FUNDING CANADA’S $400-BILLION INFRASTRUCTURE DEFICIT – Why public-private partnerships are gaining traction as a long-term strategy

Posted on: December 5th, 2011

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Crumbling bridges, crowded highways and congested airports. Much like the situation in the United States, Canadian businesses have been complaining for years that the inadequacies of their country’s transportation infrastructure makes it more expensive to manufacture and deliver many products, and remain competitive with other major industrial nations.

Unlike their counterparts to the south, however, Canadian politicians have been operating for years with what seems like a com­­prehensive nationwide plan for addressing these needs. Ever since 2007, Canada’s infrastructure development has been dictated by the $33-billion Building Canada Plan (2007-2014) administered by Infrastructure Can­ada, part of the Canadian government’s Transport, Infrastructure and Com­munities portfolio.

According to Infrastructure Can­ada, its Building Canada initiative provides “stable, flexible and predictable funding” for investing those billions of dollars into a wide range of fruitful Canadian infrastructure projects. Its long-term goal is “to contribute to a stronger Canadian economy, a cleaner environment and better communities.”

Echoing that positive view, the Global Review 2011 of the Urban Land Institute, a Washington-based non-profit research institute, asserted recently that “Canada is making headway in addressing issues of aging infrastructure” after having “underspent for decades.”

Adds the report, “In addressing its deficits, the federal government also remains steadfast in protecting infrastructure from the budget knife, viewing the spending not only as necessary to support future growth and productivity, but also as a short-term jobs creator at a time when unemployment rates have been uncomfortably high.”

Not everyone is so impressed. While Canada’s federal and provincial governments may be spending more money on infrastructure projects these days, leading analysts believe that the scale, scope and focus of such efforts are insufficient.

“Canada’s infrastructure is still in a very dire state,” said Saeed Mirza, professor emeritus of civil engineering and applied mechanics at McGill University in Montreal, and the author of a 2007 book that predicted the collapse of Canada’s municipal infrastructure.

According to Dr. Mirza, despite recent governmental spending initiatives, “about 30 per cent of the entire infrastructure in Canada is more than 85 years old. The life expectancy of a little over 80 per cent of our infrastructure has been exhausted. This represents a very serious situation.”

Adds Vijay Gill, principal research associate in transportation at the Conference Board of Canada, “There definitely has been a lack of spending in recent decades. The biggest danger is that people view infrastructure spending as something that is just a part of a stimulus program; that when the government’s economic stimulus program is over, they think that things are OK with infrastructure. What we need is a fundamental shift in how we view infrastructure.”

Building Canada’s $33-billion bud­get may sound like a lot of money, even to oil tycoons, but the sum is fairly small potatoes in the world of global infrastructure, Dr. Mirza said. “That is a very small amount of money; $33 billion is totally inadequate…. Our politicians are forgetting our infrastructure deficit is really $400 billion. We need another $400 billion to upgrade on all levels and, unfortunately, our governments are not paying attention. None of Canada’s political parties even mentions infrastructure.”

Like other infrastructure specialists, Dr. Mirza is quick to assess the huge stakes of neglect: Not only plenty of jobs lost in the process of building and maintaining that infrastructure, but rising costs for transportation and logistics, which rob Canadian companies of their productivity, damage the country’s global competitiveness, and hurt the overall quality of life.

Instead of focusing on genuine needs, too much of the Building Canada funding has been spent on frivolous or trivial programs, said Dr. Mirza, such as the construction of gazebos and lakes during the G8 conference in Toronto in 2010. While those initiatives may have made Toronto look a bit more appealing to visitors ever since, they have provided few long-term benefits for the local economy. “The ministers were shameless about it,” said Dr. Mirza of these spending projects.

Avery Shenfeld, chief economist, and Benjamin Tal, deputy chief economist at Toronto-based CIBC World Markets, agreed that much more needs to be spent on infrastructure projects – and spent more wisely. In a recent joint report, the two economists estimate that it would cost roughly $130 billion just to repair and prevent the deterioration of existing municipally owned infrastructure in Canada, much of which is aging and nearing the end of its life expectancy.

“That life expectancy gets shorter with every year of delayed maintenance,” they said in their report.

