Chapter 3 Ministry of Economic Development, Employment and Infrastructure Section 3.06 Infrastructure Ontario’s Loans Program History of Infrastructure Ontario Background and the Loans Program The Loans Program had been lending infrastruc- Ontario Infrastructure and Lands Corporation, com- ture funds to municipalities under several other monly referred to as Infrastructure Ontario (IO), is a corporate structures before IO was created in Crown corporation established by the Ontario Infra- 2011. In 2004, the Ontario Strategic Infrastruc- structure and Lands Corporation Act, 2011 (Act). IO ture Financing Authority (OSIFA) was formed to is governed by a board of directors that is appointed manage municipal loans formerly granted under by the Lieutenant Governor in Council and account- the Ontario Municipal Economic Infrastructure able to the Minister of Economic Development, Financing Authority (OMEIFA). OSIFA was estab- Employment and Infrastructure. lished to expand the OMEIFA’s mandate from one Chapter 3 • VFM Section 3.06 IO’s role is to manage Ontario’s public infra- of lending strictly to Ontario municipalities to one structure, real estate and government facilities, and that included borrowers in the broader public and to help finance public infrastructure renewal. It has not-for-profit sectors as well. Between 2006 and four main lines of business that deal with both gov- 2011, OSIFA and several other crown agencies were ernment and non-government clients: Real Estate amalgamated, first forming the Ontario Infrastruc- Management, Ontario Lands, Project Delivery, and ture Projects Corporation and ultimately creating Lending (the Loans Program). the Ontario Infrastructure and Lands Corporation IO lends money to municipalities, the broader (referred to as IO throughout the report). public sector and the not-for-profit sector in Ontario for the development of infrastructure. The Loans Program’s 2013/14 budget was $9.85 million. Expansion of Loan Portfolio IO’s Lending department employs 28 full-time- When OSIFA was formed and took over the Loans equivalent staff, including loan officers, commercial Program in 2004, it was administering a portfolio underwriters, client-relations personnel, credit risk of approximately $514 million in municipal loans. analysts, project managers, treasury analysts and Since then, the types of borrowers eligible for the legal advisors (see Figure 1). program have grown from solely municipalities to 10 eligible sectors. The eligible sectors, which are 218 Infrastructure Ontario’s Loans Program 219 outlined in the Act and further detailed in Ontario • Aboriginal health access centres; Regulation 210/11 of the Act, are as follows: • community health and social service hubs; • municipalities; • not-for-profit arts training institutes; and • universities and affiliated colleges; • not-for-profit sports and recreation • municipal corporations (including power organizations. generation and local energy-distribution com- Entities that fall into one of the above sectors are panies and district energy corporations); eligible to borrow money from IO. In addition, cer- • local services boards; tain other entities (such as the 2015 Pan American • not-for-profit long-term-care homes and Games Organizing Committee and MaRS Discovery hospices; District) have been named eligible borrowers under • not-for-profit social and affordable housing the Act and its regulations. The Royal Conservatory providers; of Music was made an eligible borrower through an Figure 1: Infrastructure Ontario Organization Chart Source of data: Infrastructure Ontario Ministry of Economic Development, Employment and Infrastructure Board of Directors President and Chief Executive Officer Chapter 3 • VFM Section 3.06 Transaction General Counsel Major Projects Real Estate Structuring, Risk and and Corporate Human and Lending* Commercial Projects* Secretary* Resources Lending and Land Chief Risk Officer Legal Services Development Responsible for: Municipal Business Risk Management • drafting loan agreements Development and Internal Audit and Lending • loan-closing documents • general legal advice Responsible for: • loan analysis and Credit Risk underwriting • construction monitoring Responsible for: • loan approval • loan monitoring * Divisions typically involved in administering the Loans Program. 