Transport Committee on April 16th, 2018

[Chris Matier]

We don't have specific estimates of that, but in our economic impact assessments we have taken account of inflation picking up, and of those inflation-adjusted dollars. Even though it's $187 billion now, over a shorter time period, it's less than that, and the economic impacts would take that into account. The one dollar spent five years from now would not be worth as much spent now.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

Gentlemen, thank you very much for the information. We appreciate it.

We will suspend for a moment while the other panel comes to the table.

[The Chair, Liberal, Judy Sgro]

Thank you very much. We are reconvening our session.

In this session, by the way, I'd like to ask the committee if we can hold 10 minutes at the end of the meeting just to go over a little bit of upcoming work that we have on our plate, just to review it.

As an individual, we have Bev Dahlby, professor, University of Calgary. As well, from the Institute of Fiscal Studies and Democracy, University of Ottawa, we have Randall Bartlett, chief economist.

Mr. Dahlby, would you like to go first? Could you please keep your remarks to five minutes.

[Professor Bev Dahlby, Professor, University of Calgary, As an Individual]

Thank you.

Good afternoon. I'm greatly honoured to be asked to appear before this House of Commons standing committee. I'm afraid I probably won't be able to contribute directly to the three key issues the committee has identified, but I will try to address some of the issues around the delay in the spending.

My contribution is really to provide some background on federally funded infrastructure projects based on the project information that's in the database on the Infrastructure Canada website and to provide some comments on the factors that have contributed to the delay in spending on infrastructure programs announced in budget 2016.

I prepared a briefing note that I think has been distributed to members of the committee. At this time I will only summarize a few of the key points.

Comparing federally funded infrastructure projects in the pre-2016 period to the current ones, we see a much larger share of federal contributions to public transit projects, and a notable decline in the share of federal funding for rural and small community projects. The average federal contribution rates are projected to be higher than in the pre-2016 period. The percentage of relatively small projects—that is, projects that are less than $1 million—is higher than in the pre-2016 period. As well, we see from the database that over half of the projects with start dates are projected to have started in 2017, and the projects with start dates in 2018 will account for 38.8% of federal contributions over the period to 2021.

With regard to the issues around the delay in spending, I think it's important to emphasize that, in budget 2016, the government announced a number of measures to provide fiscal stimulus to the economy, including housing investment, measures to support modest and low-income households, and the infrastructure projects.

The fiscal stimulus package arose out of the government's concern about an output gap in the economy in 2015–2016 in light of the decline in investment in the oil and gas industry and concerns about slow growth in the EU, China, and other emerging economies.

The new infrastructure plan was motivated by the desire to provide short-term fiscal stimulus to the Canadian economy in phase one, with a focus on 2016–2018; and in phase two to provide long-term infrastructure projects to increase private sector productivity and improve the quality of life for Canadians.

This was an ambitious—probably overly ambitious—plan. With fiscal stimulus measures, timing is everything. In particular, an increase in infrastructure spending that does not occur when there is deficient aggregate demand in the economy but occurs when the economy is on the upswing would not only be ineffective, but might divert resources—land, labour, and capital—from private sector investments that would have increased the productivity of the economy.

The use of infrastructure spending by the federal government to stimulate the economy is particularly problematic in Canada because 90% of the public infrastructure in Canada is under the control of the provincial and municipal governments.

Increases in infrastructure programs require coordination and agreement with the provincial and municipal governments, and in many cases with aboriginal organizations and governments. Delays are inevitable when plans for projects and funding arrangements have to be made with more than one government. There's also a large number of small projects. That might be a contributing factor for the delays because it is difficult for the federal department to manage a large number of small projects that require agreements with the subnational governments. It would be better, in my view, if the federal government concentrated its efforts on a smaller number of large projects.

For these reasons, I don't think federal funding of infrastructure projects is a useful instrument for short-term fiscal stimulus measures. What we see now is that 38% of the federal contributions are for projects with start dates in 2018, when the Canadian economy as a whole will be experiencing low unemployment rates and there will be little need for additional fiscal stimulus.

With regard to the delay in phase two projects, it should be noted that the Canada Infrastructure Bank is to be involved in financing $35 billion of the $186 billion in spending. Delays in the establishment of the Canada Infrastructure Bank and the appointment of the interim chief financial officer, who was only announced in December 2017, may also account for delays in developmental plans for federal spending on infrastructure.

