Election 2020

Nats’ Infrastructure Bank: Not a simple solution

ANALYSIS: National's proposed Infrastructure bank could encourage more funding of infrastructure, but would attempts to entice private capital cause more harm than good?

National says with its proposed new Infrastructure bank behind it, it wouldn't be bamboozled by a Canadian pension fund the way it claims Labour was during the light rail saga.

At an event at Forsyth Barr's high rise Wellington offices on Wednesday afternoon National Party leader Judith Collins gleefully made reference to Labour's light rail promise from 2017 as she announced her party's plans for an infrastructure bank.

In Collins' retelling, the saga was a disaster illustrative of the need to bring more skilled people into government to assess infrastructure proposals like the unsolicited light rail bid from Canadian pension fund Caisse de dépôt et placement du Québec (CDPQ) and NZ Super.

A National Infrastructure Bank would be National's way of avoiding Labour's fate. It would organise funding, suggest a financing model, and scrutinise infrastructure projects for their value for money.

Most importantly it would have the ability to borrow money to fund these projects - likely at rates similar to what the Government could get if it borrowed the money itself.

Across the world National Infrastructure Banks (NIBs) have been relatively successful at doing this. 

Over here the extra debt wouldn't be counted as core crown debt - which would technically allow the National Party to abide by its promise to borrow less, but spend more on infrastructure.

The Global Infrastructure Hub (an initiative by the G20) notes infrastructure banks like Germany's KfW development bank - financed in a similar way to what National is proposing - have a credit rating equal to the sovereign and borrow similarly cheaply. 

However, the cautionary tale on infrastructure banks arrives courtesy of the same place that threw the light rail curveball the Government's way this term.

Canadian Prime Minister Justin Trudeau went to his country's 2015 election with a vague proposal to create an infrastructure bank and a promise to iron out the finer details further down the track. 

The details around how Canada's Infrastructure bank would work were farmed out to a C-suite dominated board to deliberate on.

A report produced by the Canadian Centre for Policy Alternatives argues that's where it all started to go wrong.

What started out as a proposal to provide low-cost finance ended up as an attempt to bring higher priced private capital into the picture. 

They selected financial models and methods that favoured using the bank to leverage higher-cost private financing on public projects.

At its event on Wednesday National MPs appeared to be similarly enamoured with the idea of a new flashy investment vehicle that could bring private sector expertise and capital into the fold.

National MP Andrew Bayly complained the standard of debate over infrastructure financing here often discounted this. 

Yes, the Crown could borrow cheaply, but straight comparisons between government borrowing rates and private returns didn't account for the possibilities and skills private capital could offer. 

"We're trying to allow a mechanism for large-scale investment - by pensions funds is the example I've given you - to create the opportunity that if they wanted to invest in New Zealand they have the opportunity to do it," Bayly said.

"To do that you need to structure these investments in a way that's attractive to them."

Creating a class of debt that is appealing to private pension funds is relatively uncontroversial, but other more complicated entanglements with public-private partnerships (PPPs) and private co-financing methods are arguably what caused Canada's own infrastructure bank investment plans to move so painfully slowly.

While it launched with grand plans to spend C$35b on infrastructure, nearly three years later it had signed off on just C$3.65b worth of projects.

The Canada Investment bank's head of investments resigned after 10 months in the job. Its head of development left after a year. And its CEO served out just two years of his five year term.

Before he resigned abruptly the bank's first CEO Pierre Lavallée made it clear in speeches that the mission of the fund was to "crowd-in" private investment and not to funnel low-cost public finance to public projects.

Negotiating those sort of public-private financing deals takes time. Any form of private equity financing demands not just a higher return than Government-debt, but a lot more negotiation to ensure the risks are appropriately shared. 

And there's a bigger irony to all of this of course. 

One of the largest projects to be approved for funding by the Canadian Infrastructure Bank was a low-cost C$1.25b loan to CDPQ.

They wanted to use it to build a new light metro-type rail network in Montreal.

They'd offer the expertise from that experience to a small country at the bottom of the globe who was looking for a way to build a light rail network in its largest city without taking on too much debt.

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