With our public partners, we engage on a number of topics as listed here, all of which aim to grow the number of projects and

• pportunities.

As these meetings take place, we are developing some early thoughts on three fronts with respect to project structuring and investments.

User warning: these are not fully baked, but we wanted to give you a preview of the types of ideas that we are developing. Slide 9 We have had a number of discussions with private sponsors to discuss their ideas for unsolicited proposals and for new approaches to tackling well-known infrastructure gaps. There is clearly a lot of potential to be unleashed with a well structured unsolicited proposal process which could be adopted by various governments for a wide variety of potential projects. For the process to function well, it will be important to ensure that there is appropriate market testing to ensure proposals are competitive, while respecting the proprietary work that some sponsors have already developed. We are also working on the concept of a backstop commitment to procuring agencies. This would provide governments with greater confidence to allow the private sector to innovate and accept greater risk transfer - including revenue and usage risks - without threatening a failed procurement or an unviable

• project. The backstop concept would allow us to flex the size
• f our commitment through a competitive process, allowing us

to reduce our investment size if there is greater private sector risk appetite than anticipated. This structure allows more

projects to come to market with greater opportunities for innovation and risk transfer. Our discussions with private sponsors suggest that you are eager to work closely with CIB to deploy capital efficiently; including for example, under the competitive process described before, where CIB may tree with various proponents to design customised solutions, rather than providing a stapled CIB package. Third, we are working on the concept of standardised investment terms and conditions which may come in a number

• f varieties but with the common trait that they will allow the

CIB to support individual projects which are too small to efficiently attract private capital; but when bundled or aggregated with CIB support, they may attract the attention of investors. We welcome your input on these ideas and will also consider

• ther novel ideas that I encourage you to bring to us.

As you all know, Nick Hann joined us on October 1st as Head of Investments and he and his team are deeply engaged in structuring support for a number of projects we expect will come to market in the coming year. We have jumped into our investment mandate with both feet.

Slide 10 We have had over 120 outreach meetings in the last 6 months. We have already had discussions on over 55 specific projects, more than half of which are unsolicited proposals! If you have a good project, let’s talk! Of these 55, relatively few are off mandate. Most of them are continuing their early gestation period and we will continue to help develop these projects into opportunities. Our team is currently actively engaged in 10 different projects. And of course, under the leadership of our then interim CIO Bruno Guilmette, we closed our first transaction: a $1.28B investment in Réseau Express Métropolitain (or REM). Slide 11 REM will deliver a major improvement in Montreal’s urban transit services and is a good example of bringing in significant private capital into a transformative project. REM is also a good example of what CIB seeks to deliver, which is a custom solution for each project that meets our mandate.

Through extensive discussions and due diligence work over a 5- month period, our team, the Québec Government and CDPQ agreed that a 15-year loan with interest escalating from 1 to 3% was the most appropriate role for us to play. It supports the project through its early stage, but 15 years from now, we expect that REM will refinance itself in the private markets and repay our loan. We can then redeploy that capital to another project. REM clearly meets our mandate in terms of sector focus (ie urban transit) and has been a clear government priority. As we announced this morning, François Lecavalier will join us in early December as Head of Project Development. His key role will be to engage with public sector sponsors to understand each level of governments’ priorities and to turn ideas into

• projects. François’ and his team are also responsible to

develop, deliver and manage the Inventory of Canadian Infrastructure Projects. Slide 12 The Inventory will be built to meet two objectives: 1) Firstly, to promote infrastructure opportunities to both domestic and international players who may be investors

• r service providers. We think that there is value to

promoting projects even if they are not necessarily bankable by CIB.

2) Secondly, to foster collaboration across the infrastructure eco-system, share best practices and coordinate efforts where it makes sense. The Inventory will be accessible online. We will be seeking inputs from both public and private sector proponents but we will curate the information to ensure consistency. We are currently reviewing other project pipelines, including the GI Hub with whom we have already been in discussions and who have had a global pipeline already in operation for several years. The Inventory will be a core tool for long-term planning and the development of our own investment funnel. We have made significant progress over the last few months and are poised to accelerate over the coming months. Over the next few weeks we will re-vamp our web site to include a clearer description of our investment process, criteria and submission requirements. By January, our full executive team will be in place and we are actively building the teams that will report to them.

Slide 13 Together, we are setting out to build more infrastructure for Canadians and more opportunities for all of you to continue to build the best infrastructure market in the world. With your support and ingenuity, we will see: More large scale transformative projects More government demand for private investments in infrastructure A sophisticated unsolicited proposal process More revenue, usage and operating risks transferred; resulting in More equity and debt investment opportunities in infrastructure. Together, we can make the Bank an example of innovation that

• thers around the world will seek to emulate.

Lastly, I would like to thank you for the warm welcome that you have given me so far in this job.

I also want to thank you in advance for your on-going support and creativity to make our country an even better place to live and to do business in. Slide 14 I am happy to take some questions now or you can send them to us at these addresses.

• Merci. Thank you.