In an interview, Mr. Tal said that Canada’s infrastructure deficit has been growing by $20 billion a year, mostly because of insufficient spending on maintenance. As maintenance spending continues to be cut – because of governmental budgetary restrictions – the lifespan of much of the country’s existing infrastructure declines more rapidly than necessary, he said. No infrastructure lasts forever, but when maintenance spending is cut to the bone, things fall apart even faster.

A short-term perspective

Too often, said Dr. Mirza, “We design facilities at the lowest possible cost without considering the long-term costs such as maintenance.” The current system in Canada is “design and forget,” rather than design and maintain for the long haul, he said. Either the maintenance is managed by a third party or, even worse, it is ignored or deferred to some uncertain date in the future.

“We engineers must design, build and insure, and look at the total costs for the life cycle” of the infrastructure, not just at the initial expenditures, Dr. Mirza said.

Construction budgets must also address the issue of depreciation when calculating a realistic assessment of a project’s life cycle.

“We don’t even depreciate our assets,” Dr. Mirza said. A new pipeline may last 75 to 80 years, but as its value to the user goes down, that asset must be depreciated from an accounting point of view, so that everyone realizes what the ultimate long-term costs are going to be.

Another issue widely ignored by governments is the long-term environmental impact of such projects. “We don’t even talk about those things; the governments should get involved,” Dr. Mirza said.

How can Canada afford to fund the upgrading of its infrastructure? According to Dr. Mirza, “Our infrastructure needs are way beyond what can be afforded by all levels of government. Therefore, the governments must acknowledge that Canada has a serious infrastructure crisis, and they must attempt to fund innovative sources of funding, the best one being public-private partnerships,” otherwise known as ‘P3s.’

To improve the way infrastructure assets are managed, users “must pay for all of the costs, including the depreciation of the assets,” which is something that is “not even considered in many cases until the facility falls apart,” as in the case of water supply lines in Montreal, Dr. Mirza said.

“The government’s recent initiative (Building Canada) did not reverse” the deterioration in Canada’s infrastructure because governments in Canada lack sufficient funds to achieve that goal, agreed Mr. Tal. “Without private funding, the deficit will worsen,” he added, especially now that Canadian governments are under great pressure to reduce their deficits.

In their recent report, Messrs. Shenfeld and Tal argued that at a time when governments are trying to tighten their budget deficits, it has become “imperative to seek out projects where a potential revenue stream could be used to leverage private-sector funding or provide an economic return on any capital employed by Crown corporations.”

According to Mario Iacobacci, chief economist at Aecom Canada, “An additional dollar of infrastructure investment could lead to as much as 17 cents of cost savings per year by firms, which translates into $2 billion worth of costs savings when applied to the $12-billion spending program. But this productivity boost is easily squandered if projects are poorly conceived.”

Mr. Iacobacci said there have been numerous poorly conceived projects in Canada, such as the construction of Montreal-Mirabel International Airport (opened in 1975), “which damaged the economic potential of Montreal for two decades.” For that reason, all major new projects “should be subject to comprehensive benefit-cost analyses (that) cover all the quantifiable economic, social, and environmental costs and benefits,” he argued. Although such tests are not an ironclad guarantee against ill-conceived projects, “they are the only insurance we have that the selected projects will contribute to future prosperity.”

Some provincial agencies, such as Metrolinx, the regional transportation authority for the Greater Toronto and Hamilton area, already require such benefit-cost tests, as does the Canadian federal government. “But these tests can take time to carry out and the results do not always occupy their rightful place in project approval decisions,” Mr. Iacobacci said.

The push toward public-private partnerships

No wonder public-private partnerships have become a hot topic in Canada. In its 2011 survey of global infrastructure development, the Urban Land Institute said that “after ‘a sloppy start’ 10 years ago, Canada now also tracks ahead of the curve – and the United States in particular – in engaging and implementing public-private partnerships,” which enable private sources of capital to underwrite projects that have a long-term potential for gaining a positive return on investment.

Continued that report, “Canadian provinces and municipalities have successfully structured availability payment deals and used life-cycle budgeting with private operators to shift risks appropriately and drive down project costs. Policy also encourages using local and regional firms in contracting work, which creates constituent support for projects and provides an additional boost to local economies.”

The report lauded the Canadian Council for Public-Private Partnerships – composed of government and private operators – for having “helped provinces find common ground on procurement and share best practices, creating standardization and transparency about deals.”

