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Canada’s public infrastructure gap will require a creative solution

After decades of neglect, public infrastructure deserves to be made a much higher economic policy priority. The issue of public investment in infrastructure won’t be ignored in the federal election campaign. It is already a hot topic in provincial legislatures and city council chambers across the country, and the overall political commitment to provide financial support must begin to reflect current needs and future opportunities.
Glen Hodgson
Senior Vice-President and Chief Economist
Forecasting and Analysis

Originally published in the Globe and Mail on July 2, 2015

After decades of neglect, public infrastructure deserves to be made a much higher economic policy priority. The issue of public investment in infrastructure won’t be ignored in the federal election campaign. It is already a hot topic in provincial legislatures and city council chambers across the country, and the overall political commitment to provide financial support must begin to reflect current needs and future opportunities.

Canada has underinvested in its infrastructure for decades, and is now playing catch-up. The Federation of Canadian Municipalities (FCM) has assessed the condition of drinking water, waste water, storm water and road infrastructure across municipalities, based on 2009–10 data. The estimated cost to bring these systems up to a “good” standard is $172-billion.

This high cost does not include public transit investment, nor regional and national infrastructure priorities like border crossings, ports and power distribution. The infrastructure gap can also be seen in the foregone economic potential in regions such as the Canadian North.

Moreover, investment in infrastructure offers a good payback from public spending in terms of its immediate effect on the economy. Since most projects use a relatively small share of imports in their development, most of the GDP gains and jobs benefits are captured domestically.

More often than not, each dollar invested in infrastructure will lift GDP by more than a dollar. During the 2008–09 financial crisis and recession, federal and provincial governments relied on infrastructure to help support economic activity across Canada—public infrastructure investment shot up to 4.6 per cent of GDP in 2009 and 2010. This share has eroded to below 3.6 per cent.

So if we have a huge infrastructure gap, and infrastructure investment provides strong economic benefits, what’s holding us back? One key reason may be “sticker shock”—the scale and cost of public projects funded from current operating budgets. Another reason is budget limitations. For all three levels of government, vastly expanding the infrastructure budget can crowd out other needs—which can make for very challenging politics.

It’s time to put on our thinking caps and develop additional creative approaches to financing infrastructure development in Canada—to treat it as a long-term investment, and shift funding away from current operating budgets. We should be taking advantage of low long-term interest rates while they last to begin funding an ambitious capital investment program.

One idea worth examining is the formation of a pan-Canadian infrastructure bank. It could be modelled broadly on the very successful existing Canadian public sector financial institutions like Export Development Canada (Disclosure: the author worked at EDC for a decade).

Creating a pan-Canadian infrastructure bank would create a critical mass of funding capacity and management expertise in one body. Such an institution could be built on an equity capital base that is treated as an investment (and not a current expenditure). It could then multiply that capital base by borrowing in capital markets to build the full lending capacity of the institution.

We would expect the federal government to use its recognized ability to borrow in capital markets—at the lowest possible cost—as a key backstop for the bank. However, Ottawa need not necessarily be the only shareholder, nor the sole backstop for borrowing. Some provinces, major cities and the private sector could also conceivably participate in such a bank as shareholders or as partners. Infrastructure development is a shared responsibility of all three levels of government. Furthermore, the private sector, including sources of long-term capital like pension funds, could play an important role.

A pan-Canadian infrastructure bank and its shareholder(s) would have to develop a financially sustainable business model. Some infrastructure projects, such as toll roads, could be commercial in nature and produce a revenue stream to repay the financing. Others would require the continuing support of government borrowers. Moreover, the institution’s investment portfolio should reflect necessary adaptation to climate change and the emerging low-carbon economy.

Canada’s need for modern public infrastructure will only grow. The pressure on governments to find solutions won’t abate either. We need some pan-Canadian innovation and creativity now.


For more information contact

Corporate Communications
613-526-3280
corpcomm@conferenceboard.ca


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