Since the global financial crisis, the governments of developed nations have struggled to jump-start their economies in the face of anemic growth. Across the Anglosphere there has been a renewed call for massive infrastructure investment to boost productivity, create new jobs, and cut the costs for business. Canada is no exception. Federal government funds dedicated to financing infrastructure projects has lagged far behind what industry analysts have been calling for.
Canadian infrastructure stock continues to deteriorate due to decades of neglect by successive governments of all stripes. If this trend continues unabated, the resulting infrastructure funding deficit is predicted to reach $400 billion by 2020. Infrastructure spending reached its high-water mark during a period spanning 1950s and 1960s. Since the 1970s, however, the average age of public infrastructure has risen steadily culminating in the infrastructure gap we are left with today.
As the infrastructure stocks matured through the 1980s and 90s, a wave of privatization of public assets swept across the Anglosphere. National and sub-national governments presided over a massive transfer of public assets into private hands over the course of two decades. Public holdings that were put up on the auction block ranged from service providers such as utilities and social services to hard assets comprised of bridges, freeways, ports and roads. It was during this period that various levels of government within Canada opened up stakes in public infrastructure projects to private investment.
This period also bore witness to a dramatic shift in the burden of responsibility for infrastructure funding:
“As Mackenzie (2013) shows, in 1955 the federal government owned forty four percent of the Canadian public capital stock, the provinces owned thirty four percent and local governments owned twenty two percent; by 2011 this federal-municipal relationship had reversed: the federal government’s share dropped to thirteen percent, municipalities owned fifty two percent and the provincial ownership portion was almost identical at thirty five percent.”
This phase shift in the burden of responsibility did not coincide with any appreciable move in the share of tax take each level of government receives. For instance, municipal governments across Canada only lay claims to 8 per cent of all Canadian tax revenue. It is true that municipalities could raise property taxes, bank on the benevolence of the federal and provincial governments (grants), or simply raise the capital through borrowing. However, the long term sustainability of these options may pose a challenge. The public’s tolerance for increases in property taxes is finite; relying on the feds and province for funds forfeits a municipality’s control over the size and stability of infrastructure funding streams; and repaying the sums necessary to fund large infrastructure projects is naturally limited by municipal government’s measly share of the total tax take (not to mention that some provinces legally limit total municipal debt financing).
Dr. Whiteside at the University of Waterloo outlines in her paper:
“The chronic shortfall in public money for infrastructure and return of austerity since 2010 (Baines and McBride 2014) has been leveraged by privatization enthusiasts to argue for greater use of the P3 model to privately design, build, operate and finance public infrastructure at all levels of government across the country. TD Economics (2004), Deloitte (2004), and Canadian Chamber of Commerce (CCC 2013), just to name a few, all recommend P3s as a readymade ‘solution’ to the infrastructure gap challenge. By the end of the Harper era, federal spending and procurement initiatives to address infrastructure needs had carved out a central role for the P3 model. Included here are Infrastructure Canada’s P3 screen (the requirement that applications to access its 10- year, $14 billion New Building Canada Fund first consider the P3 option if a project’s capital costs exceed $100 million), and the requirement that municipalities adopt P3s in exchange for support from the $1.25 billion P3 Canada Fund.”
Moreover, the free-market think tank, the American Enterprise Institutes, notes “Canada’s experience with PPP units is instructive for the United States. Canada has relied on PPPs for decades and is a recognized world leader in its use.”
Given Canadian proficiency for managing P3s, the current climate provides an opportune moment for the federal government to establish its infrastructure bank, and promote joint public/private investment in the renewal of Canadian infrastructure. A decade of sluggish economic growth and the growing demands of an aging population have overtaxed the public purse, sapping funds that might otherwise be earmarked for infrastructure. Hence, the moderate initial capitalization of Trudeau’s proposed infrastructure bank, and its intended design to attract 3 to 4 dollars for every dollar of federal money is encouraging.
The share and form of private equity in a project will be contingent on the unique nature of each. With that in mind, the infrastructure bank should favour a formula that would see private investment and profit recuperated through user fees. This will limit the debt servicing cost for government, limit government’s liability, and provide a greater incentive in trying to attract private capital.
AEI Private infrastructure Paper: