No free lunch on infrastructure spending
The federal government is pushing ahead with plans to create an “infrastructure development bank” – an arm’s length organization tasked with attracting and bringing together public and private money to help in financing major projects across Canada such as bridges and highways. The infrastructure bank would be capitalized with $35 billion in federal funds.
As I write this editorial the Liberal cabinet is preparing a major sales pitch for a mid-month gathering of large institutional investors hosted by BlackRock, the globe’s largest asset manager. The aim: to attract private capital to invest in Canadian infrastructure. Several cabinet ministers will be making presentations and Prime Minister Justin Trudeau himself will be in attendance.
In other words, this could be a big deal. As an industry whose productivity is so reliant on efficient infrastructure, should we be getting excited? Is this infrastructure development bank a better way to finance large infrastructure projects? Would it allow construction to proceed more quickly and with less uncertainty than is the case currently? Would it allow us to more effectively deal with our considerable infrastructure investment gap – the difference between what is needed to maintain the national infrastructure and what is actually being spent – than we have in the past?
First, let’s be clear about the enormity of the infrastructure spending challenge we face. Estimates vary but they all paint a bleak picture. The Canada West Foundation recently pegged Canada’s accumulated infrastructure debt at $123 billion for existing infrastructure and $110 billion for new infrastructure. That’s similar to an older TD Economics estimate of $125 billion for existing infrastructure. The bleakest picture is painted by a McGill University civil engineering professor, who believes the infrastructure investment gap to be closer to $400 billion with 30% of Canada’s infrastructure close to 100 years old.
Compounding this daunting investment gap is the fact that the recovery from the Great Recession has been slow and the traditional ways of funding infrastructure projects – through gas and property taxes and government grants – are not so easy to find. So our infrastructure needs are exceeding the capacity of our governments to shoulder the cost on their own without significant tax hikes.
Yet major Canadian institutional investors such as the Canada Pension Plan Investment Board (CPPIB) are quite enthusiastic about investing in infrastructure – just not in Canada so far. For example, CPPIB has invested in infrastructure projects in Peru, Chile and Hong Kong. The Liberals believe creating the infrastructure investment bank will provide a more concentrated and strategic way to attract such investors and ease their mind about the risk involved (future governments cancelling infrastructure projects.)
But such investors are also particularly interested in investing to build assets with a clear revenue stream, like toll roads. The improvements in congestion and transit times delivered by a more modern infrastructure will be paid by more tolls and user fees. There is no free lunch when it comes to infrastructure spending. The only questions are how hungry are we and what do we want on the menu?
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