The State Infrastucture Bank Finance Model: Potential for a Canadian Application

Abstract

This paper will consider the potential benefits of adopting the State Infrastructure Bank finance model in Canada, and examine the rational for its application. The state infrastructure bank finance model (SIB) has proven to be an effective institution for federal and state governments to assist local governments and private developers in securing financing for infrastructure projects in US states1• State Infrastructure Banks, which now exist in 32 states, have effectively lowered capital costs for municipal projects, increased the amount of capital available for development, and advanced project selection practices surrounding local infrastructure investment. In Canada there is currently a need for innovation in municipal infrastructure finance. This need is the consequence of aging infrastructure, deferred maintenance, and growing infrastructure demands in expanding cities. Given broad implementation of the infrastructure bank finance model in US states, and its record as an effective finance institution for local infrastructure development, provincial governments should consider whether they can effectively adapt the SIB finance model as a means to address the infrastructure challenges facing Canadian municipalities. The purpose of this paper is to identify the features of the SIB model which might be effectively implemented in Canadian provinces, and highlight how these features would contribute to effective and efficient infrastructure investment practices in municipal governments.Enhanced project selection practices: The infrastructure bank model improves on Canadian project selection practice by formally incorporating a comprehensive evaluation process that prioritizes financing for alternative infrastructure options based on project merit. This process integrates consistent, criteria driven, cost-benefit analysis across competing alternatives, and integrates many aspects of project design, including economics, risk assessment, and project planning, capital management. This encourages the allocation of resources to projects that maximise return to public investment, and/or contribute to development goals. The SIB model also establishes the bank as an arm's length institution with private management, which introduces safe guards against political consideration in the allocation of resources. Innovative finance mechanism: In the US the SIB model has increased the level of capital available for infrastructure development by leveraging state funds, and lowered the cost of capital for municipalities through reduced transaction cost, credit backing, and subsidization. While it is likely that there is currently an opportunity to increase finance capital immediately available for infrastructure development in Canada by leveraging government capital in a infrastructure bank, it is unclear whether the unsubsidized cost of capital for priority municipal infrastructure can be lowered beyond the provincial-backed interest rates currently in place.