To summarize, my view is that federal infrastructure spending is not a very effective or reliable instrument for short-term fiscal stimulus in the event of an economic downturn. Long lead times are necessary in negotiating coordinating funding of infrastructure projects with subnational governments, thus making it an ineffective and unreliable fiscal instrument, and these may account for some of the delays in infrastructure projects.

Thank you. I'm happy to take any questions.

[The Chair, Liberal, Judy Sgro]

Thank you very much, Mr. Dahlby.

Mr. Bartlett, please, for five minutes.

[Randall Bartlett, Chief Economist, Institute of Fiscal Studies and Democracy, University of Ottawa]

Good afternoon, Chair, Vice-Chair, and committee members.

Thank you for inviting me to speak today on an issue as pressing as infrastructure investment in Canada and the investing in Canada plan specifically.

For many, the significant lapses in infrastructure spending presented in budget 2018 for the past and current fiscal years came as a shock. It shouldn't have, as this scenario has played out in the past. In December 2016, I made a short contribution to Maclean's magazine on historic delays in infrastructure investment and how we should not expect the planned infrastructure spending to roll out in a materially different manner this time. Unsurprisingly, delays are in part what we are here to discuss today.

Lapses in infrastructure spending can happen for several reasons.

The first is the delay between when the budget is presented, when the budget implementation act is passed by Parliament, and when Infrastructure Canada identifies projects presented by provinces and municipalities for investment. These delays add months to the start date of any infrastructure plan. We also saw this following budget 2009, when the demand for infrastructure spending was higher in the depths of the great recession and there was coordinated fiscal stimulus within the G20 and beyond.

Second, once the federal government puts cash in the window for infrastructure projects, provinces and municipalities must similarly match the federal contribution. This requires that lower levels of government have fiscal room and also have prioritized infrastructure as the desired use for said fiscal room in a manner that will qualify to receive federal funds.

That brings us to the third point, which is that different levels of government may have different infrastructure priorities. At the federal level, we have five priority areas for infrastructure spending: public transit, green, social, trade and transportation, and rural and northern communities. These priorities were first laid out in the 2015 Liberal Party election platform.

As such, given the limited resources available to the current government at the time, it may be reasonable to assume that consultations with the provinces and municipalities on their priorities were similarly limited, but even if priorities aren't perfectly aligned, one would assume that it shouldn't be hard to fit a round infrastructure project in a square funding hole, if that is the overwhelming desire by multiple levels of government.

This brings us to the fourth reason that infrastructure money may be lapsed: need or, more accurately, a lack thereof. Need may be looked at in a few different ways. If infrastructure spending is to be used for short-term infrastructure stimulus or economic stimulus, one needs to look to the stage of the business cycle. Currently, to paraphrase the Bank of Canada in the press statement that accompanied its recent interest rate announcement, the Canadian economy is operating near its capacity and has little labour market slack, if any. As such, there doesn't appear to be an overwhelming need for short-term fiscal stimulus at this time.

Perhaps there is a long-term infrastructure gap that needs to be addressed. This was argued by the finance minister's Advisory Council on Economic Growth in the fall of 2016, with an estimate of the infrastructure gap ranging from $150 billion to $1 trillion, a wide range by any measure. But the point was clear: the infrastructure gap is large.

However, this assertion was contradicted by a report from the McKinsey Global Institute in June of 2016. In this report, entitled “Bridging global infrastructure gaps”, the McKinsey Global Institute estimated that Canada did not have an aggregate infrastructure gap, based on historic and planned infrastructure spending and projected future infrastructure need. Indeed, this conclusion was reconfirmed by the McKinsey Global Institute in a subsequent October 2017 note entitled “Bridging infrastructure gaps: Has the world made progress?”

This conclusion matters because, unlike the Canadian analyses referenced by the advisory council, the McKinsey Global Institute employs the approach that is closest to best practice, and best practice is this: understanding the current stock of infrastructure and its remaining useful life, with a future needs assessment based on projections of demographics, economic activity, environment and climate change, and technological innovation. In Canada, we apply none of these best practices, while other jurisdictions tend to apply some but not all.

In New Zealand, for example, the cities of Wellington and Auckland have developed advanced data architectures that allow you to look at the remaining useful life of pipes under city streets through the use of an app on your smartphone. Meanwhile, the United Kingdom is the country that is literally writing the book on how to do a future needs analysis for infrastructure. In New South Wales, Australia, the public sector is applying analytics to squeeze as much value as possible out of existing brownfield assets while considering new greenfield investments only as a very last resort. Other jurisdictions are moving forward similarly to better understand their infrastructure and future needs.