According to Mr. Tal, P3 deals have to be arranged in such a way that “they make sure that there is a return for business. The risks must be shared in ways that are appropriate. This model is starting to make sense for Canada, and I am encouraged by that.”

However, added Mr. Tal, while the number of projects is rising, they do not “automatically” yield positive results. “There is a push toward models for P3, but how much risk should be taken by the private sector, and how much by the government? And what is the financing?” These issues must be considered carefully in each partnership deal.

According to the Conference Board of Canada’s Mr. Gill, the most effective projects are those “where demand for the project is already visible,” such as improvements on Quebec Highways 25 and 30, near Montreal.

“You don’t make something up and then hope that people will use it. You do something where there is already a demonstrated need for it,” Mr. Gill said.

Taking a long-term view means being open to paying some 10 to 20 per cent more for the project design and engineering up front so that the project’s life cycle is extended. Discounting the long-term costs to the present value of money, Mr. Gill noted, you can “see if the savings in the long run will exceed the extra costs (up front).”

Added Dr. Mirza, “Construction practices will have to be modified” so that they encourage engineering projects that last over the long term. For example, rather than specify that a certain percentage of concrete must be used in building a road, “The ‘specs’ (specifications) for a project could be focused on the permeability of the concrete (to be used in it).” By specifying that the concrete used on a bridge must be less permeable to moisture, the resulting project could wind up being more resistant to damage caused during recurrent cycles of freezing and icing in winter.

Although higher quality, less permeable concrete is more expensive, it could add years to the lifespan of Canadian bridges, said scientists at the National Research Council lab in 2010. Dr. Mirza agreed.

Who will make such decisions? In Canada, unlike the U.S., there is “a lot more municipal ownership of roads,” noted Mr. Gill, such as in Toronto, where two major expressways – the Gardiner and Don Valley – are owned by municipalities.

“Ultimately, the people on the ground – the municipal people – decide what to replace, but it is the provincial and federal people who have more access to raising money,” Mr. Gill said.

He noted that airport infrastructure is a different story because Canada’s large airports are still owned by the federal government but run by local airport authorities that operate at arm’s length and are funded through user fees.

Dr. Mirza said that although local authorities in Canada often understand infrastructure quite well, federal politicians should receive training about the subject.

Meanwhile, “A lot of our (Canadian) infrastructure is already privately run,” said Mr. Gill, citing, for example, Canadian Pacific Railway, which has invested heavily in the most modern equipment. He said CP is “very meticulous about trying to minimize their costs over the long run. That’s because they have ownership” of their equipment, and must steadily meet financial benchmarks set by financial markets.

Managed properly, the P3 model already has produced good results in several infrastructure-related activities in Canada, including some that are far removed from the world of transportation, such as healthcare and correction facilities. “They range from design and build, to design and build/manage,” Mr. Gill said. “People have a much higher comfort level about doing this now in Canada. It has gained traction.”

This year’s award winners from the Canadian Council for Public-Private Partnerships included the developers of a $259-million new concert hall in Montreal, L’Adresse Symphonique, which provided $46.8 million in cost savings; a $90-million correction facility, the Surrey Pretrial Services Centre, which was lauded for “improving the correctional environment”; and the $352-million Ontario Ministry of Government Service Data Centre, which saved taxpayers $64.2 million in costs.

When it comes to transportation infrastructure, the council’s first-place award went to the Sea-to-Sky Highway, a $600-million project in British Columbia that “improves the safety, sightlines and slope stabilization” of the 95-kilometre-long section of Highway 99 from West Vancouver to Whistler, according to the council.

Council president Mark Romuff said that the project won the award because it “not only showcased Canada to the world during the Vancouver Winter Olympics (but) it also provided approximately $131 million in additional benefits to the community including training and employment for many First Nations workers and recreational trail improvements along the highway. This is public-private partnership at its best,” Mr. Romuff added.

Another project cited for excellence was the North East Stoney Trail Highway. This $650.7-million ring road Alberta highway runs around Calgary and Edmonton. According to the council, the highway has improved access and safety while costing only about 63 per cent as much as a traditional project of that scope.

Other P3 projects that have been singled out by the council in 2011 include the 195-kilometre Fredericton-Moncton Highway project in New Brunswick, and the 275-kilometre Trans-Canada Highway project from Long’s Creek, N.B., to the Quebec border.