220 2014 Annual Report of the Office of the Auditor General of Ontario Order in Council (OIC), under a section of the Act Figure 2: Total Outstanding Loan Advances by Eligible that allows the government to specify other activities Sector, as at March 31, 2014 (%) in which IO may engage based on Cabinet approval. Source of data: Infrastructure Ontario The expansion of the Loans Program to the broader-public and not-for-profit sectors has given Municipalities (64.4%) borrowers who previously may not have had an Other* (0.3%) external credit rating access to affordable finan- Not-for-profit arts training cing through the province’s high credit rating and institutes (2.5%) low cost of capital. Under the Loans Program’s Long-term-care homes and hospices (3.3%) expanded mandate, IO has a portfolio of 806 loans Universities and advanced to 353 borrowers and has approved loans affiliated colleges totalling more than $7 billion since the inception of (3.6%) the Program. As of March 31, 2014, IO’s balance of MaRS Phase 2 Inc. outstanding loans receivable totalled approximately (4.4%) $4.9 billion. Figure 2 shows this balance broken Not-for-profit social and affordable down by sector. housing providers (12.8%) Municipal corporations Credit Risk Framework (8.7%) IO’s Credit Risk Policy outlines a credit risk man- * Includes the following sectors: Aboriginal health access centres; community health and social service hubs; not-for-profit sport and recreation agement strategy, roles and responsibilities, inter- organizations; local services boards. nal controls, and requirements for reporting to its board of directors. the least risky because they have ongoing, consist- This policy defines credit risk as “the potential ent revenue streams that allow them to service debt for default or non-payment by borrowers of sched- on a long-term basis. Borrowers rated “secondary” uled interest or principal repayments.” In addition include some municipal corporations (for example, Chapter 3 • VFM Section 3.06 to this general policy, IO has policies on credit risk local energy-distribution companies), long-term- and lending for each of the 10 eligible borrowing care homes, not-for-profit social housing provid- sectors. Each policy outlines the sector’s general ers and Aboriginal health access centres. These credit strengths and risks as well as common borrowers are in the secondary risk tier because, individual risks within it. The policies also outline although they have some government oversight and IO’s maximum exposure limits for individual loans financial support, the government has no legisla- and for each sector overall, debt service coverage tive requirement to support them. Borrowers rated ratio limits for potential borrowers within the “tertiary” include some municipal corporations sector according to their risk class, and other sector- (for example, power generators), district energy specific limitations. corporations, not-for-profit arts training institutes, IO classifies its borrowers into three risk tiers hospices, and not-for-profit sports and recreation that are based on the borrowing entity’s relative organizations. Tertiary borrowers are considered level of government oversight and funding. Borrow- the highest credit risk because they generally ers rated “primary” include municipalities, universi- receive little or no government capital funding and ties and affiliated colleges, and local services boards must rely on self-generated revenues to service (who provide municipal-level services outside of their debt. incorporated municipalities, in rural areas, for example). Loans to these borrowers are considered Infrastructure Ontario’s Loans Program 221 compliance with non-standard loan covenants Audit Objective and Scope within certain loan agreements. Generally, we found that IO’s policies and pro- cedures for lending and approval were reasonable The objective of our audit was to assess whether and sufficient for ensuring that loans to eligible bor- Infrastructure Ontario (IO): rowers are made at terms commensurate with the issues loans to eligible borrowers at terms that • associated risk. IO has strengthened its monitoring reflect the associated risks; and over the past couple of years through the separation effectively monitors the ongoing performance • of the monitoring function from the underwriting of outstanding loans and takes appropriate and credit review functions, and through the actions when risks warrant. development of various loan portfolio monitoring Senior management at IO reviewed and agreed reports and tools, including its Loan Watch List to our audit objective and associated audit criteria. for troubled loans. The vast majority of borrowers Our audit work was conducted primarily at IO’s are making their payments as required, and loan two main Toronto offices between January and losses have historically been rare and quite low. The June of 2014. We reviewed relevant documents and higher-risk loans in IO’s portfolio were loans that did administrative policies and procedures, analyzed not initially fall into IO’s eligible borrowing sectors. pertinent information and statistics, and inter- viewed appropriate staff from IO as well as other