Canadian Government Executive - Volume 26 - Issue 03

May/June 2020 // Canadian Government Executive / 11 Infrastructure The provider is overseen by an indepen- dent board, which approves investments and rates as prudent and ensures that the provider operates in the public interest. The COS rate-setting process provides price transparency for all stakeholders. The rate charged by a provider to a con- sumer is the sum of all the costs of deliver- ing the service to that consumer, including a provision for return on invested capital that is deemed by the overseeing board to be fair and reasonable. The COS model has proven effective in addressing the problem of “privatizing profits and socializing losses,” where the profitability of assets may be maximized for the benefit of shareholders while poor- ly executed or underperforming ventures become the responsibility of taxpayers. In addition, this model responds to a per- ceived lack of responsiveness in certain utility sectors to the needs and wishes of local consumers. The COS model is established as a good public policy in areas well beyond afford- able housing and utility services. It has been used in Canada and internationally in a range of critical infrastructure, from airports to postal services, and can be ap- plied to community projects such as dis- trict energy and renewable power. Three attractive features of the COS model are: 1. Transparency in financial operations by demanding that the provider recov- ers only its direct actual costs includ- ing a return on invested capital that is deemed fair by an independent board; 2. Protection of the public interest by ensuring that providers do not ex- ploit their market power to set prices above reasonable levels or engage in business practices that are likely to be harmful to consumers; and 3. Appropriate sharing of risk. Provid- ers are allowed to exceed their allow- able return only if they deliver a project under budget or exceed their financial forecasts. Conversely, providers may not earn their allowable return if they de- liver a project that is over budget or they fail to meet their financial forecasts. Why Revisit the Limited Dividend Company Now? There is a long waiting list of community infrastructure projects seeking federal and provincial funding, and these projects are at risk due to municipal operating deficits and large decline in GDP resulting from the economic slowdown caused by the COVID-19 pandemic. New private-sector resources could be allocated to help ad- dress this funding gap through a modified limited dividend company program that is based on the COS model for community infrastructure investments. Virtually all regulated municipal utilities that provide water, wastewater, gas and electricity services, and broadband infra- structure services use a COS model and are subject to operating agreements and cov- enants to protect the public interest. Most of these municipal utilities also lack access to private-capital markets, so their ability to build new facilities and provide new servic- es is constrained. At the same time, Canada has seen an emergence of progressive infra- structure ventures that have access to deep pools of private capital and have employed the limited dividend concept and COS mod- el as part of their goal to maximize social and environmental returns. Are there examples of this model in practice? Nipigon LNG is an example of an infrastructure services provider fashioned as a limited dividend company and based on environmental, social, and governance (ESG) principles of investing. Nipigon LNG is an affordable-energy provider in Ontario that has adopted the COS model to expand natural gas infrastructure in northern Ontario using LNG. Consumer rates recover only Nipigon LNG’s direct actual costs (without markup) including a return on capital that is aligned with Ontario Energy Board guidelines—even though its rates and pricing are not subject to regulatory approval. Nipigon LNG is a public-private co-investment. The public- sector sponsor is the Government of On- tario and the private-sector sponsor and facility owner is Northeast Midstream LP. Following the precedents of limited dividend housing companies, municipali- ties, regional authorities, band councils, and Indigenous organizations could be encouraged to engage with private-sector partners to establish new limited dividend companies for community infrastructure. These limited dividend public-private ven- tures would use the COS model to channel post-pandemic fiscal-stimulus spending to deliver new infrastructure services to cre- ate long-term economic growth, support a low-carbon green economy, and build in- clusive communities. Conclusion In the post-pandemic environment, the public policy question is not, “Do we in- vest in infrastructure?” Rather, it is, “How do we invest in infrastructure over the short and medium-term for the greatest impact?” The limited dividend company is a proven investment vehicle to provide es- sential public services for Canadians and assure that the public interest is served and upheld. It can readily be revived to ac- celerate sustainable recovery in communi- ties and regions across Canada. In a limited dividend company for com- munity infrastructure, each party’s prima- ry needs are met: 1. Public stakeholders realize significant economic, environmental, and social benefits, with downstream fiscal divi- dends, by leveraging private-sector co-investment as well as development and operating expertise to deliver projects on time and on budget. 2. Municipalities and First Nations gain better infrastructure services and a boost to the local economy and their quality of life, with the assurance that the public interest will be served and upheld, backed by operating agree- ments and covenants. This reduces the potential for opposition to the project and completion delays, disappointing- ly recurrent risks in most infrastruc- ture projects, large and small. 3. Private investors have access to reli- able, utility-type returns in a globally volatile investment environment, along with the opportunity to achieve broad- er environmental and social impacts. Michael Fenn has been an Ontario depu- ty minister under three premiers, munici- pal chief administrator in Hamilton and Burlington, and the founding CEO of both regional transportation authority Metrolinx and regional health author- ity Mississauga Halton LHIN. He is now a management consultant specializing in the public sector. Michael Fenn serves on the Board of OMERS. He is also a board director with the Toronto District School Board’s realty arm, the Toronto Lands Corporation. A char- tered board director, Michael obtained the C.Dir. designation in 2014. Since 2011, he has been jointly appointed by the Grand Chief of the Mushkegowuk Cree First Nations and the Ontario Solici- tor General to facilitate resolution of policing issues in remote northeastern Ontario communities. The opinions expressed are those of the author and do not necessarily represent the views of the organizations with which he is associated.

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