Where do we go from here? If the federal government wants to support infrastructure investments by other levels of government while maximizing value for taxpayers, it should look to put the right data infrastructure in place to build capacity before putting money for traditional infrastructure in the proverbial window. Otherwise, we may find ourselves once again discussing large infrastructure lapses in the not-too-distant future.

Thank you.

[The Chair, Liberal, Judy Sgro]

Thank you very much, Mr. Bartlett.

On for six minutes, we have Mr. Chong.

[Michael Chong, Conservative, Wellington—Halton Hills, ON]

Thank you, Madam Chair.

Professor Bartlett, I appreciate that you may not think there is a need for stimulus right now, but clearly we have infrastructure needs in this country and an infrastructure deficit that needs to be closed.

I wonder if you agree with the statement that a dollar spent on infrastructure today is better than a dollar spent on infrastructure five years from now, considering the fact of inflation and the returns on investment. Arguing that money being spent sometime in the next 10 years, some five to 10 years out, is the same thing as money being spent today is not accurate. A dollar spent today is much more powerful than a dollar spent five to 10 years from now.

[Randall Bartlett]

I think that is the case, generally speaking, but I think it also matters what stage of the business cycle you're in as well. I think that a dollar spent on infrastructure when you are facing some sort of large negative economic shock certainly has much more impact on the economy than a dollar spent when your economy is operating above its potential capacity.

[Michael Chong, Conservative, Wellington—Halton Hills, ON]

Sure, and I would argue that our economy is not operating at its potential capacity in respect to productivity growth. We have productivity growth that has lagged that of many of our economic competitors. Our per capita GDP growth is abysmal. It lags that of the rest of our competitors in the G7. We like to talk about the top line numbers, but when you actually drill down into the per capita numbers, our economic growth is actually quite abysmal.

From the government's own projected aggregate GDP, taking into account population growth of about 1.2% per annum, the most recent numbers for which data is available, you're looking at per capita GDP growth of about half a percent for the next three years. That's not very strong economic growth, particularly in light of the massive inflation of assets on the balance sheet, and particularly in housing in the last number of years. It's no wonder that Canadians are taking on ever-increasingly high levels of household debt to finance their lifestyles, because they're struggling to pay the bills.

The other thing I'm wondering about with respect to infrastructure is that Statistics Canada has consistently reported, most recently last November, that commuting times are getting longer and longer. TD Bank, a number of years ago, did a report on lost productivity as a result of congestion and traffic jams. I think, from what I recall, they said that the annual cost in the GTA alone is in the billions of dollars in lost productivity growth. The problem of commuting and congestion is getting worse; commute times are up in the most recent StatsCan data. So there is a need to fund this infrastructure, and to do it now, rather than five to 10 years from now, setting aside the fact that we are maybe at capacity on industrial production and other measures because of this productivity problem that we have, lost productivity.

One of the things you mentioned, and I think Professor Dahlby also alluded to it in his opening remarks, was the lack of data. I think that's what the Parliamentary Budget Officer is also encountering: we just don't have data. The Budget 2018 documents are incomplete when it comes to the government's own infrastructure projections. Only half the projects in phase one—$14.4 billion—can be identified. A quarter of the money is lapsing in legacy and new infrastructure programs. We just don't have the data. Canadians don't have the data. You don't have the data, and I don't know how we can embark on a $100-plus billion 10-year infrastructure plan without data, without planning. It seems to me that we need a lot more transparency from the government as to what its plans are, and it needs to get on top of this file.

Maybe you could just comment on those two general issues: dollars spent today rather than five to 10 years from now, and the lack of data.

[Prof. Bev Dahlby]

Well, I think I agree with Professor Bartlett. It depends as well on the motivation for the spending. Again, if it were for fiscal stimulus—and here I tend to disagree with you, from a national perspective, about the need for fiscal stimulus—it's no longer there. Of course, we would like to have the benefits from the infrastructure sooner rather than later, but major projects, such as the ones you've maybe alluded to for reducing congestion in major cities, take a lot of time and planning. They often cannot be forced to meet some other timetable.

I think we need to think of these two types of infrastructure spending quite separately. As I indicated in my remarks, I'm quite negative about the notion that infrastructure spending is an appropriate use for fiscal stimulus.

[Randall Bartlett]

Just to add to that, part of the data equation isn't just on the government side. While that's a big part of it and we do need more information, more more timely information, I think part of the information gap, as discussed by the folks from the PBO as well, is that infrastructure spending is often reported by other levels of government on a modified cash basis. It's only when the receipts are remitted that you actually even acknowledge or book the money in the federal framework. That in itself is a bit of a problem—the timing issue of understanding how much money has gone out the door, and where it is, between approval and between getting the receipts.

