Less of the hockey rinks!

In an exclusive interview with Infrastructure Investor, Canada’s Minister of Finance Jim Flaherty explains that going forward his focus will be on economic – rather than recreational – infrastructure. And, with some large energy and transport projects to undertake, there will likely be plenty for private investors to feast on. Andy Thomson reports

IT WAS EARLY December in the Canadian capital city of Ottawa and the weather was both freezing and mild. You read it right. Although the temperature was an eye-watering zero degrees Celsius, this was described to me as “mild” by one local resident who pointed to the fact that the mercury can sometimes tumble to minus 40 in this part of the world. He added that in summer, however, temperatures of plus 40 are possible. I’m left pondering the strange likelihood that both heating suppliers and air conditioning manufacturers consider this a land of potential riches.

But while Canada may suffer climatic extremes, at the time of Infrastructure Investor’s meeting with the country’s Minister of Finance, Jim Flaherty, the chill winds blowing from the Eurozone had not frozen its economy solid. The Organization for Economic Cooperation and Development had recently said it expected Canada to post 1.9 percent growth in 2012 followed by 2.5 percent in 2013 – figures that not too long ago would have looked on the gloomy side but which would now be enough to make most European governments green with envy.

Flaherty, perhaps quite rightly given how quickly things can change, is taking nothing for granted. “If there is a full-blown Eurozone crisis, it could affect the North American banks,” he points out. “The direct exposure of our [Canadian] banks is quite controllable but we’re close to the US and problems there would affect us. But going ahead we hope Europe will sort out its issues and we’ll see modest growth in the global economy next year and substantial growth in emerging markets.”

He is hopeful that Canada’s resilience following the 2008 collapse of Lehman Brothers will stand it in good stead. “The biggest satisfaction of my political career was weathering the Great Recession of 2008 in relatively good shape,” he reflects.

“Through the Economic Action Plan we kept [the] unemployment [rate] in single digits and a lot of infrastructure was built and jobs created. Plus the country was kept on a sound fiscal track, which was fundamental.”

He adds: “We did not have a housing bubble [in Canada] so, while consumer confidence weakened, demand remained positive. Businesses were hit by the recession but came back quickly and banks weathered it well and kept lending. People were still prepared to invest.”

WITHIN THE MAZE

Flaherty had demonstrated about half an hour prior to this interview how well he can cope with upheaval (albeit not of a macro-economic nature). Having arrived early but been warmly welcomed into his office deep within the maze that is the Ottawa Parliament’s Centre Block, Infrastructure Investor was responsible for turning the room upside down in pursuit of the perfect backdrop for photographs. When he arrived from a prior engagement, however, Flaherty barely raised an eyebrow at the scattered furniture and seemed in a genial mood – posing patiently and exchanging small talk.

Aside from a large Canadian flag and a framed picture of a youthful-looking Flaherty in an ice hockey line-up (he says he hasn’t played much as an adult as he didn’t fancy losing his teeth), the office is notable for the large bookcases and the presence within them of chunky tomes on jobs and growth – twin obsessions of many politicians in these challenging times. It helps to explain why – as a supposed creator of jobs and driver of growth – economic infrastructure is now top of Flaherty’s priority list.

“Primarily we will be focused on economic infrastructure and jobs from now on,” he says. “There has been a lot of demand for ice hockey rinks,” he says with a smile, “but the focus should be on long-term economic growth. It was the original intention anyway but when there’s a surplus, you can do recreational projects. But not so much in the times we’re now in.”

Flaherty has been a long-time convert to the benefits of infrastructure investment – and the role that private capital can play in helping to meet aspirations. Last year, he was voted Infrastructure Investor’s Minister of the Year in recognition of the continued dynamism of PPP Canada, the federal level promoter of public-private partnerships (PPPs) that was created by the Ministry of Finance in 2008. While other countries around the world have either struggled to keep PPP programmes going in the face of austerity measures (e.g., southern Europe) or political challenges (e.g., the UK), Canadian PPPs seem – by comparison at least – to have sailed serenely on.

Flaherty cut his teeth in a PPP context through Ontario’s provincial SuperBuild agency, which was launched in December 1999 when Flaherty was a member of the Ontario legislative assembly. “That was the beginning of PPPs in Ontario,” he reflects. “We built two hospitals and undertook some other smaller projects.”

‘SOME MISUNDERSTANDING’

What he found, on becoming Minister of Finance in Stephen Harper’s new Conservative cabinet in February 2006, was that “the degree of knowledge of PPPs at the federal level was minimal so it was important to make colleagues familiar with it as a way of transferring risk and as a method of financing. It took time, but eventually we ended up with a crown agency [PPP Canada] dedicated to PPPs”.

He reflects that there was “some misunderstanding” of PPP Canada in the early days. “People thought you were just taking tax money and funnelling it into infrastructure, as opposed to being a different way of financing and of accessing the capital markets.” In order to try and overcome the scepticism, Flaherty says he “asked PPP Canada to start with small victories to demonstrate that it was a successful concept”, encompassing the likes of commuter train repair workshops.

He sees vindication for this approach in the steadily increasing scale of PPP projects in Canada. For example, the A25 toll bridge in Montreal opened to traffic on budget and six weeks ahead of schedule last May. Now, the focus is on a proposed PPP for Montreal’s Champlain Bridge replacement – a C$5 billion (€3.8 billion; $5 billion) project that Flaherty hails as a prime example of the move to develop infrastructure “directly relevant” to economic growth.

