A federal infrastructure bank could help close the huge gap between infrastructure needs and funding.
Canada’s infrastructure deficit has gained prominence in recent years as catastrophic events have increased in frequency and magnitude because of aging infrastructure and global climate change. Canada’s municipal infrastructure deficit alone has been estimated at $123 billion for required upgrades and maintenance of existing infrastructure and $115 billion needed for new infrastructure. Provincial and federal infrastructure deficits are also in the hundreds of billions.
The 2013 Calgary flood forced approximately 100,000 people from their homes, with a total estimated cost of $6 billion. Later that year, an ice storm in central Canada shut off power for over 300,000 homes in the Greater Toronto Area and elsewhere in Ontario, and again this past winter thousands of homes in Ontario were without power. These examples are just the tip of the iceberg of recent infrastructure failures.
Investing in infrastructure featured prominently in the Liberals’ 2015 electoral platform, which committed to run modest deficits for the first three years of their mandate in order to invest in critically needed infrastructure renewal. Establishing a Canada Infrastructure Bank formed part of the Liberals’ infrastructure investment plan. The details of this proposed institution are as yet unknown, but this new source of financing has the potential to make serious headway in tackling the infrastructure deficit. Below are our proposals about how this new institution could take shape.
Municipalities currently have access to several funding sources for infrastructure. The New Building Canada Fund offers $10 billion for provincial and municipal infrastructure projects over 10 years. The Federal Gas Tax Fund provides municipalities with $2 billion annually for infrastructure projects. The P3 Canada Fund has funding of $1.25 billion for infrastructure partnerships with private investors on projects of over $100 million. The 2015 Conservative federal budget promised funding for big-city transit infrastructure and local infrastructure projects. In the coming months the scale and scope of federal funding for infrastructure under the Liberal government will be revealed. In addition to federal funds, municipalities also have access to loans through provincial municipal financing authorities.
However, the above funding sources, along with municipal tax revenues, remain insufficient to close the gap on the Canada-wide infrastructure deficit of over $200 billion. What remains inadequately addressed is core infrastructure such as bridges, roads and electricity transmission lines, and institutions such as hospitals. At Canada’s Big City Mayors’ Caucus meeting in Toronto in February 2015, sustainable infrastructure investment was one of the top priorities. Municipalities are responsible for at least 60 percent of infrastructure and yet have only about 8 percent of the tax room through property taxes to raise revenues.
New, innovative sources of sustainable financing for municipalities are crucial to replace aging infrastructure and make headway on new projects. Five- and ten-year federal granting programs will not solve the deficit over the long term and will likely do little more than slow its growth.
Establishing a national infrastructure bank is one new option to supplement existing sources of funding. Such an institution could be created as an independent Crown corporation with the responsibility of financing projects across all jurisdictions: municipal, provincial and federal. Infrastructure banks have existed in the European Union since 1958, and four-fifths of American states have them. Politicians on both ends of the American political spectrum have entertained the idea of a national infrastructure bank. This discussion is nascent in Canada but worthy of further consideration.
Infrastructure banks issue long-term loans to project proponents, who must repay them over an agreed-upon term. This mechanism complements existing federal grants and contributions. Project operators can charge user fees, such as tolls, to recoup funds to repay the loan. Cost recovery is particularly important for municipalities, where new infrastructure projects may impose new labour costs from operations and maintenance.
The infrastructure bank would be started through initial federal capitalization of up to $2 billion. The bank’s capital would then be leveraged through specified reserve ratios to finance loans for infrastructure projects. The bank would then sell long-term “infrastructure” bonds, with a time horizon of approximately 30 years. These bonds would not be project-specific, therefore ensuring the bank’s independence from private investors. The bonds would establish a stable, reliable domestic investment opportunity for pension and investment funds, leveraging the initial government capitalization to fund the long-term loans. Canadian investment and pension funds already invest in infrastructure projects abroad; this could be an opportunity to bring capital home. Several divestment campaigns are currently taking place at universities across the country, including the University of British Columbia. An infrastructure bank could present a mutually beneficial opportunity, offering an ethical investment opportunity by creating loans to finance long-term infrastructure projects and stable bonds for prospective investors. This takes advantage of an emerging investors’ market.
In Canada, municipal borrowing limits create restrictions on the ratio of debt a city or town can carry in relation to its revenue. While these conditions have clear benefits for the fiscal stability of municipalities, they make financing big projects difficult. Property tax hikes are politically challenging, development charges discourage investment, and grants from provinces or federal bodies tend to be piecemeal or prescriptive. With limited revenue-raising abilities for large-scale projects such as waste-water treatment plants or transit improvements, municipalities require a variety of financing options. An infrastructure bank would provide municipalities with a new source of capital, diversifying existing funding sources.
Infrastructure banks offer other advantages for project financing and delivery. The bank represents continuous investment, unlike a government-backed granting program that may last only for the term of the government in power. Instead of trying to address the insurmountable deficit through 5- and 10-year granting cycles that leave most longer-term projects untouched, infrastructure bank loans would remedy the infrastructure deficit steadily over time.
An infrastructure bank could provide specialized expertise and support to smaller municipalities that often lack the capacity required to expedite project plans and agreements toward “shovel-ready” status. Technical knowledge could provide clarity on financing or legal agreements, procurement and other planning issues that can limit innovation or balloon costs. For example, drinking water, waste-water and stormwater systems use increasingly sophisticated and evolving technologies to lessen environmental impacts.
Another long-standing challenge of infrastructure development and delivery is separating the political agenda from the pressing needs of unique jurisdictions. Unlike Infrastructure Canada, whose mandate is set by the governing party, infrastructure bank priorities would be set through an independent decision-making process by an arm’s-length Crown corporation. This would ensure separate oversight and accountability to local priorities, rather than the whims of developers or politicians.
Flowing from our research, we recommend that the federal government establish a national infrastructure bank that would serve municipal, regional, provincial and federal projects. The bank should be established as a Crown corporation to ensure its political independence. It would have criteria-based priorities set out in its founding legislation. Suggested project criteria include urgency, project difficulty and complexity, and a focus on projects that have been consistently postponed in the past. The bank could add additional value by providing advisory services akin to those provided by P3 Canada in order to increase the readiness of projects seeking the bank’s financial assistance. Complex cross-jurisdictional projects would also benefit from advice and facilitation across regions.
Current historically low interest rates, with real interest rates below 1 percent, make this an opportune time for the federal government to establish an infrastructure bank. Passed on to local governments by the infrastructure bank through loans, this is a rare investment opportunity to invest with extremely low borrowing costs. This window of opportunity strengthens the argument that there is no better time than the present to tackle the massive requirements for infrastructure investment.
Canada’s infrastructure deficit is an issue that transcends the political agenda; resolving it requires long-term commitment. Chipping away at the infrastructure deficit through sustainable, continuous investment by an infrastructure bank is a viable remedy for the problem. Improving Canada’s infrastructure will make Canada more attractive for foreign investment, leading to long-term economic growth and distributing economic prosperity across the country.
This article is based on the winning presentation in the National Public Administration Case Competition, by the team from the Simon Fraser University School of Public Policy. Graduate students from 11 public policy and administration schools across Canada gathered in blustery Halifax in February 2015 to compete. Their challenge was to provide advice to the federal cabinet on how to respond to a series of infrastructure failures, from floods and bridge collapses to blackouts and IT security breaches. The case was fictional, although several of the failures echo real events, and the facts on the magnitude and distribution of Canada’s infrastructure deficit between levels of government were accurate.