Beyond these recent award-winning projects, Mr. Gill cited the Canada Line Light Rail and the Roberts Bank Rail Corridor project in B.C., and the extension of Highway 25 to Montreal – a design, build and maintain project – as among the most successful.

Regarding the toll bridge in the last of these projects, Mr. Gill said, “A few years ago, it was not acceptable to charge a toll on a bridge in Montreal, but now people are paying it. The project was built on time, and people don’t want to see an increase in their taxes.” They would rather pay a toll.

Not surprisingly, Canadian public opinion has become increasingly positive about P3 initiatives, as word about their success has spread, according to the Canadian Council for Public-Private Partnerships.

In the 2011 poll commissioned by Nanos Research for the council, 70 per cent of Canadians said they were “open” to the idea of the private sector delivering services in partnership with the government in areas such as roads, hospitals, schools, public transit systems and safe water systems. Support for P3 projects has been increasing steadily since 2004, when only 60 per cent approved of the idea in that year’s poll.

“Over the last eight years, we have seen more and more Canadians support the idea that combining private innovation with the public good is a great partnership to deliver much-needed highways, bridges and hospitals in our growing communities,” Mr. Romuff said. “With the success of many of these large-scale projects on time and on budget, we are now seeing acceptance for the P3 model for schools, transit and water treatment systems.”

For those several years, Canadians have generally shown consistent support for P3 models for building roads (71 per cent of respondents), recreation facilities (75 per cent) and hospitals (66 per cent). But in 2011, Canadians also expressed growing support for public-private partnerships in transit systems (73 per cent).

“Expanding mass transit, especially in Canada’s pre-eminent global gateway Toronto, will become a more pressing priority (in the future),” noted the Urban Land Institute report. “After years of squabbling over building an extensive ‘Transit City’ light-rail system from the northern suburbs, Toronto’s new mayor scrapped the above-ground network in favour of a single subway line, which opponents say would carry a fraction of the number of people at considerably higher cost.

“Toronto’s existing 43-mile rapid transit system serves nearly one million passengers daily, but the area’s expanding population is outgrowing road systems to surrounding suburbs, and locals complain of worsening Los Angeles-style traffic jams.”

Canada lags behind many other countries when it comes to getting its asset-rich public pension funds to invest in national infrastructure, according to the Urban Land Institute report. Why is that so?

According to the report, “The (pension) funds can get higher yields (in the low teens) outside the country when the government feels uncomfortable doing deals at high-single-digit yields. There’s a gap in expectations.”

Investments made by Canadian pension plans in high-speed rail lines in the United Kingdom in 2010 represented a lost opportunity for Canada, the report noted. Ironically, Canada has no high-speed rail and none is currently in the planning stage, yet its pension funds are underwriting such high-speed rail in the U.K.

What other measures might help? For his part, Dr. Mirza calls for the creation of a national infrastructure bank that could channel funding for addressing non-partisan needs – such as building and maintaining roads that have a 75-year lifespan. Those projects that are deemed to have a high social priority could be provided with funds at lower rates.

In the U.S., some politicians, including ex-president Bill Clinton, have called for the creation of such an infrastructure bank.

In Canada, this sort of national infrastructure bank could start operations for a mere $30 billion to $40 billion, Dr. Mirza estimated. “It would look at projects nationally,” he said. “It would be good for leveraging funds, and it would act as a guarantor.”

Dr. Mirza said that the Canadian engineering community favours the creation of such an institution, but that governments in Canada “have short-term priorities, and no one thinks long term.”

A key goal of such long-term initiatives, noted Mr. Gill, would be to provide dedicated, clear streams of funding that are restricted for use in infrastructure projects over a multi-year period.

“The more dedicated the funds that you have (for infrastructure), the more clarity you have about how it is raised and what it is going to be dedicated to,” Mr. Gill said. “That way, you make it less likely that those funds will seep into other kinds of projects, or into the hands of politicians” who might feel tempted “to give in to local interests” and use that money for other projects. 

Adds Dr. Mirza, “We need to look at 50 to 100 years in the future and ask, ‘What kind of Montreal do we really want for our grandchildren?’ We need to have a detailed plan as to what kind of community we want in the future.”

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