With regard to data, especially completely understanding what infrastructure we have, what useful life is remaining, where the needs are, and where the pinch points are when you talk about things like congestion, do we have really good data to understand exactly where those are and exactly how we can best address those? When discussing the infrastructure gap, there's the aggregate gap. As well, in some areas we may be overspending significantly while in other areas significantly underinvesting, but we don't have the data architecture in place to really understand exactly where those pieces are. Some we know, because we can look at them, but often we don't know exactly if what we're spending is what we need to be spending in order to address current and future needs in the best and most effective way possible.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

Mr. Hardie.

[Ken Hardie, Liberal, Fleetwood—Port Kells, BC]

Thank you, Madam Chair, and thank you, gentlemen.

Canada's performance overall in a lot of different files is uneven. We have our major cities, where things happen a certain way, and then we have large swaths of rural areas dotted with small communities. The challenge, I think, for a federal government that tries to apply programs across the country is in not just in getting efficiencies but also in getting equity.

Professor Dahlby, you were talking about the lack of spending in rural areas. I would point out that in fact the government has talked an awful lot about, for instance, improving access to broadband Internet in rural areas, which is itself a catalyst for a lot of social, economic, and commercial activities. As you may be aware, the share that the federal government is prepared to take on now is 60%. Of course, if you get then a 30% contribution from the province, that leaves the smaller municipality with a really small piece to have to cover—hopefully within their means.

Talk to us a little bit about how you would see us evening out the application of infrastructure funding to lift the places that really need lifted.

[Prof. Bev Dahlby]

Don't take my remarks about the reduction in emphasis on rural and small communities as a criticism. In fact, maybe it is a good thing. Our previous report from 2015 criticized the pre-2016 infrastructure projects as consisting of too many small projects. We did a review of that, and Nut Mountain, Saskatchewan, which is not too far from my hometown, received $250 or something like that.

To deal with the small community issue, I think there should be other mechanisms, as opposed to the very granular spending on particular projects. In particular, I think the gas tax fund is the appropriate mechanism for providing funding for infrastructure for smaller communities. There is somewhat of a bias towards gas tax funding for smaller communities in my own province of Alberta, because there's a basic $50,000 amount plus a per capita amount. I would say the province could even make the funds more biased towards smaller communities in that way. I think general transfers to the provinces, passing money on directly to the smaller communities, would be by far the best mechanism for dealing with that issue, as opposed to trying to identify lots of small projects in these communities.

Again, I come from a rural Saskatchewan background. Like a lot of proud Albertans, my roots are in Saskatchewan. My sister is a town administrator in Star City, Saskatchewan. I have a deep feeling for rural Saskatchewan and their problems, but I think the mechanism that has been used by the federal government is not really the appropriate one.

[Ken Hardie, Liberal, Fleetwood—Port Kells, BC]

In a similar vein, let's take it then more to the international view. Professor Bartlett, you mentioned the fact that in comparison with other jurisdictions, perhaps our performance or just the way we approach and manage these things is found wanting. Can you comment, though, on the challenges posed by our division of responsibilities among the federal government and the other levels of government. Are there some systemic barriers or impediments to meeting perhaps what you see as better performance in other jurisdictions?

[Randall Bartlett]

I think in the context of Canada specifically, our federated framework is obviously dissimilar to those of other jurisdictions, but the jurisdictions I'm comparing us to now are also Commonwealth countries. There are some comparisons among those. Geographically a country like Australia is also fairly large and geographically diverse. It has a lot of very similar cultural circumstances and cultural history to Canada's as well. I think there are no legislative barriers to anything that I've been suggesting on the federal government playing a role in working with provinces and municipalities to actually be a catalyst for the development of better data architecture for infrastructure. In fact, arguably, the federal government is best placed in Canada to start doing that, to have a standard system by which all infrastructure is inventoried in Canada.

[Ken Hardie, Liberal, Fleetwood—Port Kells, BC]

In the time remaining, could you give us your sense of what that data framework would look like?

[Randall Bartlett]

Absolutely. In New Zealand they use a metadata architecture wherein they basically say, okay, you have a pipe for waste water, you have a pipe for clean water, you have all of these various pieces of infrastructure. What we need to do is determine how to account for these on a similar basis. This is ongoing in New Zealand and it's spreading across the country, so there are examples where this is already being done.