INSPIRED BY UK

It’s interesting to learn that Flaherty was inspired by Tony Blair’s new Labour government in the UK as his interest in the potential of PPPs intensified. “When I was in the Ontario government, I visited 10 Downing Street [in 2001] and met with Blair’s Chief of Staff [Jonathan Powell] and various people who had responsibility for PPPs. I went to see a hospital in north London and it was very helpful to see a country where there was a large number of PPPs. It encouraged me to do more.”

While the UK’s Private Finance Initiative (PFI) programme – the UK’s standard procurement method for PPPs – had been initiated by John Major’s Conservative government in 1992, it was under Blair’s new Labour administration that PFI really took off. But when the Conservative/Liberal Democrat coalition government came to power in May 2010, PFI schemes became a political punchbag and were criticised by numerous government ministers as a waste of taxpayer money.

Canada has not seen quite the same level of concerted opposition to PPPs, although Flaherty concedes that there have been criticisms of individual projects in the country. For example, he refers to Toronto’s 407 ETR toll road highway, which was sold to the private sector in a $4 billion deal in 1999. Controversy has at various points clouded the deal, including allegations of an irregular evaluation process, corner-cutting during the construction phase and poor service from the owners. “There was some learning as a result of that,” acknowledges Flaherty.

A more recent controversy revolved around the proposed Stave Lake Water Project, a planned water and wastewater PPP in Abbotsford, British Columbia, that was voted down in a November referendum that cost city mayor George Peary his job. “I was a champion for the PPP water project and it went down dramatically,” Peary said in the aftermath. “It was way, way worse than I thought it would be.”

WORK IN PROGRESS

No room for complacency then. Moreover, despite the landmarks that have been achieved and which have received much press attention, Flaherty believes that PPPs in Canada are “still a work in progress”. He adds: “The tendency of government officials is to fund projects directly and not go down a more complex route like PPPs. They create risk as you can negotiate a poor agreement and end up being criticised for it.”

He adds the following with a wry smile: “You need a high degree of expertise and, in Canada, a lot of the lawyers are experts.” Flaherty has more knowledge of the Canadian legal scene than most, having been a founding partner of law firm Flaherty Dow Elliott and embarked on a 20-year legal career prior to his election to public office. (There was some dovetailing of his legal and political pursuits – for example, he took part in political debates at law school and, during his time there, became a member of the Progressive Conservatives).

Perhaps buoyed by his faith in the abilities of Canadian lawyers, Flaherty offers the kind of observation that will no doubt be music to the ears of private infrastructure investors: “We can do much more in infrastructure more quickly, on time and on budget through P3s. The future is brilliant.”

Again, the subject returns to economic infrastructure. “We have huge infrastructure challenges and economic opportunities,” says Flaherty. “We need pipelines to run from the resource-rich West to the East of Canada and to the US. So there are huge opportunities in oil and gas. There are hydro-electric projects in Quebec, Newfoundland, Labrador and Manitoba and they all need infrastructure to generate electricity and move it.”

He continues: “We have strong commodities demand and a need for more infrastructure to move commodities to the West Coast due to the trade with Asia. And then there’s  things like highways and rail.”

Picking up the theme of transport infrastructure, he says: “Despite the size of the country being relatively small [population-wise], it’s an urban population. And in large urban areas there is an increasing demand for better infrastructure. We have less-than-efficient trains and subways and we need more light rapid transit. Governments have got involved and found P3s a very useful tool.”

Private operators may well have been encouraged had they noted a poll conducted by Canadian broadcaster CBC in November which found 76 percent of respondents in Toronto, Montreal and Vancouver were unopposed to tolls on new roads and bridges; while 56 percent said it was acceptable to add tolls on existing roads and bridges. Asked to comment on the findings, Flaherty says: “More people are of the view that if some piece of infrastructure requires a user fee, that’s ok – the important thing is efficiency.”

CONCERNS

But while Flaherty holds optimistic views of the role of PPPs, he has a couple of concerns. One of these is procedural delays – the fact that these are certainly not unique to Canada is scant consolation. “If I had a magic wand I would reduce delays in processes, which can last several years and be quite harmful. I once asked how long it would take to build a highway and was told 10 years. We’ve pushed hard to change that. You need to be diligent in pushing these things through.”

The delays are part of the reason for his second concern. Some of the larger Canadian pensions such as Canada Pension Plan and Ontario Teachers Pension Plan are behemoths on the world stage of direct infrastructure investment. But, when it comes to supporting Canada’s domestic infrastructure, “delays caused by regulatory processes is a complaint [expressed by pensions],”according to Flaherty.

He adds: “One thing I want to do is go to the pensions and solicit their involvement. We have solid fiscal fundamentals in Canada so we are seen as a stable partner. I think some pensions will get substantially involved but it depends on how good we can be on the regulatory side. We have to do our job on the government side and not impede progress. For example we need environmental processes, but we don’t need them to cause delays.”

Speaking of hold-ups, Flaherty amiably insists he has enjoyed the conversation but must head off shortly to his next engagement. Unsurprisingly, this is a man with a demanding schedule. As he gathers up his things in a hurry, we briefly discuss leisure pursuits (no irony was intended). It transpires that racing sailing boats, golf and alpine skiing are all favoured Flaherty activities, though lack of time is always a restricting factor.

He is also an avid reader of Canadian fiction, political biographies (“Robert Kennedy is a hero of mine”) and the New Yorker magazine. And he is a stickler, he says, for well-written material. “No pressure on me then,” I venture, notebook in hand, to laughter from across the desk.