Thank you very much, Mr. Easter, and thanks so much to the committee for their invitation to speak on Bill C-44.
With any budget implementation bill there is always something interesting to say and plenty to say about it. Briefly, I would like to commend this committee on Bill C-44 for closing several of the boutique tax cuts that have been opened over previous years. I hope this committee will continue forward and tackle several of the larger and more regressive tax loopholes later on, like the stock option deduction, or the capital gains inclusion rate.
Today I would like to focus my remarks on the proposed infrastructure bank. First, it's important to note that whatever the structure of the infrastructure bank, loans are a poor substitute for federal funding, and there has been a substantial shift in infrastructure investment and responsibility over the past century. In 1955 the federal government spent 35% of every infrastructure dollar. Today it spends 15%, and it is municipalities that have picked up this slack. They used to spend one-quarter of every infrastructure dollar in 1955. Now they spend close to half. Provincial contributions have remained roughly the same over this period.
The federal government continues to pay the lowest interest rate of any level of government, and enjoys the broadest tax base. Municipalities, on the other hand, face the highest interest rates and the smallest tax base. This cost shift leads to fewer dollars spent on infrastructure, and the costs that are shifted to this lower level of government are shifted to the level of government that is least able to pay them.
As I see it, the main functions of a properly constructed infrastructure bank are, first, to lower interest rates for municipalities, and second, to facilitate the borrowing process. Smaller municipalities, or municipalities unfamiliar with larger projects, would particularly benefit from these functions. However, neither of these straightforward functions is part of the proposed functions listed in the infrastructure bank in Bill C-44.
Municipalities do face higher interest costs than the federal government. I looked up the bond rates this morning for the City of Ottawa, which pays 2.25% on five-year bonds. Halton Region, just outside Toronto, pays 2.54% on five-year bonds. This would be compared with the federal interest rate for federal government bonds of 0.82% on five-year bonds, roughly 1.5% lower than the cities. As with a mortgage, higher interest rates mean higher costs for cities and/or higher user fees for Canadians.
An infrastructure bank could effectively lower borrowing costs close to the federal rate. For its part, the federal borrowing rate is close to a record low, given the incredible demand for federal government bonds. Put another way, investors are desperate for more federal bonds, thus driving up their price and driving down their yield. An infrastructure bank could take advantage of this and pass the savings on to cities.
However, I'm concerned that as structured, the infrastructure bank would not achieve the goal of reducing borrowing costs for cities, but in fact would do the exact opposite. The proposed infrastructure bank appears to serve the needs of investors, not those of cities. In fact, the input of any government is explicitly and oddly not necessary for accessing funds through the infrastructure bank. It appears that public-private partnerships, or P3s, and not low-cost financing will be the focus of the bank. The likely impact will be interest rates to cities of 7% to 9% on infrastructure bank projects instead of 0.08%, the current federal borrowing rate. In other words, the proposed structure will increase interest costs by a factor of 10.
As with a mortgage, substantially higher interest rates mean higher interest rate payments over the life of the project, and those higher costs will be borne by governments or by higher user fees, or both.
Municipalities are not blind to this issue, often preferring public financing due to lower costs as opposed to P3s. This is not a hypothetical problem. In 2014 the Ontario auditor general examined the 26 billion dollars' worth of P3 projects undertaken by the Government of Ontario, an amount, incidentally, similar to what the federal infrastructure bank is considering. She concluded that the P3 structure would add an additional $8 billion in costs over and above the $26 billion of the projects themselves, almost entirely due to higher interest-rate costs, and these much higher costs would be borne by the Ontario government, and ultimately, by Ontarians so that P3 consortiums could see higher profits.
I encourage the committee to refocus the infrastructure bank on driving down interest rates for municipalities while accelerating their access to infrastructure loans.
This refocusing of the bank's priorities on what cities need instead of on investors' needs will best serve Canadians by keeping costs and user fees down, while encouraging cities to use the bank due to its competitive rates.
Thank you very much for your attention, and I look forward to your questions.