Then we can catalogue all of this infrastructure and can actually compile this together to understand exactly where the needs are currently and where the needs are going to be ultimately for infrastructure.

if you look at subnational jurisdictions, often within that same subnational jurisdiction you might see different city departments that are accounting for inventory differently within one specific subnational jurisdiction, so you can't even understand that within that jurisdiction let alone across the entire country.

[Ken Hardie, Liberal, Fleetwood—Port Kells, BC]

Thank you.

[The Chair, Liberal, Judy Sgro]

Thank you very much, Mr. Bartlett.

Madame Sansoucy.

[Brigitte Sansoucy, NDP, Saint-Hyacinthe—Bagot, QC]

Thank you, Madam Chair.

Thank you, Mr. Dahlby, for your intervention. However, my questions are for Mr. Bartlett.

Mr. Bartlett, as you know, the government recently announced the creation of the Canada Infrastructure Bank, in which it will invest $35 billion in public funds. This investment bank will have the primary objective of generating huge profits for the private sector.

I represent a riding that includes 25 municipalities with populations between 500 and 56,000. The criteria that have been established for this bank with respect to the size of the projects and the rate of return, in particular, do not correspond to the reality of my riding. I think that's also the case for most rural ridings. However, in the NDP, we believe that the public funds invested must have repercussions on all sectors of the economy and create good jobs.

We also believe that by funding infrastructure projects itself, the government would have reduced costs for future generations through lower interest rates than the bank, which would have limited the risks. This is all the more obvious in the case of Australia, where a bank of this kind has been created over the last 20 years, and the results have been catastrophic. According to Rod Sims, president of the Australian Competition and Consumer Commission, Australians are still paying the price. Their economy has suffered a hard blow.

As an economist, what do you think about this model to privatize infrastructures, which will be expensive for Canadians but will benefit the private sector?

[Randall Bartlett]

When it comes to the infrastructure bank overall, while I agree that small and rural communities may not benefit as much as larger communities, I think the traditional mechanisms for funding infrastructure are still going to be there. I still think that's going to be a consideration, and the infrastructure bank really is just a small piece of that overall, so I don't think there's any real risk on that side of missing out on infrastructure investments that communities would otherwise get.

When it comes to the infrastructure bank, the questions that we ask specifically at the Institute of Fiscal Studies and Democracy are essentially with regard to the business case for the bank, whether or not infrastructure investment will occur in a way that is of most value to taxpayers. If you look at things like comparing the financing cost, the benefit of pulling in the private sector, and whether or not it will lead to additional investment overall and innovation within the infrastructure space, those are the fundamental questions. It's difficult to know, because Canada does not have a lot of experience with this overall.

The one thing we do know is that Canadian pension funds don't have a lot of experience with greenfield investment, and the required rate of return on greenfield investment is quite a bit higher than if you're buying an existing piece of infrastructure that has an existing revenue stream, because they're taking on the revenue risk. Some of the things that we've heard in talking to both the private sector and government officials, as well as just going to conferences and hearing about this, are what the return expectations are going to be and whether or not that's necessarily maximizing taxpayer value. I was at the Public Policy Forum recently, and that was one of the things that was talked about there.

Part of it is putting the cost on those who use it, which is something that is definitely much more efficient in an economic context, but there is also of the question of whether Canadians will continue to use that infrastructure, and whether will we benefit more broadly as an economy and a society from it. Those are open questions still.

[Brigitte Sansoucy, NDP, Saint-Hyacinthe—Bagot, QC]

We haven't had public-private partnerships in infrastructure for too many years. Has your institute reviewed the experiences of other countries that have been using public-private partnerships for a long time? How could we benefit from these experiences?

[Randall Bartlett]

On the topic of public-private partnerships, in the context of the Canada Infrastructure Bank, these are certainly not mutually exclusive. One is a mechanism for designing, building, operating, maintaining, and financing, so they're not necessarily mutually exclusive. The Canada Infrastructure Bank could use public-private partnerships for investment purposes.

In the context of public-private partnerships overall, in the global experience as well as the Canadian, the jury is still out on whether or not the net benefit is there. It seems to suggest that ultimately there's a trade-off between a higher financing cost under public-private partnerships, but also a greater likelihood of having projects delivered on time and on budget. It's sort of a trade-off in terms of what the net benefit is there. If being on time and on budget is a key priority, P3s are seen as a very effective vehicle for doing that, but ultimately that comes at a higher financing cost.